Latest Stewardship Activity: December

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it has been an incredibly busy year and we have made some great progress in our work in this area.

Market Developments

Climate change and COP25

As 2019 drew to a close, climate change was once again in the headlines – most notably with reference to the deadly bushfires that raged in Australia in the closing weeks of the year.

Also in December was the the 25th annual UN Climate Change Conference (COP25) taking place in Madrid. In theory this was supposed to agree the final operational guidelines of the Paris Agreement leaving 2020 free to focus on ‘raising ambition’ post 2020. However, the conference ended without agreement in a number of areas and a weakened statement overall, which potentially leaves too much on the agenda for 2020 to make meaningful progress.

COP26, which will take place in Glasgow, UK, this November will now have to focus on trying to pull together common timeframes and is likely to mean slower legislative reforms overall and the potential for greater climate impacts over the next decade unless there is a sea-change from some of the large emitters.

European Green Deal and taxonomy

At the same time as COP25 was taking place, the European Commission launched its much-anticipated Green Deal for the European Union (EU), with a proposal for a ‘climate law’ in the coming months that will commit the region to climate neutrality by 2050.

As well as strengthening its climate ambitions, the Commission has said that in the future all of the EU policies and actions will need to contribute to the European Green Deal Objectives and all legislative proposals will have to include a ‘do no harm’ element. This approach is being taken within the EU’s developing green taxonomy. After an initial hiccup, the EU has agreed the scope of this taxonomy which will come into effect over the next couple of years. Under the provisional agreement, all financial products sold in Europe would be subject to disclosure requirements – this extends the reach beyond the taxonomy’s original application to products marketed as environmentally sustainable.

Japanese Stewardship Code draft revision

The Japanese regulator, the FSA, published a draft version of a revised stewardship code. This new version effectively sets out enhanced ESG, stewardship and voting disclosure recommendations and puts pressure on Japanese asset owners to monitor their managers to make sure that they’re ‘walking the talk’ on stewardship.

The code also sets out that investors should clearly state in their stewardship policies whether or not they consider sustainability issues in order to promote sustainable growth through “dialogue with purpose”. It will continue to operate on a comply or explain basis but these revisions suggest an increasing focus on stewardship and ESG – something we have been aware of through our recent meetings with organisations including the GPIF, the largest pension fund in the world.

As 2019 drew to a close, climate change was once again in the headlines most notably with reference to the deadly bushfires that raged in Australia in the closing weeks of the year.

A look back at key developments in 2019

2019 was an incredibly busy year for developments in the ESG and stewardship arena:

Climate change

  • Extinction Rebellion highlighted the issue with climate protests which caused widespread disruption in London, Sydney, New York and many other cities around the world. ‘Extinction’ for the threat facing humans (and other species) from climate change; and ‘rebellion’ for the action the group says is required in the face of perceived government inaction on climate change.
  • Mercers published Investing in a Time of Climate Change – The Sequel – intended to help investors understand how climate change can influence their investment performance in both the short and long term and what steps they should take to protect and position portfolio assets. The document demonstrated the substantial cumulative negative impact on sectors such as coal and electric utilities, in contrast to the positive benefits for renewables and sustainability themed investments.
  • In the UK, the Government published its Green Finance Strategy – building on recommendations from the Green Finance Taskforce. It covered a range of actions including a requirement for listed companies and large asset owners to disclose in-line with the Task Force on Climate-related Financial Disclosures guidelines by 2022, to setting up a taskforce to look at new (possibly) mandatory climate-related reporting.
  • The Intergovernmental Panel on Climate Change (IPCC) published two substantive reports. One focused on land, looking at climate change, desertification, land degradation, sustainable land management, food security, and land related GHG emissions. This report highlighted the impact of dietary choices on land and water with a diet higher in meat having a higher impact on global warming. The second focused on oceans and cryosphere highlighting that ice sheets are melting at an increasing rate which, in turn, worsens the pace of sea level rises and has a more-acute impact on various ecosystems. The report also warned of extreme sea-level events being more likely, potentially becoming annual events by 2050 (from once in a century now) and suggested the impact on indigenous and coastal communities is large and any delay in acting may limit the ability for adaptation.

Against this backdrop it was perhaps no surprise that climate change was a focus at the PRI in Person conference in September. The release of the PRI's updated Inevitable Policy Response found that, in order to get close to ambitions set out in the Paris Agreement, would require (and the PRI expects) a sharp and disruptive policy response in the early to mid-2020s, which will have consequences for financial assets.

Martin Currie signed the 2018 Global Investor Statement to Governments on Climate Change. This statement was presented at the G20 in Japan in June 2019 and has been signed by more than 400 investors. It calls on governments to achieve the goals set out in the Paris Agreement, accelerated private-sector investment into the low carbon transition and commitments to improve climate-related financial reporting.

Regulation

There was a notable shift in the debate on shareholder primacy. In August, a statement from the Business Roundtable, one of the world’s most powerful business lobby groups, saw the long-held concept of shareholder primacy (where shareholder interests are assigned first priority over all other corporate stakeholders) abandoned in favour of broader stakeholder accountability.

The declaration from the Roundtable, which consists of over 180 CEOs from leading US companies, marks a notionally significant departure from the shareholder capitalism espoused by Milton Freidman over 50 years ago – specifically, that a company’s sole social responsibility is to increase its profits.

The open letter stated that the purpose of business is inherently much wider and companies are accountable to their employees, customers, suppliers and communities at large, as well as shareholders. The statement was not met with unanimous praise. The Council of Institutional Investors (CII), for instance, criticised the statement for relegating shareholders to last (with no mention until right at the end of the statement). In addition, the CII expressed concerns that accountability to everyone (all stakeholders) implies accountability to no-one – a position I am sympathetic to. In the end, however, it is the actions rather than the words which matter. Will CEOs set out their stakeholder goals for instance and then make sure compensation is tied to these goals? Perhaps they will.

Martin Currie

December was a relatively quiet month for Stewardship at Martin Currie. However, it has been an incredibly busy year and we have made some great progress in our work in this area.

Events

I spoke at a broad range of events over the course of 2019, including:

  • The Trend Summit in Brussels, a key conference for fund buyers in the Benelux region
  • RI Tokyo, with more than 700 attendees and a broad range of domestic asset owners and asset managers participating
  • Presenting on our ESG & Stewardship capabilities to institutional investors in France; private banks and wealth managers in Switzerland; and wealth managers and wire houses in the US
  • As a panellist at the inaugural FT ESG conference and at the ICGN Global Stewardship conference

Publications

Once again, we produced a number of stewardship-focused publications through 2019 including:

  • ESG integration in GLTU – looking at the integration of ESG into the Global Long-Term Unconstrained (GLTU) strategy and the ratings we use in making risk assessments for companies we invest in
  • How asset owners can drive sustainability which focuses on the role that asset owners can play
  • ESG in Asia – looking at the wide diversity of adoption and awareness of ESG factors by companies, investors and governments
  • Stewardship Annual Report – showcasing our stewardship activities over the last 12 months

ICGN Global Stewardship Award & PRI ratings

The Stewardship Annual Report was also the basis for our nomination for the ICGN Global Stewardship Award shortlist in the autumn, which we were really delighted to win. This is a great achievement and reflects the hard work and leadership that we have been able to show in this space. The award was based on our disclosure and, in particular, the stewardship annual report. The independent judges noted the broad scope of the reporting, the clear use of examples across a wide range of topics and geographies and the use of graphics to bring the report to life. This is a prestigious award to have won and is a good base from which to continue to build our credentials.

We were also really pleased to retain the top ratings from the PRI for each of the three pillars

  • Strategy and Governance
  • Integration
  • Active Ownership Very pleasingly the percentile rankings from the PRI, once again, shows us in the top 7% of equity managers for Active Ownership (and for equity managers overall).

Governance & Sustainability assessment

We have been working over the last year to establish a proprietary Governance & Sustainability assessment of the companies we invest in. We already have in place a respected position in the ESG/Governance & Sustainability arena, but equally we continue to be ambitious in how we are evolving our approach. We believe innovation is key to retaining a leading position in this important field. Clients, competitors and gatekeepers are also recognising the benefits of a robust and integrated approach to ESG/Governance & Sustainability and data availability is improving. Developing our analytical framework further enhances our overall process and puts us in a position to more consistently identify risks, opportunities, and areas for engagement. One consistent way to express these measures is through a ratings structure that enables us to condense our work into easy-to-use analytical information.

Engagement

December has been relatively quiet for engagements, however, the Global Long-Term Unconstrained (GLTU) team spent time engaging with cosmetics manufacturer Estée Lauder, most notably on remuneration and board structure. In this case we had some questions about the structure and quantum of its stock plan and how this will evolve in future. In the past, there have been concerns about a potential lack of depth in the leadership, which has resulted in a focus on retention. However, the company now appears to have good succession planning in place. It has been notable that the company is increasingly open to engagement and is now seeking our input on what future plans could look like.

The team also engaged with department-store operator TJX. In particular they engaged on recent board changes and the importance of succession planning, and on TJX’s main sustainability priorities – where its focus is on workplace, communities, environmental sustainability and responsible business – notably wages and fashion.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.