Putting our commitment to being a responsible investor into practice
We place great importance on working with companies to make them better investments for our clients and use our voting rights to give them a voice in the boardroom. We engage with companies on a range of subjects with the aim of bringing about specific change on the issues that matter most to us and our clients – from climate change to executive pay and diversity.
A 59% increase in engagement activity in 2020. We undertook 413 company engagements to reduce ESG risk and improve behaviour and performance.
An 85% increase in voting activity in 2020. Globally, including the UK, we voted against or abstained 1,115 out of a possible 3,556 times, or 32% of the time on remuneration.
Proprietary ESG research
We’ve created our own proprietary carbon data for fixed income, increasing the data coverage for a typical RLAM fund from approximately 50% to over 85%.
Tackling climate change
In 2020 we engaged 141 times on climate related risk with 71 companies. In March 2020 we were among the first to call for ‘Green’ to be embedded in the COVID stimulus packages.
Shaping green bonds
We engaged with the UK Government to help ensure the first sovereign green bonds they issue are robust and contribute to supporting a climate transition in the UK.
Awarded A+ by the UN supported Principles for Responsible Investment in strategy and governance. Overall, we secured three A+ and 5 A grades across the eight categories of assets we manage.
Today, engaging with the management and boards of investee companies is required of all good asset managers – it is no longer the haunt of activist investors. Asset managers must act as good stewards of client assets, and not just ensure that investments provide steady financial returns, but also that they uphold minimum environmental, social and governance (ESG) standards. At RLAM, we value engagement as a versatile tool and use it in the pursuit of two key goals: delivering sustainable outcomes; and managing ESG risks and opportunities.
RLAM has long advocated the need for our sector to be good asset owners and consider climate change. This means considering both how we as a manager impact the climate, as well as how the climate, and more broadly the fight against climate change, can impact us and the assets that we manage. For the former, this means considering the carbon output of our holdings – like all asset managers, our investment holdings are the major contributor to our carbon emissions.
At RLAM we recognise the important role of stewardship, whether in preserving or improving returns, or for urging boards to be proactive in managing and leading on ESG opportunities and risks. Amidst the reckoning of a global pandemic, we recognised the need to shift our stewardship efforts and concentrate on areas most pressurised by Covid-19. For 2020 this meant a greater emphasis on executive pay, both during company and engagement and when voting on behalf of our clients.
Case studies - Stewardship and responsible investing in action
In 2020, we took part in a collaborative engagement programme aiming to assess whether companies are embedding microfiber managing technologies within their products and to encourage the uptake of such solutions in critical sectors.
Microfibers are an unwanted by-product across the global supply chain and within global water systems. The extent of the impact of microfibers is still being researched, though it has already shown signs of increasing death rates when absorbed by humans and wildlife at high levels. In particular, we decided to engage with washing machine manufacturers.
The washing of garments is one of the most common ways microfibers find their way into our water systems. Regulation is beginning to respond to the reality of microfibers and set requirements for washing machine manufacturers. As a result, in 2020 and as part of the collaborative engagement, we took a lead in engaging with Electrolux Professionals to understand how and if they are responding to the Microfibers issue within their products. Based on our discussions to date, it is clear that whilst Electrolux don’t currently offer products with Microfiber solutions, it is an area which they are researching heavily.
Looking ahead, we are intending to continue engaging with Electrolux Professionals with the aim of pushing them to commit to enhancing their strategy on Microfibers and will continue to lead the engagement, with the support of other participant Asset Managers.
RLAM led a collaborative engagement effort with fellow members of the 30% Club to request increased gender diversity and female representation on the board of Japanese company Sumitomo Mitsui Financial Group (SMFG).
RLAM is an active member of the 30% Club Investor Group, which is aiming to reach at least 30% representation of all women on all boards and c-suites globally. The Japanese chapter of the 30% Club has a specific target to achieve 10% representation of women on the boards of TOPIX100 companies by 2020 and 30% representation by 2030. SMFG had never been approached by investors to discuss diversity, so this was the first investor dialogue on the issue. SMFG is one of Japan's largest banks with a large consumer finance business and activity in leasing, brokerage and asset management.
SMFG was selected for targeted engagement as it only had one female representative on its board. However, relative to peers in Japan, the company has good corporate governance building blocks that make it feasible to promote gender diversity and to lead change on this ESG issue in the Japanese market. For example, SMFG describes diversity as a factor in its board selection and has good quality disclosure on recruitment and staff rotation by gender.
During the investor meeting, we found the company had no targets for gender representation on the board and deemed the 30% Club aims unrealistic. Their only gender diversity goal is to increase female senior executives, from 10 people (4%) to 20 people (8%) by 2025. We found that recruitment of female employees had decreased sharply because of digitisation trends and reduction of 'clerk' work. SMFG was not aware of any gender-bias in panels or recruitment firms. They did describe a series of sound policies on childcare but acknowledged that men still only take, on average, two days of childcare leave per year. SMFG made positive comments of understanding diversity as a broader issue, including age, race and skill-set.
Whilst challenging we found this engagement to have been positive. The company was open to acknowledging the issue and agreed to escalate our concerns to the Chairman of the Board. We will continue to work with other collaborators' on a follow-up meeting in 2021 to seek progress on the issue.
In 2020 with the onset of the global pandemic remuneration engagement took on a new focus. The calls for increased alignment with the workforce and improvements to existing practices have been circulating for a number of years but really came to the fore over the course of last year. Our engagement aimed to understand what steps companies were taking and to encourage them to fully consider the wider implications of any decisions.
Some of the most positive initial engagement came from companies like Rentokil and Dunelm early on in the pandemic. Board directors and executives took significant salary reductions, bonuses and long-term incentives were suspended and in some cases employee welfare funds were created to help the companies through the 1st UK lockdown. Later in the year we spoke to these companies again about when and how they planned to reinstate pay. Dunelm again proved to be a positive example when we spoke to them at the end of the summer. As a thank you they provided a small cash bonus to all shop floor staff in recognition of all their hard work re-opening their shops, and those at head office who would not be receiving their normal bonus, a small share award was made in recognition of their hard work. Another company in the hospitality sector has confidentially consulted with us on similar plans in late 2020 / early 2021.
At the other end of the scale, we have spoken to a number of companies who wish to override the formulaic outcomes of their bonus or share awards to ensure that their executives still receive sizable pay-outs despite the negative impact of COVID. These situations have proven highly complex with recent financial performance, the use of furlough and treatment of staff being taken into account. In those situations where companies have acted responsibly we are supportive of them rewarding the executives, provided that is reflected in the treatment of their staff. The cases where dividends for shareholders have been cut, redundancies had been made and/or the government furlough scheme has been used to a greater degree we have pushed back, either through our engagement or our voting.
As part of our collaborative engagement with the Friends Provident Foundation on net zero and the Just Transition, we met with a number of electric utility companies at the start of 2020, including SSE. SSE is a power generation company and regulated networks business which includes electric and gas distribution and transmission systems.
During our engagement meeting with SSE in the summer of 2020, our responsible investment analysts scrutinised the company’s targets and alignment to the UK’s ‘Net Zero by 2050’ commitments. We questioned its assumptions on the role of natural gas, carbon capture, use and storage, hydrogen and energy demand. We also requested details about its contributions to flexibility, storage and demand side response. We discussed the company’s strategies to influence public policy, and its views on OFGEM’s recent regulatory consultation.
We also proposed that SSE develop a Just Transition strategy and embed it into its decarbonisation plans. SSE welcomed our suggestions and requested we submit a question to the board at the company’s upcoming AGM. During the AGM, SSE committed to publishing its strategy by November 2020, alongside mid-year reports, and a statement outlining the company’s principles and plans to support a Just Transition.
Now released, SSE’s pioneering Just Transition Strategy is the first of its kind in the sector.
We are committed to taking lessons from this engagement and applying it in other contexts. For example, we have leveraged our role as coordinator of the IIGCC Power and Heat Utilities engagement group to produce an investor expectations paper on the utility sector’s path to net zero.