Stewardship at Hermes
NAPF Stewardship Forum, 19 March 2015
Saker Nusseibeh
Chief Executive Officer, Hermes Investment Management
Hermes Investment Management
Offering an experienced and stable investment foundation
• Active institutional fund management since 1983
• Owned by one of the UK’s largest pension schemes: BT Pension Scheme
• 11 specialist teams with £28.6bn/€36.8bn/US$44.5bn1,2 assets under management
• A leader in corporate governance with £134.0bn/€172.4bn/US$208.8bn3 assets under stewardship
1
AU$54.4bn.
Please note the total AuM figure includes £3.7bn/€4.7bn/US$5.7bn/AU$7.0bn of assets managed or under an advisory agreement by Hermes GPE LLP (“HGPE”), a joint venture between Hermes Fund Managers
(“HFM”) and GPE Partner Limited. HGPE is an independent entity and not part of the Hermes group. £0.4bn/€0.5bn/US$0.6bn/AU$0.7bn of total group AuM figure represents HFM mandates under advice.
3 AU$255.2bn.
Source: Hermes as at 31 December 2014.
2
Record of responsibility
Ralph Quartano urges
companies to do the
right thing: “I expect
M&S to be on the
side of the angels.”
Hermes sets up a
dedicated
governance team
Alastair RossGoobey seeks
shorter contracts
for CEOs
Hermes Focus Asset
Management is
created
Hermes Real Estate
establishes energy
strategy
Saker Nusseibeh,
Hermes CEO, founds
the 300 Club
Hermes Equity
Ownership Services
is founded
Hermes explains
what shareholders
should expect of
companies
Hermes Real Estate
publishes
Responsible Property
Investment
annual report
Hermes Real Estate
clarifies the responsible
property investment
principles Hermes
becomes founding
signatory of UNPRI
The ESG Portfolio
Monitor created
Hermes Emerging
Markets appointed by
leading US sustainability
focused investor
Hermes signs the UK
Stewardship Code
The ESG Dashboard
created
Hermes Responsible
Ownership Principles
published
Hermes Global Equities
awarded customized ESG
mandate for large
Australian
Superannuation Fund
Hermes becomes a signatory
for further global agreements.
Hermes Global Equity ESG
Fund is launched.
Hermes signs the
Banking and
Finance Oath
Integration of stewardship at Hermes
Hermes’ mission: Active asset manager working to deliver excellent, long term performance – responsibly
Core investment belief: “It is the decisions we make on how we spend our beneficiaries’ money that shapes the society
they live in. Our agenda is defined by them” – Saker Nusseibeh, CEO
• Embedding responsibility seeks to align all decisions an investment manager makes with the interests of
clients and the beneficiaries they represent. This includes:
• Delivering sustainable performance within the terms of the mandate and within the clients’ risk appetite
Investment Office independently mitigates risk and ensures the rigour of our strategies
• Taking into account all material investment factors including environmental, social and governance
ESG dashboard, portfolio monitor, input from EOS engagers, 3rd party research
• Acting as a responsible steward (rather than simply a trader) of investments through constructive dialogue
taking action where necessary
EOS engagement as overlay to funds
• Engaging with public policy makers and industry bodies to encourage a sustainable economy beyond the
timeframe of a specific mandate
EOS public policy and best practice engagement programme
Portfolio screening
Controversial Company Report
• Highlights breaches of international norms and conventions:
• UN Global Compact Principles, which cover the environment, human
rights, labour rights, bribery and corruption, infringements of trade and
arms embargos
• Controversial weapons
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•
Ottawa Convention on landmines; Oslo Convention on cluster
munitions
Biological and chemical weapons conventions
Involvement in nuclear weapons
• Integrates insights from Hermes EOS engagements and external
research from Sustainalytics
• Spotlights material governance concerns
Value to clients
• Used to inform exclusion and engagement decisions, manage reputation
risk and hold in-depth discussions with fund managers
•
•
Portfolio overview report (“heat map” showing risks)
Detailed company reports on material risks
For illustrative purposes only. The above information does not constitute a solicitation
or offer to any person to buy or sell any related securities or financial instruments.
Controversial Company Report
Published Q1 2014
Report last reviewed: Q4 2013
Chevron Corporation
United States
Report last reviewed: Q1 2014
Industry Sector: Energy
ISIN: US1667641005
Engagement Rating
Engage
Severity Score
High
Screening Point
Issue Status
Human Rights – UNGC P1 & P2
Serious
Labour Rights – UNGC P4
Moderate
Environment – UNGC P7, P8 & P9
Serious
Issues Summary
Embargo – The company is involved in an important infrastructure project in Burma.
Human Rights/Labour Rights – Chevron has been involved in several major controversies related to local communities in Nigeria, Burma, Angola and
the United States including Alaska and California.
Environment – Chevron has been found liable for USD 9.5 billion in damages related to severe environmental violations which took place between
1954 and 1990 in Ecuador. The company refuses any liability for the damage claims. In addition, two spills occurred at Chevron’s deepwater
operations in Brazil in 2011 and 2012. These events further indicate the company’s failure to properly manage the environmental risks of such
operations.
Engagement Summary
We have engaged intensively with Chevron on these issues for a number of years. Specifically, we have addressed human rights concerns in Nigeria
and Myanmar, environmental issues in Ecuador and risk management following Maccondo/Deepwater Horizon. We are pleased that Chevron is in
the process of implementing an improved human rights strategy across its operations as part of our engagement with the company. Our work on
risk management has included a visit from the company’s San Ramon, California Headquarters to meet with the executives in charge of Chevron’s
environmental and risk management functions. We also met with Chevron’s CEO and Head of Upstream Operations in 2013 to discuss these issues
further. Overall, we were impressed by the CEO’s description of Chevron’s handling of operational risk as well as the improvements in oversight and
assurance systems which are being put in place better to manage risk on an enterprise-wide level.
Corporate engagement
Global engagement activity
Engagements in 2014
Company engagement by region between Q1 and Q4 2014
• We engaged with 446 companies and pursued 714
separate engagement objectives
Australia & New Zealand 43
Developed Asia 77
Emerging Markets 53
Europe 70
Source: Hermes as at 31 December 2014.
• Of the 714 objectives:
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15% were on the environment
48% were on governance and stewardship
22% were on social and ethical matters
15% were on strategy and risk management
North America 138
• We have made progress on 48% of the companies we
have engaged
United Kingdom 65
• All engagements tracked using milestones
Milestone 0
Milestone 1
Milestone 2
Milestone 3
Milestone 4
Objective set
Raised concern at
appropriate level
Company
acknowledges issue
Company commits
to credible change
Change
implemented
Intelligent voting
Global voting activity
Voting in 2014
In 2014 we voted at 10,363 meetings (99,724 resolution)
Total meetings voted in favour 55%
Meetings where voted against (or
voted against AND abstained) 44%
Meetings where abstained 0.2%
Meetings where voted with
management by exception 0.4%
Source: Hermes EOS quarterly reports.
• Voting is engagement-led and includes
communication with management
• Voting covers more than10,000 companies
• Between Q1 and Q4 2014 we opposed management
on 10.4% of resolutions
• Includes communication with boards when voting
against management
• Partnership with ISS provides best-in-class voting
execution platform
Value to clients
• Ability to exercise voting rights in alignment with
bespoke policies, without the overheads of
administering this internally
• Intelligent voting service focused on generating
change
ESG integration: Investment analysis
Hermes ESG Dashboard
• Proprietary analysis tool accessible through
Bloomberg
• “Best of breed” data sources:
• Hermes EOS, Sustainalytics, Trucost, Bloomberg, FactSet
• Hermes EOS engagement progress and voting
decisions
• QESG Score shows whether a company’s level of ESG
risk is improving or worsening
• Highlights ESG controversies
• Environment impact assessments
• Sector-specific key performance indicators
Source: Hermes as at August 2014. For illustrative purposes only. The above information does not constitute
a solicitation or offer to any person to buy or sell any related securities or financial instruments.
ESG integration: How it can influence decisions
Selection of examples across Hermes equity strategies
Did not buy/reduced position due to concerns on ESG risk
Held/invested in stock notwithstanding awareness of ESG risk factors
Barrick Gold
Did not invest due to excessive ESG concerns, particularly around health and
safety.
Viacom
It is a controlled company but the risk is not deemed sufficient to warrant
selling. We are taking a more qualitative approach to assessing ESG risk
Kilroy Realty
Sold because felt the consistently excessive remuneration of management,
which was insufficiently correlated with returns for investors
Cosan
Held this stock since 2010 but now considering selling due to strong
governance concerns, complexity of structure and opaqueness.
Petrobras
Sold due to a number of factors, including state interference in the governance
structure and price of subsidies, which means it is not selling at market price
Bayer
Continue to hold. Aware of potential regulation that could impact crop
science business.
Buy due to good ESG profile
Held/invested in stock due to encouraging engagement
Freeport Mc Moran
Monitoring this company as it is exposed to ESG risks through its Grasberg
mine in Indonesia. Aware of the risks but continue to hold while EOS are
actively engaging
China Mengniu Dairy
Investment that included lots of engagement around product safety. The
company has recovered from a scandal and has now more stringent
supply chain standards, company doubled in value in the last two years.
Sodexho
Maintain position - good disclosure and ESG information. EOS
engagement provides added value
Global Equities
GEMS
Sourcecap
SMID
Novo Nordisk
Business model addresses big thematic issues such as obesity and
diabetes: Growing trend - particularly in emerging markets
Gildan Activewear
Buy due to great labour and community relations and very strong
environmental credentials particularly through efficient and innovative
operations
Randgold
Very high QESG score. Committed to high social and ethical standards.
Works with DRC governments. Employs locals to lead/manage the mines.
Conch
Buy due to best in class among Chinese cement companies. Well prepared
for new pollution legislation in China. Winner for the future.
Source: Hermes as at February 2015. For illustrative purposes only. The above information does not constitute a solicitation or offer to any person to buy or sell any related securities
or financial instruments. There is no guarantee that Hermes continues to hold, nor does not as of this date, hold the stocks mentioned above.
ESG integration: Case study (i)
The regeneration of King’s Cross
Responsible property investment at Hermes
• Hermes a key force in the conversion of the “railway lands” into
N1C, the first new London postcode in a century
• New 67-acre site delivers both strong investment returns to
Hermes’ clients and socio-economic benefits to the community
• Corporate offices: Google, The Guardian, Eurostar and High
Speed 1, Macmillan Science and Education Publishers
• Central Saint Martins campus, University of the Arts London
• 45,000 residents; 2,000 new homes; 300 social housing units
• Local apprentices trained during construction before securing
full-time employment
• New primary school, nursery and community centre for the
London Borough of Camden
• Heritage buildings restored and community spaces created
ESG integration: Case study (ii)
China Mengniu Dairy: Better returns from better governance
Catalysts
China Mengniu Dairy share price
• Milk consumption rising from low base in China
45
• New management underrated by market
40
• Consistent earnings growth, high RoE
35
ESG factors
• Improving supply chain and quality controls
HKD
• Dominant industry position
Initial
purchase
30
25
• Market overstating ESG concerns
• Steps taken to improve food safety
20
• Hermes EOS engagement
15
Jan-11
Jan-12
Jan-13
Jan-14
Source: Bloomberg as at 28 February This stock was bought in March 2012 and is still held within the portfolio. For illustrative purposes only. Past performance is not a reliable indicator of future results.
The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
Jan-15
Public policy and industry best practice
Hermes has a comprehensive programme of engagement with legislators, regulators,
industry bodies and other standard setters to help shape capital markets
Corporate governance
Environment
Shareholder rights: Single-class share structure, relatedparty transactions, board disclosure, proxy access,
majority voting
Support the management of carbon emissions, water
and pollution risk through engaging on:
•
Disclosure of resource use
Board structure: Requisite skills, independence, diversity
•
Best practice targets and delivery
Executive remuneration: sSy on pay, pay for
performance, risk alignment
•
Carbon-pricing mechanism
Sector and issue coverage
Social
Banks: Board structure, culture change, compensation,
risk, company structure..
Appropriate board oversight and robust processes on:
Development of stewardship codes
Labour rights: Health and safety, right of association,
lack of discrimination, living wage
Fiduciary duty clarification
Unlocking human potential
Minority interest protection
Local community rights
Dialogue between investors and directors
Extractives: Stranded assets, carbon emissions,
pollution, health and safety
Retail: Supply chain, labour rights, indigenous
populations
Access to finance and medicine
Bribery and corruption
Stewardship
Effective company reporting
Promoting responsible investment
Helping to bring responsible investment from the fringe to the centre
Hermes is actively involved with the following organisations:
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UN PRI
International Corporate Governance Association
Asian Corporate Governance Association
UN Environment Programme Finance Initiative
Carbon Disclosure Project
CFA Institute – Centre for Financial Market Integrity
Council of Institutional Investors
Global Real Estate Sustainability Benchmark
International Investors Group on Climate Change
Eumedion
Extractive Industries Transparency Initiative
• Regional and national forums:
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Eurosif
ASRIA (Asia Pacific)
UKSIF
NAPF
USSIF (United States)
RIAA (Australia)
Canadian Coalition of Good Governance
KOSIF (Korea)
DSW (Germany)
FIR (French Social Investment Forum)
Assogestioni (Italy)
Dansif (Denmark)
Summary
Hermes: At the forefront of stewardship and responsible investment
• Our track record in stewardship and responsible investing began in 1993 and has grown stronger over
time
• Stewardship functions – portfolio screening, corporate engagement and intelligent voting – inform the
rigorous integration of ESG risks into our investment decisions
• As long-term investors in equity, fixed income and private markets, we seek to generate excellent
performance for our clients – responsibly
• This also helps to create a more sustainable environment and economy for pension fund beneficiaries,
thus contributing to positive change beyond the scope of our mandate
• Our extensive engagement in public policy and industry forums helps promote stewardship in the
investment industry
Disclaimer
This document is for Professional Investors only. In Australia this document is directed at ‘Wholesale Clients’ only. Any investment products referred to in this document are only available to such clients. Investing
with Hermes may be restricted in other countries and as such, any person who receives this document is required to make themselves aware of their respective jurisdictions and observe any restrictions.
This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United
States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to the investment objectives or financial needs of any recipient. No action should be taken or
omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on
their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability.
Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be
affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed.
All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes.
Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. In
Singapore, this document is distributed by HFM Singapore, which is a capital markets services holder for fund management under the Securities and Futures Act, Cap 289 (“SFA”), and an exempt financial adviser
under Section 23(1)(d) of the Financial Advisers Act, Cap 110 (“FAA”). Accordingly, HFM Singapore is subject to the applicable rules under the SFA and the FAA, unless it is able to avail itself of any prescribed
exemptions. HFM Singapore is regulated by the Monetary Authority of Singapore.
The main entities operating under the name Hermes are: Hermes Investment Management Limited (“HIML”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes Sourcecap Limited (“HSL”);
Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE (USA) Inc (“Hermes GPE USA”); and Hermes Fund Managers (Singapore) Pte. Limited
(“HFM Singapore”). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, Hermes GPE USA and HFM Singapore. HIML currently carries on all regulated activities
associated with HREIML. HIML, HSL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission (“SEC”).
Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services
Compensation Scheme
Excellence. Responsibility. Innovation.
Hermes Investment Management
Hermes Investment Management is focused on delivering superior, sustainable, risk-adjusted returns – responsibly.
Hermes aims to deliver long-term outperformance through active management. Our investment professionals manage equity, fixed income, real estate and alternative portfolios on behalf of a global clientele of institutions and wholesale
investors. We are also one of the market leaders in responsible investment advisory services.
Our investment solutions include:
Private markets
International Real Estate, Pooled funds, Segregated mandates, UK Real Estate, UK Real Estate Debt, Infrastructure, Private Equity.
High active share equities
Asia, Global Emerging Markets, Greater China, Europe, Global and Small & Mid Cap.
Specialist fixed income
Global High Yield Bonds, Illiquid Credit, Multi Strategy Credit, UK Government Bonds and UK & Global Inflation-Linked Bonds.
Multi asset
Multi Asset Inflation
Responsible Investment Services
Corporate Engagement, Intelligent Voting, Public Policy Engagement and PRI.
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