RESPONSIBLE INVESTMENT QUARTERLY - Q1 2019 - Columbia Threadneedle Investments
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RESPONSIBLE
INVESTMENT
QUARTERLY
Q1 2019
COLUMBIATHREADNEEDLE.COM
Responsible Investment Quarterly – Q1 2019
CONTENTS
01 Foreword................................................3
02 Portfolio Manager Viewpoint...................4
03 The future of food: eat or be eaten........7
04 Benelux – RI Spotlight..........................12
05 Vale’s Brumadinho dam collapse –
the tip of the tailings iceberg?............. 17
Stewardship in action
06 Voting Q1.............................................20
07 Engagement Highlights.........................21
2
Responsible Investment Quarterly – Q1 2019
01 Foreword
We have also had one eye firmly annual member survey of the UN PRI
fixed on the fast-developing provides an opportunity for us to effect
backdrop provided by the European a ‘stocktake’ of our activities and
Commission’s Sustainable Finance review what constitutes current and
Package. The draft proposals emerging best practice in responsible
emanating from the European investment. This year’s survey has
Commission foreshadow significant been no less exhaustive than those
reform. At the core, there is a welcome gone by but, by keeping our heads up
acceleration for the consideration and maintaining focus on supporting
in investment practice of issuers’ our clients in achieving their objectives,
environmental, social and governance we ensure that our overall investment
risk performance, but there is plenty process remains robust.
more besides. Funds marketed in
Europe and aligned to the specific National and regional developments
Iain Richards continue as well. Whilst the UK’s
Head of Responsible Investment delivery of environmental objectives
appear likely to be subject to increased Prudential Regulation Authority
levels of scrutiny. Managers of (which oversees banks and
mainstream funds meanwhile may find insurers) has recently become the
their performance benchmarked to first regulator globally to publish a
The first quarter of the year is a time supervisory statement on climate
ESG-adjusted indices. Given that the
to prepare for the year ahead, refining risk for consideration, the Benelux
impact has potential to be as broad
plans to address strategic priorities and region remains a notable centre for
and significant as that introduced
allocating resource to ensure we are responsible investment activity.
under MIFID II, we continue to monitor
well positioned to execute on these. A summary note of recent events in
the situation extremely closely to
In March, we launched our own RI the region, including as regards the
ensure we are ready to react to the
ratings system that harnesses our issuance of sovereign green bonds,
final recommendations given that they
company’s data science and technology is provided later in this report.
appear likely to materialise in the form
capabilities to provide a forward-looking
of Delegated Acts. Of course, other nations have moved to
rating that combines an assessment
of a company’s financial stewardship Client interest in ESG continues to issue sovereign green bonds in recent
with a view on how well it manages its grow rapidly at the same time and years but many major economies are
environmental, social and governance notwithstanding the potential impact yet to do so. We can only hope that
risks. Our equity portfolio management of the EU agenda we remain focused the increased focus on RI that is soon
teams have been using the tool since on helping all our clients, old and new to fall across the EU will provide the
late 2018 and it is being rolled out to alike, to implement solutions to meet sovereign green bond market the boost
our fixed income investment teams their particular needs in responsible it so badly needs.
during the course of this year. investment. Our response to the
3
Responsible Investment Quarterly – Q1 2019
02 Portfolio Manager Viewpoint
Nicolas Janvier Ann Steele
Portfolio Manager, Senior Portfolio Manager,
US Equities European Equities
Our proprietary responsible How do the ratings help you Are there specific themes/issues
analyse your portfolio/better in your portfolio, or in any given
investment ratings is research potential companies sectors, that you might pay closer
an innovative tool that to invest? attention to as a result of the
ratings tool?
combines ESG and financial Nicolas Janvier: The RI ratings
Nicolas Janvier: We approach RI from
stewardship data to create represent another source of potential
alpha. They help portfolio managers a holistic perspective and there are no
a single company rating for (PMs) and analysts to better focus on specific issues of concern. Where the
5,500 listed equities globally. crucial responsible investing topics that tool has been particularly useful is in
need to be addressed when interacting giving us a greater understanding of
So how do our PMs use it? with companies and their management a company before we speak to them,
teams. The back-testing that has with particular regard to their carbon
been performed gives us confidence footprint among other risk factors.
that the ratings will help us find those
companies that are better positioned to For example, portfolio managers and
deliver sustainable future cashflows. analysts can now use the tool to
quickly understand what a company’s
4
Responsible Investment Quarterly – Q1 2019
risk factors are and analyse its carbon understanding of the risks as well By contrast, our RI ratings focus on the
footprint so that we can then prepare as the knowledge and opportunity most material ESG issues as well as
questions from a more informed to drill down further to establish accounting and financial stewardship
standpoint. where a company’s future cashflows models. They use frameworks agreed
might be going. by industry experts and supported by
The unique model combines academic research; likely outcomes
financial stewardship with ESG How do the ratings improve can be derived from robust back-
factors to arrive at a single portfolio management? testing.
company rating between 1 and 5.
Ann Steele: A company’s financial
Why do you think this combination Are there specific themes or
sustainability is linked to the
is beneficial to the analysis of the issues which the ratings have
sustainability of its business model
companies you invest in/would like highlighted to you?
and the quality of its management.
to invest in?
Ann Steele: Climate-related risks are
Nicolas Janvier: The 1-5 ratings RI ratings provide evidence of this – highlighted in more than 90% of the
scheme is consistent with our approach back-testing shows that better-rated industry models within the RI ratings.
to both fundamental and quantitative companies outperform and worse-rated We analyse complimentary data, for
ratings and is easily understood by underperform. The ratings give us a instance carbon emissions and water
PMs and analysts. Traditional models consistent, detailed dataset to assess intensity, as this helps us optimise
generally focus on one component, but the quality and sustainability of the portfolio management, meeting clients’
our model incorporates all potential risk companies we hold. These concepts objectives, as well as helping us
factors to the sustainability of future – quality and sustainability – lie at the monitor and report to clients.
cashflows. heart of our approach. The logical and
necessary evolution is to include RI Will you use the ratings as part
Will you be using the ratings as factors in the analysis. of a risk management toolset?
part of your risk management
What is the particular advantage in Ann Steele: The ratings help us in
toolset going forward?
the combined nature of the ratings the risk discovery process. They are
Nicolas Janvier: We have fully – looking at both traditional ESG insightful not only for fund management
integrated the RI ratings into our metrics and financial stewardship? but across other areas of our business,
approach to research and portfolio for instance portfolio and risk
construction, and we think of ESG risk Ann Steele: The third-party ESG monitoring.
in the same way as we think of risk to ratings originated in a vacuum and
the income statement or the balance are not designed to help investment Clients and regulators are increasingly
sheet. We consider these risks to decision-making. Material ESG issues focused on this area, and there
be part of the holistic analysis and – the ones most likely to drive a share is an underlying dynamic at play.
understanding of the future direction price – are often clouded by peripheral Sustainability-related risks increasingly
of a business. Integration is key. distractions or legacy controversies. shape economic reality. Investment
They don’t address the quality and firms with the awareness and
Ultimately, the RI ratings are an prudence of accounting and capital information to anticipate them will
additional tool that allow me to perform management: these fall outside be best placed for the future.
my role more effectively, rather than traditional ESG analysis but are key
differently. They give me a greater to the stewardship of a business.
5
Responsible Investment Quarterly – Q1 2019 6
Responsible Investment Quarterly – Q1 2019
03 The future of food: eat or be eaten
Ben Kelly Jess Williams
Senior Thematic Analyst, Portfolio Analyst,
Responsible Investment Responsible Investment
Key to Future Prosperity and related non-communicable diseases) In terms of global GDP, the share from
or indirectly such as goals 13 Climate agriculture, forestry and fishing is
Development Action, and 15, Life on Land (given the relatively modest at 3.5% globally, but
The food value chain is vital to the impact of global farming on emissions this masks a considerable range – for
success of many economies, global and forestry). instance for low income countries this
financial markets, and sustainable is over 25%.2 When related areas such
Figure 1: Food-aligned SDGs as food staples, retail and services are
development.
taken into account – the impact of the
Thus UN Sustainable Development food value chain to the global economy
Goal 2, Zero Hunger, emphasises the is of course much greater.
importance of nutrition, food security
and sustainable agriculture to global This picture is similar for financial
development and prosperity.1 markets, which are not only impacted
Whilst other goals also relate to food to food through asset classes such as
either directly such as 14, Life Below Commodities but also through exposed
Water (which includes a focus on areas within conventional asset
sustainable fishing), 3, Good Health classes. For instance, we estimate
and Wellbeing (given the rise of food- that around 7% of the most commonly
Source: UN.
7
Responsible Investment Quarterly – Q1 2019
used global equity index, the MSCI All nnDemographic growth increases it is estimated that at global warming
Country World Index, are exposed to pressure: it is expected that there of 1.5°C above pre-industrial levels
food related health and nutrition issues will be around 10 billion people on (the most conservative and ‘best case’
through their business models.3 the planet by 2050, around a 30% estimate of future warming), 35 million
increase from today.6 people would be exposed to crop yield
changes. At 3°C (increasingly seen a
Critically Challenged nnThe health impact of food is
BAU scenario) this is expected to be
increasingly of concern: one in
Yet our food systems are facing eight adults are obese and 8.5% 1.8 billion.8
fundamental changes and challenges have diabetes.7
on multiple fronts. Yet agriculture is exacerbating the
Given these challenges, there is a problem. It is estimated that agriculture
nnClimate change poses risks to critical need for not only greater risk and land use has accounted for
global food and health: In 2017 awareness, but innovation, and scaling 24% of Global GHG emissions, and
alone, climate-related disasters up of alternative models and improved dairy & cattle around 40% of this
caused acute food insecurity for practices. We explore three of the total.9 At a time of increasing drought
c.39 million people across 23 challenges and solutions. risk, agriculture is also the largest
countries.4 consumer of the Earth’s available
nnUnsustainable past practices freshwater: 70% of “blue water”
threaten the future: Nearly 1/3 of
Sustainability Challenges withdrawals from watercourses and
fish stocks are overfished and 1/3 Current food systems are both groundwater are for agricultural
of freshwater fish species assessed threatened by and a threat to usage.10
are considered threatened.5 environmental shocks. For instance,
8
Responsible Investment Quarterly – Q1 2019
Technology & Innovation Inari – focused on developing climate markets, have sugar taxes in place.
resilient, less resource intensive, and Sugar is not the only area of focus,
Importantly, new models and more nutritious crops. with growing concerns raised about
techniques can help reduce the impact the overconsumption of meat.
of agriculture on the environment –
including those offered by investable Health & Consumers This was one of the key findings of
companies. Another challenge faced by the food the EAT-Lancet Commission on Food,
value chain, is around health and Planet, & Health – formed of over
One avenue is through the use 30 world-leading scientists, which
nutrition, and related shifts towards
of precision techniques: farm quantitively describes a reference diet.
alternatives especially in developed
management based on observing, The findings showed the need for a
markets.
measuring and responding to substantial increase in consumption
conditions, with the goal of optimizing For instance, greater understanding foods such as vegetables, fruits, whole
returns while preserving resources. of the relationship between sugar grains, and a decrease in consumption
Through offering these solutions, consumption and lifestyle diseases of red meat, sugar, and refined grains in
US firm Trimble helps improve farm – from obesity (now impacting one in order to provide major health benefits,
yields by up to 30% whilst concurrently eight adults) to diabetes (which has and also increase the likelihood of
reducing water use by up to 20%.11 risen threefold over the past 15 years) attaining the Sustainable Development
The Lancet Commissions
– has catalysed a range of policy shifts Goals. Strikingly, they found that
One new development addressing
and consumer demand for healthier globally meat consumption was over
climate impact is from the Dutch
alternatives.13 Now 28 countries, 2.5x the recommended amount, whilst
company DSM, which has developed
across developed and emerging in North America this was over 6x.14
a feed additive for cows that reduces
internal fermentation and hence their
methane emissions by 30%.12
Figure 2: Overconsumption: an issue in all geographies
Despite the pockets of innovation wher
within public markets, many of the Red meat The
news solutions are being developed inclu
by start-ups of varying size and focus. Starchy vegetables folat
These range from Californian Indigo incom
Eggs
(a late stage Venture backed by The that
Investment Corporation of Dubai or fo
Poultry
amongst others, developing crops ribofl
capable of surviving climate change) We
Total dairy
to Small Robots Company (a small, UK relat
based and equity crowdfunded firm Fish (tabl
aiming to replace much of the work asses
done by tractors with a series of highly Vegetables cons
accurate, smart, lightweight robots). cons
Fruit Region pork
Harnessing the potentially disruptive Global nuts
East Asia Pacific
power of these private businesses – Legumes
South Asia obes
whether through investing in them or Sub-Saharan Africa disea
Whole grains Latin America and Caribbean
partnering with them – is an area which Middle East and North Africa
an ag
larger companies will need to explore. Europe and central Asia conn
Nuts North America
One example is Campbell Soup which mort
has launched its own VC fund Acre 0 100 200 300 400 500 600 700 800 from
Venture Partners, investing in new 2016 dietary intake versus reference dietary intake (%) (appe
agricultural business models such as refer
Source:
Figure 1: Food
Diet ingap
thebetween
Anthropocene: the EAT-Lancet
dietary patternsCommission on reference
in 2016 and healthy diets fromintakes
diet sustainable food systems.
of food year
Data on 2016 intakes are from the Global Burden of Disease database. The dotted line represents intakes in
130
reference diet (table 1).
Us
9 assu
Percentage Number Comments and f
Colla
Responsible Investment Quarterly – Q1 2019
Whilst demand for sugary products and premium functional drinks featuring The question remains as to whether
red meat has persisted to date, the ingredients such as turmeric, matcha more traditional companies have the
accelerating demand for alternatives is and collagen.17 Similarly General Mills capacity to evolve at sufficient pace,
even more striking. For instance, plant- has developed a venture arm 301 Inc, and whether or not they will contribute
based food sales growth was 10x that specifically identifying emerging brands towards the achievement of the UN
of all food sales growth in 2018 in the usually with a specific health angle SDGs by their 2030 deadline.
US.15 Whilst a recent survey the UK, (such as plant-based meal and snack
45% of shoppers were actively looking company Urban Remedy).18
for healthy snacks and 41% want
snacks with less sugar.16
Conclusion
This poses a risk for companies As the impacts of climate change,
with less healthy product lines and natural resource constraints, health
portfolios, particularly in a digital era and new consumer demands, increase
when the barriers to entry for insurgent – companies will need to continue to
brands are lower than ever. Yet some innovate and adapt.
companies have responded proactively
to these shifts. Unilever, for instance, Harnessing new technologies,
has 26 sustainable living brands (which proactively looking for alternatives,
are healthier and/or more sustainable) and staying close to regulatory and
Sources:
which have delivered 70% of its recent consumer shifts will be increasingly 1 https://sustainabledevelopment.un.org/sdg2
sales growth. Examples include organic critical for public companies. 2 https://data.worldbank.org/indicator/NV.AGR.
TOTL.ZS?year_high_desc=false
food and tea brands as well as their 3 CTI 17 April 2019, drawing from data provided by
We have identified some specific, MSCI ESG Research
recent acquisition: The Vegetarian
investable opportunities with solutions 4 World Economic Forum, Global Risk Report 2019
Butcher. Other interesting developments 5 FAO report on Biodiversity, 2019
to enhance the sustainability and 6 UN
include the acquisition of WhiteWave
health of our food systems. Mainstream 7 WHO
by Danone – giving them access to 8 FAO
financial markets can already play a
plant-based alternatives – and even 9 IPCC. Barclays
role in supporting these as they seek 10 https://www.globalagriculture.org/report-topics/
Amazon’s diversification into healthier water.html
to scale up, broadening their impact.
food retail through Wholefoods. 11 https://www.trimble.com/Corporate/RCC/Our-
Solutions.aspx
For established companies, however, 12 https://www.dsm.com/corporate/science/climate-
Here venturing has also been pursued
these challenges are risks to business energy/methane-reduction.html
as a strategy, especially by those with 13 WHO
as usual. Some proactive companies 14 https://www.thelancet.com/commissions/EAT
less healthy portfolios. For instance
are further ahead in mitigating these 15 Sugar, fat, salt and Obesity HSBC, Feb 2019
Coca-Cola has ventured into the 16 Sugar, fat, salt and Obesity HSBC, Feb 2019
issues – and evolving products and
company behind Dirty Lemon – a 17 https://dirtylemon.com/
practices which form part of the 18 htps://www.foodbev.com/news/general-mills-301-
direct-to-consumer brand which offers inc-leads-17m-investment-urban-remedy/
solution.
10Responsible Investment Quarterly – Q1 2019
11Responsible Investment Quarterly – Q1 2019
04 Benelux – RI Spotlight
Jess Williams Prosper van Zanten
Portfolio Analyst, Head of Benelux
Responsible Investment
The Netherlands’ plans to issue History of Innovation financial instruments and now has
its inaugural sovereign green bond an approximate 50% market share
(expected May 2019) provide further The Benelux region leads by example of listed green bonds.20 In addition,
underpinning, as if it was needed, in terms of furthering its sustainable the LGX has started an initiative to
for the longstanding interest in finance ambitions, having developed facilitate and streamline access to
responsible investment across the wide ranging practices. One of the Chinese domestic green bonds listed
Benelux region (Belgium, Netherlands, most prominent innovations is the on the Shanghai Stock Exchange
Luxembourg). That said, if local leaders Luxembourg Green Exchange (LGX), or traded on the Chinese Interbank
are serious about maintaining this launched in 2016. The LGX is a Market. This is a much-needed bridge;
leadership position, now is not the time dedicated platform, launched and whilst the market has very different
to be resting on laurels; with the EU’s maintained by the Luxembourg Stock operating standards (most notably in
Technical Expert Group on Sustainable Exchange, for green securities that terms of disclosure), it will nonetheless
Finance due to publish its findings meet eligibility criteria closely aligned be a key player in achieving the
in the near future, the rest of the with ICMA’s Green Bond Principles.19 ambitions of the Paris Agreement.
European bloc will soon be catching up. The Luxembourg Stock Exchange was
the first listing authority globally to
introduce such a platform for green
12Responsible Investment Quarterly – Q1 2019
Sustainable Bonds account for two out of a global total Labelling
of 11 sovereign green bonds (18% of
Companies registered in the Benelux the sovereign green bond universe) A further innovation from Luxembourg is
region have (at the time of writing) which is particularly remarkable given the LuxFlag suite of labels for financial
issued over 60 labelled bonds (green, that the region accounts for only products which provide the end
social or sustainable). Of these ~1.5% of global GDP.22 Aside from consumer with assurance around the
bonds, the majority are from Dutch its sovereign green bond, Belgium products’ non-financial goals. Currently
issuers such as TenneT and NWB, has also been a prominent issuer of LuxFlag provides three accreditations:
respectively a transmission system sustainability bonds. Sustainability the ESG Label, the Microfinance label
operator focusing on renewables bonds are bonds that finance a and the Climate Finance label. Febelfin,
and a Bank particularly focusing on mix of green and social projects. the Belgian federation of the financial
financing the Dutch water boards. A notable Belgian issuer is The sector, is also in the process of
In fact, the Netherlands was the 5th Flemish Community, a regional authority designing an ESG accreditation which
largest issuer of green bonds in 2018 in Flanders, whose sustainability bonds is expected to launch in the Autumn
issuing a total of $7.4 billion over aim to finance: energy efficiency in of this year. The ‘eco label’ concept
the course of the year.21 Belgium’s buildings, affordable housing, access has been picked up by the EU in its
existing sovereign green bond and to education and pollution prevention sustainable finance action plan, where
the Netherlands’ anticipated issuance and control. retail investors are again the center
in May 2019 will see the region of attention.
13Responsible Investment Quarterly – Q1 2019
Impact and the capital markets. Although still responsible investment shows no
in its infancy, MIVs having emerged signs of wavering, a recent example
The question of measuring the impact as a viable instrument only 15-20 being the Dutch Pension Funds
of investments is currently at the years ago, the market looks set to Agreement on Responsible Investment
forefront of responsible investment. grow substantially given the increasing which was signed by over 70 pension
The central bank of the Netherlands, interest in impact investing. funds with $1.4 trillion of assets in
DNB, along with several large Dutch December 2018. We look forward to
investors has developed a system seeing what initiatives will emerge in
for mapping impact indicators to the A blueprint for Europe? the region in 2019.
UN Sustainable Development Goals With the EU Sustainable Finance
(SDGs). The indicators allow investors action place high on the horizon, we
to assess how their investments Sources:
believe that the Benelux region may 19 International Capital Markets Association
and loans contribute to the SDGs soon face some stiff competition from 20 https://www.greenlit.lu/luxembourg-green-
and therefore start to gauge their exchange/
other EU nations in terms of promoting 21 https://www.climatebonds.net/files/reports/
impact, the end goal being to scale up responsible investment. That said, the cbi_gbm_final_032019_web.pdf
sources of investment that deliver a 22 Statista
commitment of the Benelux finance
23 http://www.impactinvestingguide.com/impact-
measurable contribution to the SDGs. industry to fostering and growing investing-microfinance/
SDG impact mapping is a theme that
we have also been focusing on at
Columbia Threadneedle Investments Figure 3: MIV % total assets
where such analysis now forms part of
our evaluation process in social bond
strategies. 16%
Switzerland
34%
Microfinance 5% Netherlands
Outside of the traditional capital Germany
markets, the Benelux region is a 8%
USA
major hub for inclusive finance.
Over 20% of the market for Sweden
Microfinance Investment Vehicles
16% Other
(MIVs)23 is domiciled in the region.
These MIVs act as a link between 20%
multilateral financial institutions, who
on-lend funds to the end recipients, Source: Impact Investing Guide.
14Responsible Investment Quarterly – Q1 2019
15Responsible Investment Quarterly – Q1 2019 16
Responsible Investment Quarterly – Q1 2019
05 Vale’s Brumadinho dam collapse –
the tip of the tailings iceberg?
The frequency of these disasters in expected to bring additional risks, as
Brazil, along with the tailings collapse changes in rainfall may lead to less
at Mt. Polley in Canada in 2014, has predictable conditions and changing
placed a renewed spotlight among water levels within the dams which
investors, companies, and civil society may affect their stability.
on the underlying risks which tailings
dams present, particularly when they
are located near to local populations
Improved safety standards
and environmentally sensitive areas. and disclosure are needed
The risks remain even where dams In this context, we welcome the
are no longer in active use, as was the request, spearheaded by the Church
case in Brumadinho, where Vale had of England Pensions Board and
applied for a license to decommission Sweden’s Council on Ethics, to call
Olivia Watson the facility. for improved disclosure by extractives
Senior Analyst, There are estimated to be at least companies of the tailings facilities
Responsible Investment 3,500 active tailings dams around the they operate or control. The proposed
world, as well as dormant facilities. creation of a new, and independent,
The large number of legacy dams, standard to assess tailings dam safety
built over the last century to contain in the context of their location and the
The collapse of the tailings dam mining wastes, have varying degrees impact of a failure would also be a
at Vale’s Córrego de Feijão dam in of construction standards and record helpful development. The initial
Brumadinho, Brazil in January was keeping surrounding their design positive response from several large
a tragedy on a massive scale. and the environmental conditions at extractives companies has been
As of April 2019, over 220 people the time of their construction. welcome.
have been confirmed to have been Safety standards and disclosure Although we have a relatively small
killed, and nearly 70 people are still are also variable. exposure to the mining sector, we
missing following the collapse.
These latent risks have been have reviewed our extractives holdings
Beyond the immense human toll,
compounded by the increasing across equity and fixed income.
it is clearly concerning for Vale to
volumes of tailings being produced Over the coming months we will be
experience such a significant disaster
by the extractives industry – as engaging with companies around their
so close on the heels of the 2015
remaining minerals and ores are disclosures on tailings facilities and
collapse of the dam at Samarco,
becoming more difficult to extract, the steps companies are taking to
which was operated as a joint
a larger quantity of tailings waste is ensure safety standards.
venture between Vale and BHP.
produced, leading to more, and
larger, dams. Climate change is
17Responsible Investment Quarterly – Q1 2019
The Brumadinho case Vale plans to manage an increasing In prior years we have voted against
proportion of future tailings through the re-election of non-executive
In the aftermath of the dam collapse dry processing, rather than tailings directors whom are not independent.
in Brumadinho, we spoke with Vale dams. This will reduce health, safety In 2019 we voted against the financial
to understand more about their initial and environmental risks, but is not statements as a result of concern on
response to the disaster, including a sufficient measure given the large the lack of adequate risk management
their emergency management number of legacy dams that will remain. and disclosure. The responsible
response, their initial investigations, investment team and relevant PMs
and the certification processes which We also took part in a collective and analysts will continue to monitor
the dam had undergone. We felt that investor call with Vale, and the investigation and to engage with
the company’s appointment of an we welcomed the company’s the company on the results of the
independent expert committee to acknowledgement that significant investigation and the actions it plans
investigate the causes of the failure governance and organisational to take as a result. It will be important
is a positive step. While we await the changes will be needed to rebuild trust. to continue to work alongside other
findings from the committee later The issues at Vale are compounded by investors, and we will continue to
this year, the reports in the media the significant lack of independence engage with the company collectively
surrounding allegations as to the on the board. A lack of independent through the group investor dialogue
status of the dam and safety lapses scrutiny of safety measures adopted facilitated by the PRI.
are clearly of significant concern. in the wake of Samarco may have
contributed to the failure to foresee
the disaster at Brumadinho.
18Responsible Investment Quarterly – Q1 2019
STEWARDSHIP IN ACTION
Columbia Threadneedle Investments While analysing meeting agendas and the issuers in which we have
views an integrated approach to and making voting decisions, we large holdings – based on either
stewardship as an integral part of its use a range of research sources monetary value or the percentage
responsible approach to investment. and consider various ESG issues. of outstanding shares.
The RI team makes final voting
We vote actively at company decisions in collaboration with There are many companies
meetings, applying our principles the firm’s portfolio managers and with which we have ongoing
on a pragmatic basis. We view this analysts. Votes are cast identically engagements, as well as a number
as one of the most effective ways across all mandates for which we that we speak to on a more ad hoc
of signalling approval (or otherwise) have voting authority. basis, as concerns or issues arise.
of a company’s governance,
management, board and strategy. All our voting decisions are available We actively participate in
We classify a dissenting vote as for inspection on our website seven several investor networks, which
being where a vote is cast against days after each company meeting. complement our approach to
(or where we abstain/withhold engagement. Along with other
from voting) a management-tabled We engaged with numerous investors, we raise market and
proposal, or where we support a issuers throughout the quarter. issuer-specific environmental, social
shareholder-tabled proposal not In prioritising our engagement work, and governance issues, share
endorsed by management. we focus our efforts on the more insights and best practice.
material or contentious issues
19Responsible Investment Quarterly – Q1 2019
45
40 38
35
Number of meetings voted
7
30
06 Voting Q1
30
26
25
20 19
15 17
15 31
12 10 9
10
11 11 6 5
5
5 4 4
0
Asia United Europe North Japan Latin
Pacific Kingdom ex-UK America America
ex-Japan
Dissent from at least one item Support Management on all items
Between January and March 2019, we voted at 130 Figure 5: Proportion of dissenting votes per category
meetings across 22 global markets. 96 of these were
2% 1%
annual general meetings, 32 special meetings and two 3%
2% Directors
bondholder meetings. Of the 130 meetings, we cast at Other business
least one dissenting vote at 66 (51%).
12% Remuneration
Figure 4: Meetings voted by region Capitalisation
45 Audit related
14%
40 38 51%
Reorganisations and
35 mergers
Number of meetings voted
7
30
30 Supporting shareholder
26 resolutions
25 16%
20 19 Antitakeover
15 17
15 31
Source: Columbia Threadneedle Investments, ISS ProxyExchange, 31 March 2019.
12 10 9
10
5 11 11 6 5 We did not support 133 individual voting items throughout
5 4 4 the quarter, the majority relating to directors’ elections
0
Asia United Europe North Japan Latin and executive pay. Two votes were also cast against
Pacific Kingdom ex-UK America America
ex-Japan management recommendations in support of shareholder
proposals.
Dissent from at least one item Support Management on all items
Source: Columbia Threadneedle Investments, ISS ProxyExchange, 31 March 2019.
We voted in 22 separate markets in the first quarter.
Most meetings
2% were voted
1% in the UK (30), followed by South
2% Directors
3% (17), the US (16), India (14), Japan (10) and Brazil (6).
Korea
Other business
12% Remuneration
Capitalisation
Audit related
14%
51%
Reorganisations and
mergers
Supporting shareholder
16% resolutions
Antitakeover
20Responsible Investment Quarterly – Q1 2019
07 Engagement Highlights
In the first quarter, we engaged with Specific environmental focus Rentokil Initial plc, Sika AG, SimCorp
the 62 issuers listed below, some on Total SA A/S, Spirent Communications plc,
multiple occasions. SSP Group plc, Standard Chartered PLC,
Specific social focus Stock Spirits Group plc, Ted Baker PLC,
Environmental, social and governance Becton, Dickinson & Co. Thai Beverage Public Co., Ltd., Vectura
discussions Group plc, Weir Group plc, XP Power Ltd
Alexion Pharmaceuticals, Inc., Applus Specific governance focus
Services SA, Britvic Plc, Breedon Barclays plc, British American
Group plc, Brunello Cucinelli, Tobacco plc, Burberry Group plc, Case studies
Continental AG, Croda International plc, Cargotec Oyj, Coats Group plc,
Cobham plc, Cognex, Crest Nicholson The following case studies describe
Deutsche Telekom AG, easyJet plc,
Holdings plc, CRH plc, Domino’s ESG-focused engagement led by
Edenred, Evonik Industries AG,
Pizza Group plc, Elementis plc, Epiroc, members of the RI team.
Iberdrola, Innogy SE, Kingspan
Group plc, Koninklijke Philips, Korian, GlaxoSmithKline plc, Greene King plc,
Lar Espana Real Estate Socimi SA, Howden Joinery Group Plc, IMI plc,
Mondelez International, National Imperial Brands PLC, Informa plc,
Grid plc, Nintendo Co. Ltd., Nordea ITV plc, London Stock Exchange
Bank AB, Pennon Group plc, Schneider Group plc, Pearson plc, Pernod Ricard,
Electric SE, Vale S.A. Prudential plc, Rathbone Brothers plc,
Becton Dickinson, USA, Health Care Equipment
Social, strategy
nnAccess to healthcare, and good ESG management, highlighted as core to Becton Dickinson’s business
model. Sustainability an increasingly important issues for their employees – considering sustainable pension
plan options. They have a proactive approach to new EU medical regulation, which will be material. They must
produce new evidence for some products and relabel others.
nnIssues around litigation are considered as part of due diligence around M&A activity. Potential cash flow
impacts for 8-10 years are considered alongside the natural life span of any impacted products.
nnCyber risk is an important issue with a direct report to the CFO. They examine business relationships
based on cyber risk e.g. banking. The company was caught in the WannaCry attack but updated customers
in 24 hours and fixed the issues within 48. The company continues to work with the FDA on best practice.
21Responsible Investment Quarterly – Q1 2019
Brunello Cucinelli, Italy, Textiles
Environmental and sustainability, social, strategy
nnWe held a call with the company’s Director of Investor Relations and Corporate Planning during the first
quarter to discuss a number of material ESG issues. We concluded that the quality of the company’s ESG risk
management does not appear to be reflected in its external reporting and therefore not captured in ESG data.
nnAll production takes place in Italy, rather than developing countries, mitigating supply chain risk. The company
values its close relationship with direct suppliers. Circa 340 ‘Artisan laboratories’ – with no subcontractors –
produce the company’s goods and are paid 20% more than the market rate.
nnThe company also has a close relationship with its raw material suppliers and can trace cashmere and cotton
to their origin. The company’s growth plans avoid supply chain stress or loss of brand exclusivity.
nnBrunello Cucinelli is the company’s founder, majority owner, chairman and CEO. Positively, his succession
was openly discussed. He, along with all senior management, are subject to both a long-term and short-term
succession plan.
easyJet, UK, Airlines
Strategy, Brexit
nneasyJet believes it is well-prepared for Brexit. The referendum result led to a structural change at the
company, with a new European airline set up in Austria. With 40% of its flights intra-Europe, monitoring
and preparing for Brexit developments has been a huge draw on resources. Brexit-related activities have
dominated the CEO’s first year.
nnWhen former CEO Carolyn McCall left, the board realised the succession plan wasn’t good enough.
This has been an area of focus and there has been significant change at the senior management level; the
new team is establishing itself.
nnThe company highly values its workforce and has good relations with the c20 unions – it was last affected
by industrial action in 2016.
nnThe company have been working more with data, including establishing an organisational temperature chart
to identify where resources should be focused. Though flight punctuality was worse this year, customer
satisfaction levels increased.
22Responsible Investment Quarterly – Q1 2019
Greene King, UK, Beverages
Governance, human capital
nnWe discussed changes to the governance structure resulting from the departure of the CEO, including
succession and transition plans, and remuneration proposals. We noted that the pension arrangements for
the incoming CEO have been reduced as compared to his predecessor.
nnWe also discussed board and senior management diversity. A new non-executive director has been appointed,
bringing the level of female representation to 25%. The company recognises that further work is needed to
address gender diversity at senior management level.
nnWe discussed the company’s ongoing efforts surrounding employee engagement, including among pub
management. There has been some improvement in employee metrics including engagement and retention
rates, and the company has formalised an employee liaison role within the Board.
Total SA, France, Integrated Oil & Gas
Environment and sustainability, strategy
nnWe attended Total’s results and climate strategy presentation. The company has set a 15% GHG reduction
target for operational emissions (Scope 1 and 2) for 2025, which we welcome as a positive step. The company
emphasized that they have a number of cost-neutral options to meet the target, including a focus on natural
gas, efficiency improvements, and their low-carbon electricity business, among others.
nnThey believe with their 3 strands of oil, gas and low-carbon electricity that the company will be able to adjust
as climate policy tightens. The company is making small investments in R&D into carbon capture and storage,
looking at potential to commercialise this in the North Sea if carbon prices increase, as well as biofuels, and
carbon sinks (forest carbon credits).
nnWe note that future executive compensation will also include targets aligned with emissions reductions, and
we will await the detail of these.
23Responsible Investment Quarterly – Q1 2019
Breedon Group, UK, Construction Materials
Environment and health and safety, strategy
nnBreedon Group is a construction materials firm based in the UK and Ireland focussed on aggregates, and
more recently, cement.
nnWe spoke with the company about their strategy and expansion plans, including the outcomes following the
acquisition of Lagan, an Irish construction and cement business. We also discussed how company culture
is maintained and how safety standards are addressed and maintained following acquisitions.
nnWe discussed the increase in the company’s injury rate during the year. This is above their target, though it
is not significantly out of range as compared to peer companies. The increase appears to relate to an increase
in minor accidents.
nnWe also discussed sustainability reporting and plans to improve disclosure in the future. As an AIM-listed
company, disclosures on many ESG issues such as GHG emissions are lacking as compared to larger peers.
The company has recently joined the Global Concrete and Cement Association and will improve its reporting
in line with requirements. We will continue to engage with the company in this area.
Pennon Group, UK, Water Utilities
Environment and sustainability, strategy
nnPennon is a UK based utility group focused primarily on water and wastewater services and waste
management.
nnWe spoke with the company about their environmental strategy, given the growth of their GHG emissions
in recent years, which has resulted from an increased focus on Energy Recovery Facilities (ERFs) alongside
landfill, within their waste management business.
nnThe company is modelling its future carbon emissions and developing a group level carbon strategy, which
will include 3-year targets. The company is also seeking to improve its CDP rating.
nnThe company has community consultation programmes and liaison groups surrounding planned and existing
ERF facilities. Community concerns have resulted in delays to the planning process for some new facilities,
particularly those sited near to urban areas.
nnWe encouraged the company to report on its other air emissions, particularly those from ERFs, outside of
detailed reporting to the Environment Agency. They are seeking a common reporting format to be adapted
across the sector.
24Responsible Investment Quarterly – Q1 2019
Alexion Pharmaceuticals, USA, Pharmaceuticals
Business ethics, human capital, governance
nnAlexion is a US pharmaceuticals company focused on the development of therapies for rare autoimmune and
cardiovascular diseases. It has recently undergone a restructuring and a headquarters move from Connecticut
to Boston, as well as investigations around business ethics and marketing practices.
nnWe discussed corporate culture and employee engagement following the reorganisation. The company’s ‘net
promoter score’ an indicator of employee engagement, has increased significantly following the office move.
The company plans to increase their disclosure around employee issues in the future and will produce a
separate sustainability report.
nnIn relation to business ethics, the Code of Ethics has been expanded, and all employees now have
compliance/integrity related goals linked to compensation. This had led to some positive changes in corporate
culture and it was noted that the ‘tone from the top’ has had a stronger focus on integrity.
nnOn the issue of board diversity, the company will publish a board skills matrix which will include gender and
ethnicity and will be used in board composition discussions. We noted that although only 20% of the board
is comprised of women, over half of the senior management team are women.
Mondelez, USA, Food and Beverage
Strategy, remuneration, nutrition
nnMondelez is a global food and beverage company focused primarily on snack foods including chocolate,
biscuits, and gum.
nnFollowing the release of their updated strategy in late 2018, we discussed the focus for their next phase,
including consolidation into core product lines and a focus on high growth geographies with a more
decentralized structure.
nnWe also discussed shareholder concerns around executive pay in 2018, and their plans for remuneration in
2019 including changes to the peer group comparison for the CEO.
nnWe sought their views on how ESG issues such as health and nutrition might affect the company, given
consumer trends and the greater focus on regulation and sugar taxes in many markets. We discussed how
these trends are overseen and discussed by the Board, as well as some of the changes that have been
introduced to improve the nutritional profile of some of the company’s products.
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