Responsible Investment Report

Transcription

1 Responsible Investment Report 2017 This information is for Investment Professionals only and should not be relied upon by Private Investors. IMPORTANT INFORMATION Reference in this document to specific securities should not be considered as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Views expressed may no longer be current and may have already been acted upon.

2 Foreword Michael Gibb Head of Stewardship and Sustainable Investment As the new Head of Stewardship and Sustainable Investment, I am excited about the strong momentum across the business at Fidelity to reinforce our approach to sustainable investment and ESG integration. This is based on a strong foundation and a committed desire to improve investment outcomes for our clients. Responsible investment is increasingly in demand, and indeed, expected, as an important and necessary component of asset management. We are in a privileged position to foster positive change that helps deliver enhanced long-term returns, as well as invest with a broader purpose than just a narrow, financial lens. We believe that competitive returns can be achieved whilst making a positive difference to society for future generations. At Fidelity, sustainable investing is at the heart of our approach. We believe that delivering superior investment solutions demands fundamental analysis aligned with effective consideration of the risks and opportunities presented by environmental, social and governance (ESG) issues. As such, we have integrated the analysis of ESG factors across our investments. This focus reflects both our clients needs and our commitment to long-term stewardship, which, along with active engagement and proxy voting, underpins the fiduciary role that we play as managers of our clients money. Where we are? We have a long list of focussed ESG initiatives this year, including restructuring the team to better align with the sectors and focus areas of our research analysts, working with clients to improve our ESG reporting and developing our ESG product capability. A key priority is our enhanced engagement strategy. ESG issues are clearly material: we need to identify, assess and manage them, and this is not just about investment analysis but about engagement. Asset owners increasingly expect active ownership from their investment managers. We will prioritise dialogue with targeted investee companies where we believe there is scope to encourage positive changes on corporate behaviour and management attitude to material non-financial factors. Engagement outcomes are measured against specific objectives. Talking with companies in which we invest is a key part of our investment process, and has always been, so engaging in a more targeted way on ESG matters - from, for example, climate change to the growth of artificial intelligence to evolving human capital governance to sugar taxes - is a natural step. I am encouraged by the results of the 2018 Fidelity Analyst Survey regarding companies taking ESG issues more and more seriously. One objective of our engagement strategy will be to encourage improved disclosure. In that regard Fidelity welcomes initiatives aiming at harmonising companies ESG reporting and encouraging companies to report material information for investment decisions. We consider the recommendations of the FSB Task Force on Climate-Related Financial Disclosures as a major step in improving and enhancing companies reporting on the risks and opportunities linked to climate change. Fidelity will also be reviewing the implications of the recommendations as an asset manager. 2

3 What you can expect going forward Interest in responsibility investing will continue to expand, reflecting the growing body of evidence that ESG-friendly policies and behaviours tend to be associated with higher quality firms better positioned to manage risk and opportunity and adapt to changes in business environments. It s also worth noting that by leveraging our ESG capabilities we are assessing the viability of launching a family of sustainable investment strategies across asset classes that are designed to meet client demands. You can expect distinctive funds intended to take advantage of innovative companies that are well positioned to take advantage of changes in energy supply, resource efficiency developments, new technologies and sustainability themes which will offer attractive long-term returns. I hope the information we provide will help our clients and our peers to appreciate the value of Fidelity s approach and build confidence that responsible investment is a key component of our overall approach. 3

4 Table of Content Perspectives Fidelity Analyst Survey 2018: ESG enters the board room 5 Defining ESG: Evolution not revolution in review Highlights 15 Our Governance and Policies 16 ESG Integration 17 Engagement 19 Voting 21 Engagement with regulators and other stakeholders 26 Our ESG Team 29 4

5 Perspectives Fidelity Analyst Survey 2018: ESG enters the board room The 2018 Fidelity Analyst Survey reinforces what we already witness from asset owners and regulators in terms of rising demand for responsible investment. The survey reveals that the proportion of analysts finding their companies thinking about ESG (Environmental, Social and Governance) issues is 40% higher than last year, and, for the first time, more than half of respondents report that some or most companies in their sector are taking ESG seriously. Our analysts are finding that corporations are sitting up and taking notice of environmental, social and governance standards, and it s more than mere lip service. Chart 1 shows how the proportion of analysts reporting some or most of their companies are taking ESG seriously has jumped from 42% in 2017 to 59% in The data also shows that analysts with a majority of companies stepping up ESG efforts have swelled from 13% to 30%. And this increase has come entirely from those companies which were previously all but ignoring ESG. In other words, this is a strong indication that more companies are taking ESG seriously. Chart 1: Companies are taking ESG seriously Have you seen a growing emphasis among your companies to implement and communicate ESG policies in the last year? No, not really Yes, but only among a minority of companies Yes, most companies are stepping up their ESG efforts 30% 29% 41% 29% 13% 58% Source: Fidelity Analyst Survey 2018 Environmental regulation features as the most important environmental or social issue according to our analyst responses (Chart 2). A quarter of analysts think environmental regulation is most relevant to their companies, and in China this number rises to 34%. Bribery/anti-corruption and cybersecurity/data protection also appear as key issues. We delve deeper into each of these categories below. 5

6 Chart 2: Environmental regulations are keeping our analysts occupied Which environmental/social issues are most relevant to your companies? Environmental regulation Bribery / anti-corruption 2% 3% Cybersecurity / data protection 10% 25% Health & safety 10% Supply chain management Human rights / community relations Environmental / social issues are not relevant 16% 16% 19% Nutrition Source: Fidelity Analyst Survey 2018 Environmental regulations Environmental regulations have been one of the biggest drivers of equity and bond market performance in many sectors in the last few years. Utilities are one of the most affected industries. Decisions by governments to phase out coal have led to many companies holding stranded assets i.e. fossil fuel resources that are not exploited for economic reasons. Some firms, such as RWE and EON have responded by restructuring. But these developments have also thrown up opportunities to invest in and fund green projects such as energy efficiency solutions. We expect environmental regulation to continue to become more stringent especially given that all countries - except the US - have signed up to the Paris climate agreement, with China, in particular, demonstrating leadership and the intention to dominate green energy. Anti-bribery and corruption In recent years, we have seen countries increasingly fight back against corruption and show they are willing to ramp up fines for bad behaviour, and to go beyond just fines. In some cases, countries are banning companies from tendering for contracts, such as India blacklisting the 5 billion market cap, Italian defence provider Leonardo. In other cases, incidents are having a more positive long-term effect by putting pressure on company boards to bolster checks and balances, increase transparency, and even bring in new management with a mandate to deliver a clean house. For investors, it s crucial to understand the nature of bribery and corruption events, the likely consequences, and whether the incident is a one-off or a symptom of a more pervasive problem. Cybersecurity and data protection Insurers at Lloyds 1 of London estimate that a new, global cyberattack against a computer operating system servicing a large number of countries could cause up to $53 billion in economic losses. For financial companies and exchanges, which manage large volumes of highly sensitive customer data and financial transactions, cybersecurity and data protection is a 1 6

7 large part of their cost base. Our analysts note that data breaches are the number one worry for exchanges and information providers. Breaches can cost firms millions to fix, but much more in reputational damage (e.g. Equifax, Yahoo or Uber). While breaches are difficult to predict, investors can protect themselves against cybersecurity weaknesses by limiting exposure to sub-sectors handling particularly sensitive data, use expert networks for better information, and monitor whether a company is allocating sufficient resources towards security and has effective internal control systems in place. Extract from the article ESG enters the boardroom published on 20th February 2018 and available on Fidelity s website: 7

8 Perspectives Defining ESG: Evolution not revolution ESG investing seems all the rage, but what does this focus on environmental, social and governance criteria actually mean? ESG practices among investors and institutions vary widely, and what is seen to constitute ESG investing has evolved over time; today s approaches to ESG investing range from simple exclusion lists to activist strategies. We think the absence of a unified definition may not matter all that much in the grand scheme of things - and it will not halt progress in ESG investing. Having said that, it does pose a challenge for investors who need to decide on their own definition and criteria. What is ESG? What is ESG? Finding an answer to that question is much harder than it ought to be. Environmental, social and governance factors cover an extremely broad range of issues from avoiding investing in tobacco companies to financing clean water initiatives. The fact that different labels such as sustainable, responsible, ethical and impact investing all fit under the ESG umbrella complicates finding a definition that encapsulates all the different facets of ESG. The concepts underpinning ESG have also evolved over time. A hundred years ago, responsible investing was mostly about religious beliefs influencing the choice of investments. Now it s also about people s perceptions of themselves and their role in society informing their investment framework. ESG s beginnings were largely based on exclusion - avoiding the asset classes and sectors deemed to have a negative effect on society - but in recent years it s extended to modern-day activism, where investors directly intervene to enact positive change. Today, ESG is considered by some as an asset class and an investment approach in its own right. Investor motivations for pursuing ESG vary widely, ranging from the already mentioned moral and religious beliefs to regulatory and legislative requirements, public and client pressure, and economic reasons. Some of the issues that ESG-aware investors think about today are detailed in Chart 3. From this starting point we unpick the complexities of what constitutes ESG and try to pin down a universal definition by asking why ESG matters, what s driving the ESG trend and what the different approaches to it are. In doing so, we also highlight the range of interpretations of ESG, and that the discipline requires investors to think carefully about their own policies and beliefs. 8

9 Chart 3: Some modern-day ESG issues ENVIRONMENTAL SOCIAL GOVERNANCE Climate change Greenhouse gas (GHG) emissions Resource depletion, including water Waste and pollution Deforestation Working conditions, including slavery and child labour Local communities, including indigenous communities Conflict regions Health and safety Employee relations and diversity Executive pay Bribery and corruption Political lobbying and donations Board diversity and structure Tax strategy For illustration purposes only. Source: Fidelity International, 2018 Why does ESG matter? There are two broad schools of thinking when it comes to why ESG matters; one starts from the role of investors in society and the other focuses on risk management. Many investor groups including pension funds, charities and endowment funds see their role as more than just return-seekers. They are conscious that funding our retirements, financing societal initiatives and contributing to the cost of education, can lend them a function within wider society. With this responsibility comes influence. These investor groups manage significant pools of capital; directing this capital gives them a substantial amount of authority. They decide how and where they want their funds allocated, and can choose to favour schemes that aim not to have a negative effect on society or those targeting a positive effect. to help mitigate risk. For example, a potential investment in a company with low ESG standards could expose the portfolio to a variety of risks faced by the company in the future, such as worker strikes, litigation and negative publicity etc., resulting in lower future returns. For investors, monitoring the ESG credentials of an investment can lead to better risk-based judgements. This is not a divergence from the traditional investment principle of maximising shareholder value - it s an evolution. In the early 2000s, there was some debate over whether the fiduciary duty of asset managers included considering non-investment related indicators such as ESG characteristics. A large body of research since has led to an overwhelming consensus that ESG factors do indeed play a part in the performance of investments. By considering ESG, investors may be able to deliver better risk-adjusted returns. The other major philosophy behind ESG is rooted in risk management. Investors who take this approach incorporate ESG factors into their investment process 9

10 What factors are driving ESG? The primary driver of the growing focus on ESG is access to information. The proliferation of 24-hour news channels, the internet and social media mean that the public has an extraordinary amount of information available at its fingertips. It s not only an instant news world, but it s also a global news world - we can find out rapidly what is happening almost anywhere in the world. Armed with this transparency, public scrutiny is at an all-time high, and people power is changing how the investment world behaves. Companies understand the value of their brand and have a heightened sensitivity to public opinion to avoid risking damage to their reputation. The rapid response by a number of companies to distance themselves from the National Rifle Association (NRA) in the wake of a mass shooting in Florida in February 2018 demonstrates this clearly. It was the first time this happened after a mass shooting, and it was largely down to companies sensing the changing public mood. This public scrutiny affects how institutional investors direct their capital, which in turn influences how asset managers deploy funds and engage with companies. But the relationship between institutional investors, asset managers and companies isn t one way. They often have long-term partnerships and influence and inform each other. So in practice, the drive towards ESG can come from institutions, asset managers and industry. One important aspect of the increasing access to information is the availability of data. This has made it practical to incorporate ESG factors into the investment process. Regulatory frameworks have improved, companies disclose more ESG information, ESG investment metrics and tools are proliferating, independent third-party agencies provide ESG ratings, and new ESG indices allow for portfolio benchmarking. And an increasing body of research explains how to incorporate ESG factors into decision making. 10

11 Turning points It s worth highlighting a few turning points in the history of ESG investing which had a significant effect on how the discipline developed. Chart 4: ESG milestones The economic boycott of Apartheid South Africa was first proposed in 1962 by UN Resolution 1761, which called for imposing economic sanctions on South Africa. In 1977, the Sullivan principles advocated institutional investors withdraw direct investments from the country. By the mid-1980s, capital flight reached scale, and as the South African rand fell, inflation rose to over 18% in 1985, and the government introduced capital controls. This ESG approach of divestment has largely been out of favour for much of the intervening years, but has been re-introduced by NGOs more recently. The technique was on full display in February against corporations with connections to the NRA. UN resolution 1761 calls for imposing economic sanctions on Apartheid South Africa DowJones Sustainability Index is the world s first ESG-based index Sullivan principles advocated institutional investors withdraw direct investments from South Africa The Principles of Responsible Investment (PRI) aimed to counter the argument put forward by some investors that their fiduciary responsibility to clients meant that they could exclude non-financial indicators in the investment process. The PRI argued against this limited understanding of fiduciary duty and launched a guide to help investors integrate ESG techniques into their equity investing process. As of April 2017, there are more than 1,750 signatories to the Principles from over 50 countries, who are collectively responsible for nearly USD 70 trillion. First Green Bond is issued (by the European Investment Bank (EIB)) The Paris Agreement is negotiated, coming into effect a year later For illustration purposes only. Source: Fidelity International, March 2018 Principles for Responsible Investment (PRI) is launched The UN Sustainable Development Goals (SDG) is published France s Article 173 introduces climate profile reporting of funds by institutional investors The UN Sustainable Development Goals (SDG), published in 2015, listed 17 objectives and 169 associated targets to transform the world by Although these principles are not legally binding, they have had a pervasive influence and are increasingly informing ESG policies of many institutions including governments, universities and financial entities. The Paris Climate Agreement is the world s first comprehensive climate agreement, and entered into effect in November It s legally binding in forcing governments to accept and cater for the goal of keeping global warming this century to below two degrees Celsius above pre-industrial levels. The agreement has spurred many climate-based initiatives and accelerated the move away from fossil fuel-based vehicles. The US s withdrawal from the agreement cannot take effect until November 2020 at the earliest, after the next presidential election. And despite the government s position, many states and corporations in the US have publicly committed to the climate targets. 11

12 Chart 5: PRI s impact on the investment world Assets under management signed up to PRI (USD trillions) Number of signatories (RHS) Apr-06 Apr-08 Apr-10 Apr-12 Apr-14 Apr Source: PRI, April 2017 What are the main approaches to ESG? Investors can implement ESG considerations into their portfolios in a host of ways, stretching from active ownership to impact investing. One way to think about the different approaches is as a dial, from less ESG to more ESG. Chart 6 shows how this can be done - it is a rough guide and there are gradations within, and overlaps between, categories. Chart 6: ESG terminology overview For illustration purposes only. Source: Fidelity International, March

13 ESG unaware - This is a stage where investors place no positive value on ESG-related issues. They may consider certain risk management or regulatory factors somewhat relevant to ESG such as the potential for environmental litigation, but this is based on avoiding loss rather than the positive shareholder benefits of incorporating ESG into investment decisions. Exclusion policy - This excludes investment sectors which are contrary to the investor s ESG specific criteria, such as avoiding weapons or tobacco stocks, or investments in countries with poor human rights records. Outside of these excluded categories, investors apply a standard investment approach. Active ownership - Investors seek to influence companies on many different levels so this includes a broad spectrum of interaction with company boards and straddles many categories. Investors can take an engagement approach where they monitor the ESG performance of companies and engage in constructive shareholder dialogues to ensure progress. A consulting approach is a particular form of engagement where larger institutional investors and shareholders are able to pursue quiet diplomacy, attempting to influence the company through regular meetings with top management, exchanging information and developing a trusted advisor relationship. Activism is the most aggressive form of engagement. It is a pressure-based technique, involving strategic voting in support of a particular issue or to bring about governance changes. This approach can be pursued publicly to apply more force. Increasingly, we are seeing investors use activist methods for environmental and social-related issues, rather than purely governance. ESG aware - Investors recognise the positive contribution that ESG considerations can make to investment outcomes. This is a broad category and there are varying degrees of the level and systematic recognition and incorporation of ESG elements into investment decisions. ESG integration - The consistent fundamental analysis of environmental and social issues to adjust forecasts of key security price drivers, in order to identify additional sources of risk and opportunity, and deliver better overall investment decision-making. Statistical methods can also be used to establish a predictive correlation between the sustainability aspects of a company s performance and financial factors. Best-in-class - Investors actively select companies to invest in based on a set of ESG criteria or choosing from a sub-set of the best practitioners in a sector. In practice, this can involve ranking the potential investment population by the criteria, then selecting the best performers from each characteristic or picking a number of investments that feature in the top group of the ranking. Impact or thematic - This refers to investments made with the intention to generate measurable and beneficial social or environmental impacts alongside a financial return. This differs from traditional philanthropy because it intends to earn a financial return. It often follows themes such as renewable energy, water treatment, education providers etc. These approaches to ESG demonstrate what a broad church it is. One element that binds all these forms together is the careful consideration, by investors, of environmental, social and governance effects on stakeholders. This requires investors to integrate, to some degree, ESG factors into the investment process. Such integration could take the shape of a separate ESG advisory group informing the investment decision makers, or an ESG function embedded in the investment process. Either way, ESG investing requires investors to conduct, intentionally and systematically, an assessment of relevant risks and opportunities as part of their financial analysis, in order to allocate capital in a society-conscious way. Exclusion / norms based - This is a more comprehensive type of negative screening that excludes investments in companies which do not meet widely accepted norms such as the UN Global Impact principles, Kyoto Protocol, or the UN Declaration of Human Rights. 13

14 Conclusion The closest this takes us to a definition of ESG is a statement about assessing risks and opportunities within the investment process in order to allocate capital in a society-conscious way. We don t have a more specific, unified ESG definition - but do we even need one? Investors practice their craft differently according to the asset class they operate in, their objectives, their resources, and the investment environment and market infrastructure prevailing at the time. As a result, there has always been a variety of investment styles and approaches to making investment decisions in the non-esg world. Indeed, this range of approaches can inject diversification and risk management benefits into portfolios. So instead of seeking a universal definition of ESG, perhaps it s more productive for investors simply to understand a providers approach to the discipline, and decide whether that aligns with their own objectives and beliefs. External factors to the debate such as the progress of technology and data, and events such as the BP oil disaster in 2010 or the Wells Fargo mis-selling scandal in 2016, undeniably have an impact on the ESG conversation. The common criticism that ESG becomes merely a luxury when the market turns downwards perhaps had an element of truth to it in the past. But it s also reductive to say that ESG is reactionary. Not only is there data supporting its role in investment returns but it s also becoming increasingly institutionalised in financial analysis. ESG, just like in the decades before, is not going away, but is here to stay and continuing to evolve. The ESG landscape is evolving, in part because of the different voices and entities informing the discussion. Public scrutiny, governments, supranational institutions, academics, asset owners, asset managers and corporations are all presenting unique points of view. We think robust debate is healthy, and likely to lead to better ESG analysis, implementation and outcomes in the long term, just as it has in other corners of the modern economy. Extract from the article Defining ESG: Evolution not revolution published on 5th April 2018 and available on Fidelity s website: 14

15 2017 in review Highlights ESG Oversight Group An ESG Oversight Group has been formed to provide oversight over all ESG matters. Responsible Investment Policy A new Responsible Investment Policy was introduced during the year. It gives greater prominence to Fidelity s approach towards ESG integration. PRI Fidelity received an A+ or A rating in all categories assessed by the Principles for Responsible Investment ( PRI ). ESG Integration Analysts are explicitly required to comment on ESG issues when a company has a poor ESG rating or when it has faced a severe controversy. TCFD In January 2018, Fidelity became a named supporter of the recommendations of the Task Force on Climate-related Financial Disclosures ( TCFD ). Engagement The ESG team communicated with 761 companies in 2017 and held 193 meetings with chairmen and independent directors. Governance and remuneration were key topics for discussion but environmental and social issues were of increasing focus during the year. Voting Fidelity voted against management on at least one resolution at 26% of the meetings at which we voted. Remuneration continued to be the main reason for votes against, with director independence and shareholder proposals comprising most of the remainder. LTIPs campaign Further progress was made in promoting Fidelity s long-term incentive plans ( LTIPs ) share retention guidelines with most UK companies now having a minimum share retention period of 5 years for shares granted to top executives. Progress is slower in the rest of Europe but 38 companies in the Eurotop 100 are now compliant (compared to 16 in 2012). 15

16 2017 in review Our Governance and Policies ESG Oversight Group An ESG Oversight Group ( ESGOG ) was set up during the year to ensure a comprehensive oversight of all ESG matters within the company across all jurisdictions and business areas. It comprises of seven members of Fidelity s senior management team representing all asset classes. The ESGOG meets quarterly and review any ESG company policy changes, industry developments, client requirements, new product innovations and regulatory updates, and ensures the alignment of all active ESG initiatives across the company. Exclusion Policy Fidelity has introduced a formal Exclusion List for Cluster Munitions and Anti-Personnel Landmines which falls under the broader Exclusion Policy. The list is reviewed every six months and approved by the ESGOG and the Board. Investment Compliance will ensure that Fidelity does not trade in or provide a rating for any of the securities on this list although analysts are still free to engage with companies on the list for their sector research. Responsible Investment Policy Fidelity s Principles of Ownership and ESG Policy have been replaced with a new Responsible Investment Policy which describes Fidelity s approach to ESG integration, stewardship, engagement and voting. The new policy provides information on our approach to engagement and integration of ESG issues into our investment process. 16

17 2017 in review ESG Integration ESG analysis is carried out at analyst level within the equity, fixed income and real estate teams and our portfolio managers are also active in analysing the potential effects of ESG factors when making investment decisions. Principles for Responsible Investment ( PRI ) Fidelity has been a signatory to the PRI since Fidelity submitted its fourth survey response to the PRI, which is a mandatory requirement as part of Fidelity s signatory status. Over 2017, Fidelity improved its score in the Strategy & Governance module to an A+ and maintained its scores across the remaining equity and fixed income modules, as detailed below: Module Fidelity Median Fidelity Median Score 2 Score Strategy and Governance A+ A A B Listed Equity Incorporation A A A A Listed Equity Active Ownership A B A B Fixed Income Corporate Non-financial A+ B A+ C Fixed Income Sovereigns, Supranationals and Agencies A+ B A+ C Fixed Income Corporate Financial A+ B A+ C Fixed Income Securitised A+ E A+ E 2 The PRI assessment is broken out in to ten different asset classes and signatories are required to report on every asset class module that amounts to more than 10% of their total AUM. For Fidelity this means we report on listed equity and fixed income. Each module consists of core assessed indicators (mandatory to report) and additional assessed indicators (voluntary to report but can add a further opportunity to increase the overall score). Signatories receive a score for each indicator in every relevant module based on a 3-star system (zero stars for weak answers/3 for strong answers). The amount of stars received from each indicator within a module are then totalled and this total is then translated into the performance bands (A+,A,B,C,D, & E). 17

18 Equity & Fixed-Income During the year, we have introduced a new feature within our internal research management system to capture a more in-depth ESG analysis of the poorly rated companies within our coverage universe. An ESG Comment Box has been included which will be triggered when an analyst publishes a research note on a company that has a poor ESG rating from Fidelity s third party research vendor or when it has faced a severe controversy. This box will automatically appear when the analyst starts to write their note and the analyst is then required to comment on all three factors (E, S and G). Additionally, the ESG team has developed sector KPIs which capture material ESG criteria per sector and potential engagement questions providing a framework to examine ESG practices. The objective is to help our analysts in assessing the performance of companies under their coverage, especially where the issuer is not covered by our external third-party research. These also provide examples of nonfinancial questions the analysts may ask during their company meetings. Multi-Asset The ESG team have been working closely with the Multi-Asset team to create more innovative steps to incorporate ESG into their analysis. This includes creating a watch list of third party non-fidelity funds and their ESG policies and procedures, including ESG questions in their RFP process and training the analysts on ESG engagement questions. Training The ESG team continued to provide training to different teams across the company in relation to our ESG strategy and new initiatives we have put in place as part of our ESG integration process. This included the following teams - Global Equity and Fixed Income Investment Directors, Equity Analysts, Fixed Income Analysts, Global Consultants Team and our ESG team also provided training to our new intake of analysts as part of their global orientation. 18

19 2017 in review Engagement We adopt a positive engagement approach whereby we discuss ESG issues with the management of the companies in which we invest or are considering investing on behalf of our clients. More than 190 meetings with non-executive directors Over the course of 2017, the ESG team actively engaged with 761 (2016: 654) companies of which 63% (2016: 69%) were non-uk. This was supported by 193 (2016: 160) related meetings with chairmen, independent directors or other advisers. 49% (2016: 70%) of these engagements related to governance and remuneration, 24% (2016: 11%) to board composition and structure, 12% (2016: 8%) to strategy and with the remaining 15% (2016: 7%) covering topics such as capital structure, mergers & acquisitions and environmental and social issues. The change in the weighting between these different topics is reflective of the progress Fidelity has made in the last 12 months in encouraging longer share retention periods (see below) as well as a conscious decision to spend more time discussing board composition and structure. It is important to note that these statistics only cover the activities of Fidelity s ESG team and do not take account of the full spectrum of Fidelity s investment activities. To place the numbers in context, in the course of 2017 Fidelity as a whole conducted over 16,000 company meetings and visits worldwide. In many of these meetings (particularly those with companies in which Fidelity holds significant shareholdings) robust discussions took place about the direction and governance of the business in question. This is not described as intervention but regarded as the normal conduct of business. Environmental and social issues Whilst the ESG team has a long history in engaging with companies on governance issues, the number of meetings where we engage on environmental and social issues has increased significantly. In 2018, Fidelity is reviewing its engagement process to become more proactive and systematic in its discussions with investee companies on environmental and social issues. The ESG team will prioritise companies based on several criteria including companies ESG rating, the controversies they may be facing, their exposure to certain themes such as climate change, and following or reflecting relevant discussion with analysts and portfolio managers. 19

20 Taiwanese Company Election Mechanics In January 2017, Fidelity targeted thirteen Taiwanese companies in which it held significant positions to communicate concerns regarding their continued use of the non-nomination system to elect nonindependent directors and supervisors. This system allows any shareholder to nominate any individual to the board, at any time, including at the shareholder meeting. Companies are not obliged to provide candidate details and profiles before the meeting and therefore shareholders, including many international asset owners who are voting electronically in advance of the meeting, are limited in their ability to make informed decisions. Fidelity wrote to the chairmen of these companies to recommend that all voting at future meetings is based on the best practice standard of a formal board nomination system. Additionally they were requested that if they are not doing so already, they provide details of candidates proposed for election at the same time the proxy voting materials are distributed to shareholders ahead of their meetings. Positive feedback was received from most of these companies, with five confirming they will switch to a nomination system at their next director and supervisor elections. The remaining companies advised us that they are actively considering adopting the nomination system in the future. 20

21 2017 in review Voting All votes are cast in accordance with Fidelity s established voting policies after consultation with the relevant portfolio managers where appropriate. Our voting policies and records are disclosed on our website. Vote against at least one proposal at 26% of meetings In 2017, Fidelity voted at 98% (2016: 97%) of the 3728 (2016: 3,708) company meetings analysed. We did not vote our holdings at a further 2% of the meetings (2016: 3%), the majority of these because they were meetings of Fidelity s funds. During 2017 votes were cast against at least one of management s proposals at 26% of meetings (2016: 28%) and abstained at 2% of the meetings (2016: 2%). Table 1: 2017 vote summary Votes Votes Abstain 3 Blocked Took TOTAL With Against no Action Management Management 3 Americas Asia Europe Japan MEA Oceania UK TOTAL Includes all meetings where Fidelity voted against management or abstained in respect of one or more resolutions. 21

22 Table 2: 2017 proportion of votes against management by category Americas Asia Europe Japan MEA Australasia UK TOTAL Auditors 0.5% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% Board 8.4% 21.2% 10.2% 82.0% 11.1% 12.8% 27.1% 22.4% Capital Structures 1.0% 3.3% 17.4% 0.0% 3.7% 0.0% 5.0% 8.3% Charter Amendments 1.2% 7.3% 2.0% 2.6% 3.7% 0.0% 0.0% 2.1% Remuneration 47.7% 25.8% 60.7% 8.2% 48.1% 84.6% 68.0% 49.4% Routine Business 2.2% 1.3% 0.2% 0.4% 0.0% 0.0% 0.0% 0.7% Shareholder Proposal 38.3% 35.8% 6.4% 1.9% 29.6% 2.6% 0.0% 14.4% Strategic/Restructuring 0.5% 5.3% 0.2% 0.4% 3.7% 0.0% 0.0% 0.7% Takeover Related 0.2% 0.0% 2.6% 4.5% 0.0% 0.0% 0.0% 1.8% TOTAL 100% 100% 100% 100% 100% 100% 100% 100% Key: 20% or more of votes in the region Between 10% and 20% of votes in the region 22

23 Chart 7: 2017 summary of votes cast 1,4% 1,6% 1,1% Voted with Management Voted Against Management Abstained 26,0% 2% Took no Action 69,9% Blocked Chart 8: 2017 summary of meetings by region Asia Europe Americas UK 10,6% 11,9% 1,6% 6,1% 34,8% Japan Oceania 16,7% 18,3% MEA Chart 9: 2017 votes against management by category Auditors Remuneration Board Shareholder Proposals 0,2% 0,7% 1,8% 0,7% 2,1% 8,3% Capital Structures Charter Amendments Takeover Related 14,4% 22,4% 49,4% Routine Business Strategic/Restructuring 23

24 Remuneration The most common reason for voting against management, as in previous years, was where incentive arrangements for senior executives were not in compliance with Fidelity s proxy voting guidelines and where management had not been able to persuade us that there were compelling reasons for our support. In total, 49% of votes against management were in relation to remuneration proposals. When analysed by region, this accounted for 68% of votes against management in the UK, 61% in Europe, 48% in the US, 26% in Asia Pacific (ex Japan), 85% in Oceania and 48% in the Middle East and Africa. Re-election of directors The second most common reason for voting against management was in relation to the re-election of directors, which represented 22% of Fidelity s total votes against management, down from 24% in The majority of these votes were in Europe and Japan. In large part this was because a vote against executive remuneration two years in a row was escalated to the re-election of the remuneration committee chair or it was believed the proposed candidates were insufficiently independent from management. Going forward we will also look at gender representation on boards and include it in our engagement with companies and voting policy. Shareholders proposals The third most common reason for voting against management was in relation to shareholder proposals mainly at US-listed companies. Whilst there were shareholder proposals in other markets, including South Africa and China, these were very few in number. In the US, Fidelity voted in support of a number of shareholder-sponsored proposals (against management s recommendation) including proposals requiring the chairman to be independent, giving shareholders the right to act by written consent in lieu of calling an EGM, reporting on lobbying payments and proposals calling for proxy access. This latter provision refers to the ability of shareholders to place their nominees for director on a company s proxy ballot. Fidelity believes that long-term shareholders that hold a significant percentage of the company s share capital should have the opportunity, when necessary and under reasonable conditions, to nominate individuals to stand for election to the board. In the US Fidelity will generally support proposals which require sponsors of candidates for election to the board to have a minimum ownership of 3% of the equity for at least three years with a 25% cap on the number of shareholdernominated board candidates. During 2017, Fidelity increased its active monitoring of shareholder proposals relating to environmental and social issues. We tended to support these proposals where it was felt that the proposal would have a positive impact on the Company and shareholder value creation but also on society more broadly, as well as improve disclosure. We are monitoring the progress of and engaging with these companies in Overall, shareholder proposals accounted for 14% of Fidelity s total votes against management and 38% of votes against management in the US. Capital authorities The fourth most common reason for votes against management was increases in authorised share capital without pre-emptive rights which were not in line with Fidelity s guidelines. This accounted for 8% of total votes against management, down from 9% in When analysed by region, this accounted for 3% of votes against management in Asia Pacific (ex Japan), 17% in Europe and 4% in the Middle East and Africa. 24

25 Remuneration: Update on Fidelity s campaign on LTIPs in Europe Since we launched our campaign in 2012 to extend the duration of Long Term Incentive Plans (LTIPs) for corporate executives, we have seen a material rise in the number of companies which have adopted our recommendation for LTIPs of a minimum of five years. Our LTIPs campaign Fidelity has continued to vote against all remuneration policies and LTIPs in Europe where they did not have a guaranteed minimum share retention period of five years and Fidelity is now pleased to report that five year share retention has become official UK Government policy. From the start of 2017, Fidelity has taken its share retention policy a step further and has started to vote against the re-election of the chairman of the remuneration committee (provided there has been no change of personnel) for companies that continue not to meet our guidelines when Fidelity has voted against the remuneration arrangements for two consecutive years. 5-year LTIPs become standard practice in the UK By the end of 2017, 67 (2016: 48) FTSE 100 companies had a minimum LTIP share retention period of five years compared to 4 at the start A further eight (2016: 17) companies had a minimum share retention period of between three and five years compared to 13 in January In the FTSE 350, 185 (2016: 118) companies had a minimum LTIP share retention period of five years or more compared to six companies in January 2013 and a further 23 FTSE 350 companies (2016: 52) had a minimum LTIP share retention period of more than three years. For the first time the number of companies with a retention period of five years is now greater than those with a retention period of three years. With the recent change in the UK Government policy adoption of a five-year share retention period is expected to become standard practice in the UK. Over the past year, Fidelity voted against FTSE 350 management on at least one remuneration proposal at approximately 27% of AGMs (2016: 55%). The fall in the number of votes against reflects the increase in companies now compliant with Fidelity s guideline. The rest of Europe is still lagging Looking at the most highly capitalised blue chip companies in Europe, 38 companies in the EuroTop 100 had a minimum share retention period of 5 years compared to 16 at the end of A further 26 had a share retention period of over 3 years compared to 32 in However, when UK companies are excluded the number of EuroTop 100 companies with a five-year retention period falls to only 20. In 2017 Fidelity voted against management on at least one remuneration proposal at approximately 35% of AGMs on EuroTop 100 companies. Progress in Europe on this issue continues to lag behind the UK. There are a number of reasons why the results have not been as strong in Europe as the UK, including the greater diversity of corporate governance structures on the continent, more cautious attitudes towards pay, and differences in national tax policy. 25

26 2017 in review Engagement with regulators and other stakeholders Members of Fidelity s ESG team are involved in a number of external and collaborative governancerelated bodies. Fidelity s general approach is to participate in governance-related consultations through the offices of these intermediaries but we may nonetheless also respond directly to consultations where its views are not reflected or where it holds a strong view. We provide a few examples below. External Memberships Asia Securities Industry and Financial Markets Asian Corporate Governance Association (ACGA) Association of British Insurers Assogestioni Confederation of British Industry Companies Committee Corporate Governance Forum EFAMA s Responsible Investment Working Group Global Real Estate Sustainability Benchmark (GRESB) Hong Kong Investment Funds Association International Corporate Governance Network (ICGN) Investment Association Investor Forums (in both Japan and the UK) Panel on Takeovers and Mergers Code Committee Principles for Responsible Investment (PRI) UK Sustainable Investment and Finance Association (UKSIF) VBDO (Dutch Association of Investors for Sustainable Development) Fidelity is also a signatory to the UK Stewardship Code, the Japanese Stewardship Code, the Hong Kong Securities and Futures Commission Principles of Responsible Ownership and the Taiwan Stock Exchange s Stewardship Principles for Institutional Investors. 26

27 UK Corporate Governance Reform In November 2016 the Department for Business, Energy and Industrial Strategy published a Green Paper on corporate governance reform seeking views on executive pay, strengthening the voice of stakeholders and corporate governance in privately held companies. Fidelity has been involved in various discussions on the Green Paper with other investors and third parties and submitted a response to the Paper in February In December 2017 the Government published its final response to the Green Paper and made a number of recommendations which have now been picked up by the Financial Reporting Council in their review of the Corporate Governance Code. These recommendations include an extension of share vesting/holding periods to at least five years, an expansion of the brief of the Remuneration Committee to include oversight of a company s overall approach to pay, a requirement for Chairs of Remuneration Committees to have at least 12 months prior experience on the Board of the company in question, a provision to require companies to specify the steps they will take following negative shareholder votes (even if the Resolution in question receives an absolute majority) and an increased emphasis on how Boards are fulfilling their obligation to wider stakeholders and in particular the workforce. There is also an increased focus on boardroom diversity. The Financial Reporting Council is scheduled to review the Stewardship Code in 2018 but it is evident from the current review of the Corporate Governance Code that a fundamental overhaul is being considered. The possibility of different Stewardship Codes for different classes of asset signatories is being considered as well as an extension of the Stewardship Code to cover topics such as corporate culture, ESG, sustainability, social impact and wider stakeholder interests. The possibility of widening shareholder obligations to include stakeholder interests is also raised. Ofcom Letter In June 2017, Fidelity submitted a letter to the Chief Executive of Ofcom, the communications regulator in the UK, in relation to BT Group where it believes the existing regulatory environment is increasing financial uncertainty surrounding BT Group and hence the company s potential cost of capital. The Wholesale Local Access Review and the Business Connectivity Market Review operate on three year cycles yet the company needs to make multi-year investment decisions. In order to make informed decisions the company needs to be able to forecast likely returns with a degree of accuracy which is difficult to achieve if the pricing environment is going to change every three years. In our letter we asked Ofcom to consider extending the regulatory review cycle from its current term of three years and to recognise the importance of allowing the company and its shareholders to make adequate return on investment. Dual Class Shares in Hong Kong and Singapore Hong Kong In June 2017, the Hong Kong Stock Exchange ( HKEx ) launched a consultation to establish a new board, or so-called Third Board, for start-ups and companies with multiple-class shareholding structures. Fidelity voiced opposition to the introduction of mechanisms that would create dual or multiple-class shares with differential rights contrary to the principle of one-share one-vote. In December 2017, the HKEx confirmed they were not adopting plans to create a Third Board but would instead amend their existing rules to allow companies with dual class shares ( DCS ) structures to list on its Main Board. There remain many unaddressed regulatory implications regarding the amendments that will introduce DCS. It is expected there will be a further consultation on specific rule changes in the first quarter of 2018 with the new rules in place to attract issuers in the second half of Fidelity is keen to comment where possible on the implementation of investor safeguards. The HKEx has already proposed some positive features including a mandatory corporate governance committee of independent non-executive directors. However, they have ruled out a mandatory sunset provision on DCS structures as in their view, it would reduce its competitiveness when compared to other exchanges where no such requirement exists. 27