RESPONSIBILITY MATTERS

Transcription

1 RESPONSIBILITY MATTERS Royal London Asset Management Responsible Investment Quarterly Review Q 2016 ASSET MANAGEMENT Royal London Asset Management (RLAM) is committed to being a responsible investor. This means being a good steward of assets and promoting responsible investment with other stakeholders. The aim is to generate sustainable, risk-adjusted returns that reflect a wider understanding of what will drive economic performance in the future. As part of that commitment RLAM seeks to understand environmental, social and governance risks and opportunities within the investment process. To achieve this we engage with companies and industry regulators to understand the issues and to promote best practice. FUND MANAGER VIEW Mike Fox Head of Sustainable Funds The performance of the Sustainable funds in the third quarter was strong in a historical context. Given that the majority of this performance occurred after the Brexit vote to leave the EU, something which most investors believed to be a negative event for the UK economy, this requires some explanation. Our funds have a diverse mix of investments across geographies and asset classes (in particular equities and fixed income). This, for reasons we will discuss, is an ideal investment vehicle for these times. Many of the investments in the Trust actually benefited from the Brexit vote, and this was a key reason for the strong performance. The most likely, although not certain, outcome of the Brexit vote is a slowdown in economic activity in the UK. In the main this reflects a prolonged period of uncertainty for business investment. Until new trading arrangements with the EU have been agreed it will make it difficult for companies to invest here. This in itself is enough to slow the UK economy. The other key variable, and much harder to forecast, is the reaction of UK consumers. Should they stop shopping and buying houses, this could exacerbate any economic downturn. As at the end of September there was no evidence of this occurring, although it is early days. It is important to note however that the majority of the companies we own in the Funds make more money outside of the UK than in. The chances of Brexit being a material negative to global economic activity are low. Add to this the benefit of the weaker UK currency - perhaps the biggest change in a post- Brexit world - which will result in higher overseas profits for many companies, and we can begin to understand why many of our investments have performed well. Finally, Brexit had an immediate and strong impact on fixed income markets, in which a number of the Funds assets are invested. A belief that Brexit will be accompanied by new monetary stimulus, in the form of lower interest rates and more quantitative easing (QE), has led to assets which pay a regular income stream becoming more valuable. This has benefited the value of the fixed income investments in the Funds. In summary, although we own some UK orientated companies whose prospects may well be impacted by Brexit, the diversified nature of the Funds means we have far more investments that have benefited.

2 THE VIEW FROM RLAM Responsible Investment Quarterly Review Q 2016 A View from Inside: Insight into the agenda of our quarterly Advisory Committee Gail Counihan and Mike Fox As always, the agenda for our quarterly Advisory Committee meeting was packed, and provided us with the opportunity to discuss both topical and thematic subjects with our external counsel. A recent enhancement to our process means that our agenda is now agreed and shared a month in advance, allowing ample time for our committee members to collect and refine respective points of view. It also affords us the appropriate time to reflect on our investment philosophy against the backdrop of Brexit. An unexpected event will usually trigger a reasonable amount of market turmoil, and this held true for Brexit and the UK financial market. While the global diversification meant the Funds were a net beneficiary of the vote, they weren t completely insulated. Our funds tend to be skewed towards companies with global operations, who create their own end markets, and would thus prosper outside of political and economic cycles. It was interesting to compare this to the last quarter when the Funds underperformed without our view of the world having changed. Our fundamental confidence in our holdings meant that no portfolio changes were made at the time, as this would have been inconsistent with the philosophy of our funds and indeed, our patience was rewarded. However, the vote to leave has given us pause for thought in terms of what this would mean for the UK and the global economy in the longer term. We took the opportunity to reignite a discussion about the alcohol industry, given the interest that the subject generates from clients. The discussion centred on our concept 2 of ESG leadership within industries that are neither overtly positive nor absolutely negative. Our process considers ESG leadership to be significant even central to performance and we enjoy the freedom that this affords us to invest in companies that might have been excluded by a more traditional negative screen. With an eventful voting season coming to a close, we took the opportunity to delve into and dissect the topic of executive remuneration. Sentiments around the table converged around the belief that our scrutiny should focus on structure, before quantum. Structure should enable exceptional performance to be duly rewarded, while industry relevant KPIs should be the litmus test for identifying such performance. Stress-testing remuneration packages would allow investors insight into what the maximum pay out could be but overly complicated remuneration policies make this kind of analysis difficult. Each of our committee members brings uniquely different experience but however we look at it, we see poor pay structures as the side effect, and poor governance as the ailment. Another topical subject on our agenda was that of tax. We ve been talking about tax for what feels like years the same can be said for the media and general public. We believe that current tax legislation is ill-equipped to deal with an increasingly globalised business environment. This is a key driver of the prevailing lack of consensus between governments, investors, NGOs and companies. This divergence of stakeholder expectations is the source of uncertainty, media scrutiny and potential risk. We took the approach of mapping out all of our stakeholders, and considering tax from each of their perspectives. Every way we look at it, we conclude that a robust, transparent and coordinated tax framework is good for business. Our role as a responsible steward of assets means that we need to be of assistance in achieving this. We see engagement as our primary lever if we believe that tax strategy is problematic, in much the same way that we would engage with a company on any risk that we view as material.

3 THE VIEW FROM RLAM Responsible Investment Quarterly Review Q 2016 SUSTAINABLE INVESTMENT IN PRACTICE Gail Counihan The philosophy of the sustainable funds is underpinned by a belief that markets undervalue companies that provide a net benefit to society, through environmental, social and governance (ESG) leadership and socially positive products and services. This belief manifests in the form of a positive screen, where we qualitatively assess the ESG performance of a company against its peers. It is this screen which provides us the licence to include companies from industries that might be excluded by a more traditional negative screen, such as Diageo. Diageo implemented a water stewardship strategy in 2015 encompassing goals that we consider to be industry leading. The food and beverages sector contributes to increasing water scarcity globally. As populations rise in regions projected to face severe water scarcity in the future - such as Africa, China and India - pressure on water resources is predicted to increase. Diageo has implemented targets that go beyond reducing water usage, but also replenishing water in water stressed areas and returning all waste water back to the environment safely. There is a distinct and tangible benefit to Diageo operating in developing regions, and it is this clear leadership in ESG that renders them a worthwhile holding in the sustainable funds. Performance Asset class 1 year years 5 years 10 years Sustainable Leaders m UK All Companies UK Equity 1st 1st 1st 1st Sustainable World m Mixed Investment 40-85% Shares Global Equity 1st 1st 1st - Sustainable Diversified m Mixed Investment 20-65% Shares Multi Asset 1st 1st 1st - Sustainable Managed Growth m Mixed Investment 0-5% Shares Fixed Income 1st 1st - - Sustainable Managed Income 1 29.m 12 month income target.8% PPU* to 0/6/2016 Fixed Income 11.74% total return 7.71% total return - - Source: RLAM and FE as at 0 September ¹Fund Performance shown is based on the C Acc share class. *Pence per unit. Please note that the 12 month income target to 0/06/2016 was 4.1 PPU, with the Fund achieving 4.9 PPU over the year. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested.

4 CORPORATE GOVERNANCE Responsible Investment Quarterly Review Q 2016 Stewardship & Voting Sophie Johnson Voting has quietened down over the summer following a stormy 2016 proxy season but there has still been a number of controversial votes and shareholders are continuing to voice their opposition to executive pay. Sports Direct received 18.98% votes against the Chairman, which equates to 52.99% against without Mike Ashley s majority shareholding. This unusual move by investors was in protest against what we see as consistent failings at Board level with the company. Following unproductive engagement with the company we felt this was necessary, also voting against Mike Ashley and the non-executive directors to express this. We supported the shareholder resolution calling for an independent review of working practices, which received 5% of independent shareholder support. salary than his predecessor but, when taking into account the removal of the matching scheme, on lower total remuneration for the role. We also voted against the Remuneration Report and Policy at Sophos, where both items received 27% of votes against. Following conversations with the company we appreciate the reasons behind the current pay policy but do not agree with the high levels of award, some of which are not subject to performance conditions. We feel these are not appropriate for a UK listed company and hope that the company will move away from its US influenced pay model. At Ashtead we voted against the Remuneration Report and Remuneration Policy following unproductive conversations with the company where we disagreed with the high base salary increases and the increases to maximum incentive award levels. The report and policy received 26% and 28% votes against respectively. Babcock received a 7.47% vote against and 10.96% abstain on their pay report. RLAM voted to abstain due to concerns with the report but in acknowledgement that the matching share plan had been removed from the remuneration policy. The CEO was appointed on a higher The UK s remuneration votes In the UK, shareholders are given two opportunities to vote on remuneration: an annual vote to approve pay awarded in the year, and a triennial vote to approve the forward-looking pay policy. The annual vote is advisory only, so effectively will have no impact on the pay-outs awarded in However, the pay policy vote is binding. If boards fail to receive a majority of support from shareholders then they must propose an alternative policy the following year. Resolutions voted 2,571 Votes against pay 25% Companies we met with 15 Votes in support of management 95.5% t Votes against directors 4.5% Company meetings voted 179 Pay consultation requests 5 8 4

5 CompanY Engagement Responsible Investment Quarterly Review Q 2016 Executive Remuneration Executive pay has and will remain one of the principal focuses of our engagement activity. The subject has recently drawn focus, with Theresa May announcing government plans to tackle excesses in the boardroom and the announcement of a new Department for Business, Innovation and Skills (BIS) committee to look into both pay and corporate governance more generally. There have been numerous suggestions over recent months from independent groups as to how to tackle these issues. We support a review of the current system and believe that there does need to be an overhaul. We are in agreement with a number of these proposals, particularly those that call for a simplification of the way in which executive pay is structured. Too much focus in recent years has been on forcing all companies to comply with the same rigid pay structure, something which has contributed to a rise in levels of pay. We will be working with companies, particularly over the coming months, on this issue. Fundamental to this will be to understand the business model and how the proposed pay structure fits with the company s strategy. As with anything new there will always be an element of the unknown but on this occasion we believe we should be supportive of those companies taking a new approach, provided they can show us the link between performance and pay. Year-to-date we have engaged with 9 companies and expect this to increase as we approach the triennial binding votes of the 2017 AGM season. These remuneration consultations with senior board members cover all aspects of the executive pay. We seek explanations for the levels of proposed awards, demonstrable links between performance and strategic goals and a sensible, clear structure. We take particular interest in pension arrangements and frequently oppose the practice of pay benchmarking. Notable examples this year have been BP, IG Group, Aberdeen, Inchcape, Ashtead and DS Smith. Sports Direct Considerable media attention over the previous few weeks has been focused on the numerous corporate governance failings and poor working practices at Sports Direct, which is the reason why RLAM sold the majority of our Sports Direct holdings in We now hold a relatively small stake in the company and feel a responsibility to continue to highlight our concerns and engage with companies to remedy them. We engaged with and supported the TUC s (Trade Union Committee) proposal to call for a review into working practices, and have most recently voiced our desire for a completely independent review of the company to be carried out. We believe that the current board has lost the confidence of shareholders and cannot be relied upon to effectively oversee the running of the company. We are extremely concerned with the continued lack of a permanent financial director and will continue to press the board for improvements until we recognise meaningful progress. VOTING THEMES In the quarter we engaged with 9 companies on a range of topics: Remuneration Corporate Governance AGM Vote Succession Planning Culture Environment Board Skills 5

6 CONTACT For further information about our responsible investment capabilities, please contact: RLAM s Responsible Investment Team Niall O Shea Ashley Hamilton Claxton Gail Counihan Sophie Johnson Head of Responsible Investment Corporate Governance Manager Responsible Investment Analyst Responsible Investment Analyst Royal London Asset Management 55 Gracechurch Street London ECV 0RL Tel Fax bdsupport@rlam.co.uk For professional investors only Issued by Royal London Asset Management October Information correct at that date unless otherwise stated. For professional investors and advisors only. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Royal London Asset Management Limited, registered in England and Wales number ; Royal London Unit Trust Managers Limited, registered in England and Wales number RLUM Limited, registered in England and Wales number All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number Registered Office: 55 Gracechurch Street, London, ECV 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number Registered office: 70 Sir John Rogerson s Quay, Dublin 2, Ireland. Ref: NRLAMON0002