London Pensions Fund Authority
2012 Q4
Engagement Summary Report
(Active dialogue and voting)
2. Responsible investing 3 3. At a glance 4 4. Voting highlights 5 5. Shell in Nigeria 7 6. ESG-Investment risks in Unconventional Energy Sources 9 7. Carbon Disclosure Project 11 8. Climate change performance private car makers 13 9. Collaboration in the Sudan Engagement Group 14 10. Soy supply chain 16 11. Themes and companies 18 12. Codes of conducts 19
This report describes the active ownership activities that Robeco performed on behalf of LPFA in the fourth quarter of 2012. Chapter 2 details how LPFA uses active ownership with the aid of Robeco to support its responsible investment strategy. Chapter 3 presents a summary of the voting and engagement activities for the quarter. In Chapter 4 we present the voting highlights in the fourth quarter of 2012. Chapter 5 describes the results of a fact-finding mission to Shell’s operations in Nigeria. Chapter 6 presents the results of the engagement research into ESG-investment risks of unconventional energy sources. Chapter 7 presents the results of the engagement theme Carbon Disclosure Project. Chapter 8 gives a wrap-up of the climate change performance of private car makers. Chapter 9 gives insight in the results of the Collaboration in the Sudan Engagement Group. Chapter 10 describes the first steps in engagement in the Soy Supply Chain theme. Chapter 11 lists the themes and companies under engagement and finally, Chapter 12 summarises the various codes of conduct which Robeco uses as guidelines to execute its active ownership program.
The London Pensions Fund Authority (LPFA) attaches considerable importance to responsible investing. Responsible Investing is implemented through active dialogue and voting at shareholders’ meetings of companies in which investments are made. Within the scope of this active dialogue, companies in which LPFA invests are encouraged to practice good corporate governance and to take social responsibility. The LPFA has a long-standing commitment to responsible investment, guided by their investment principles and beliefs.
2. Responsible Investing
LPFA as an active shareholder
LPFA invests in the stocks of different companies. Each share held entitles LPFA to vote at shareholders’ meetings. LPFA has authorised Robeco to vote these shares on LPFA’s behalf. By making active use of this voting right, Robeco can encourage the companies concerned on behalf of LPFA to increase the quality of their corporate management and to improve their sustainability. We expect this to benefit the development of shareholder value in the long term, mainly because companies that have their business in order - in the form of good corporate governance and good environmental and human-rights policies - generally perform better. In other words, effective corporate governance is good for LPFA and good for its beneficiaries. For this reason, LPFA is in favour of responsible investing and addresses companies as an active shareholder.
Worldwide, the voting right is exercised on shares actually held in the investment portfolio of LPFA. In addition, Robeco, acting also on behalf of LPFA, seeks to actively engage the companies in which it invests in a dialogue on good corporate governance and social responsibility.
The dialogue in which Robeco is engaged with companies on behalf of LPFA is intended to increase shareholder value and at the same time promote sustainable behaviour and improve the quality of the management of these companies. Active and committed ownership can have a bearing on social policy, the environment and ethical behaviour, but also on questions
such as changes in corporate structure, controlling rights and profit distribution. A dialogue of this nature addresses issues linked to opportunities and risks that can have an influence on the value of a company. Ultimately, a company’s management must be in a position to influence these issues.
Cooperation
Robeco is a signatory to the United Nations Principles for Responsible Investment. Within this initiative, institutional investors are pledging their commitment to promoting responsible investing, both internally and externally. Wherever possible or necessary, Robeco will collaborate with other investors. Examples include Eumedion, a platform for institutional investors in the area of corporate governance, and the Carbon Disclosure Project, a collaboration among investors encouraging transparency on the CO2 emissions of companies.
International codes of conduct
Robeco makes use of international codes of conduct such as the United Nations Principles for Responsible Investment to implement responsible investing, and the United Nations Global Compact to practice corporate social responsibility. These codes of conduct are found at the back of this publication.
Over the last quarter, Robeco voted 22 shareholder meetings forming part of LPFA’s portfolio. A further breakdown of the voting behaviour for these meetings is provided below.
3. At a glance
In addition, Robeco conducted 31 engagements with different companies on a range of environmental, social and governance issues across various sectors and geographic regions. A further breakdown of engagement activities by issue, sector and region is provided below.
Voting behaviour
4th Quarter YTD
Total number of meetings which was voted 22 216 Total number of agenda items which has been voted for 299 3307 % Meetings voted against management 41% 57%
Europe 59% North America 23% Pacific 14% Emerging Markets 4%
Vergaderingen per regio
Meetings per region4th quarter 2012
Active dialogue activities per contact event
3 22 5 9 5 3
Meeting at Robeco offices E-mail
(Open) Letter
Analysis (no actual contact with company) Meeting at company offices
Conference call
Overzicht engagement
Europe 65% North America 32% Pacific 3%
Vergaderingen per regio
Energy 32% Materials 13% Industrials 7% Consumer Discretionary 13% Consumer Staples 19% Health Care 13% Information Technology 3%
Active dialogue per region 4th quarter 2012
Breakdown of active dialogue activities by sector 9 6 10 3 1 Environmental Impact Community Environmental Management Corporate Governance 1 1 Human Capital Healthy Living Human Rights Overzicht engagement
Topics of active dialogue
6 3 1 3 Supervision of management Audit Remuneration Shareholder rights Overzicht engagement
* ICGN Statement on global principles for corporate governance.
Agenda items which Robeco voted against the company’s management according to the ICGN principles*
4. Voting highlights
Corporate boards have the responsibility to oversee the actions of the management of a company. As their tasks are crucial for the company’s wellbeing it is important that board consists of capable members who act in the best interest of relevant stakeholders and the company as a whole.
Across markets guidelines and practices of the compositions boards differ greatly. In many markets a required level of independence is set. In the US and the UK for example a high degree of independent directors is common whereas in other countries such as Japan only a few independent directors are required. Some local corporate governance guidelines allow the CEO to be the Chairman concurrently , while others do not. Another common distinction exists between a one tier and a two tier board structure. A two tier board structure is one where the supervisory board oversees the actions of the management boards, thereby separating daily management and supervision. In one tier boards this distinction is less apparent as all responsibilities are concentrated in the same board. Local guidelines also differ in the amount of formal influence different stakeholders have via the board and how long a board member is allowed to remain on the board.
Robeco votes on the election and re-election of board members of more than 3000 companies in a large number of countries worldwide. We take the differences in local practices into account, which makes it difficult to compare one case to another. However a unifying set of principles and questions exist that are important in assessing the functioning of corporate boards and its members.
One of our primary concerns is judging whether the board has recently performed well. Major operational incidents and accounting irregularities can indicate that boards are not functioning properly with regards to their supervisory task. On the other hand it is possible that boards and
members have performed well in taking and monitoring important strategic decisions or improving their corporate governance. Secondly the board should be sufficiently independent and knowledgeable to monitor without bias and guide the management of the company in the best interest of shareholders. Local guidelines are a starting point for these requirements. A board might experience independency problems when there is no independent leadership on the board, or when board members are involved in business relations with the company. Apart from independence it is also important that board members are knowledgeable and have sufficient experience with regard to the company’s business practices. This is often hard to assess. Therefore it is important that companies disclose sufficient information to shareholders to show that the nominated board members indeed possess these capabilities.
Board members also should have enough time to carry out their duties. Often board members sit on several boards. When the amount of board memberships becomes too excessive one can question if sufficient time can be allocated to a specific company. When board members do not attend board meetings we regard this as a clear signal that a board member is not undertaking their responsibilities.
British Sky Broadcasting - 1
November 2012 - United Kingdom
British Sky Broadcasting Group
plc (BSkyB) operates the paid
television broadcasting and home
communications services in the
United Kingdom and Ireland.
BskyB has been troubled by the phone hacking scandal of News Corporation since its 2011 AGM. News Corp. holds a 39% stake in BskyB and its representative in the board, Chairman James Murdoch, received substantial opposition last year from independent shareholders. Despite strong operational performance and a share price that has rebounded since News Corp. withdrew its takeover bid for the remaining BSkyB shares, fallout from the scandal has continued to raise questions regarding the company’s ownership structure and role as a broadcaster, and led to significant board room changes. While BSkyB itself has not been directly implicated in phone hacking, News Corp.’s 39% stake in BSKyB was cited as grounds for an investigation by the UK Office of Communications (“Ofcom”) into the company’s suitability to hold a broadcast license.
Robeco applauds that Mr. Murdoch has stepped down as the Chairman of BSkyB, however in light of his testimony in the Ofcom investigation Robeco is concerned that his re-election will not be in shareholders’ best interestS. This is due to the combination of his poor governance record combined with the significant voting power he carries as News Corp. representative at the board. Therefore we voted against his re-election.
Cisco Systems, Inc. – 15 November
2012 – United States
Cisco Systems, Inc. designs,
manufactures, and sells Internet
protocol (IP)-based networking
and other products related to the
communications and information
technology (IT) industry and provide
services associated with these
products and their use.
At Cisco’s AGM Robeco has supported a shareholder proposal regarding the election of an independent board chairman. The proposal requests that the board adopts a policy that the board’s chairman should be an independent director who has not previously served as an executive officer of the company. An independent chairman is better able to oversee the executives of a company. He can set a pro-shareholder agenda without the management conflicts that a CEO or other executive insiders often face, leading to a more proactive and effective board of directors.
Oracle Corp. - 7 November 2012 -
United States
Oracle Corporation is an enterprise
software company. The company
develops, manufactures, markets,
distributes and services database
and middleware software,
applications software and hardware
systems.
The Chairman of the independence committee of Oracle has not performed up to our expectations in the past year. The Company’s independence committee oversees the monitoring of related person relationships and reviews proposed transactions and other matters for potential conflicts of interests. We believe that in this position, the Chairman bears the responsibility for ensuring that the company is providing reasonably clear and transparent disclosure to investors. However poor disclosure has persisted for more than two consecutive years on related party transactions. Therefore we hold the Chairman of the independence committee responsible for not performing his fiduciary duties. Furthermore at Oracle we have, similar to Cisco, supported a shareholder proposal regarding the election
of an independent board Chairman. Implementing such a proposal will lead to improved oversight of the executives of a company.
5. Shell in Nigeria
Pollution and gas flaring are two of the issues linked to Shell in Nigeria. Robeco visited the company’s operations in the Niger delta.
The case against Shell
The Niger delta in southern Nigeria is one of the most polluted places on earth. Amnesty International claims that between 9 to 13 million barrels of oil have been spilt—on land and offshore—as a result of Royal Dutch Shell’s operations in the area over the past 50 years. The main factors causing this have been corrosion of oil pipes, poor maintenance of infrastructure, spills and leaks during processing, human error, oil theft and deliberate vandalism.
The region is also afflicted by the effects of gas flaring—burning off the natural gas produced during the petroleum-extraction process, as the infrastructure to use the gas is not in place. Shell has been heavily involved in flaring, even though it has been illegal in Nigeria since 1984.
Shell is currently involved in litigation in the Netherlands, with four Nigerian villagers accusing the company’s operations in the country of polluting land and waterways around their homes in the Niger delta. If they are successful, it could open the door for further claims.
Although Shell is not the only oil major operating in the country, it does have the largest presence within the country. It also has the worst reputation.
Shell’s response
For its part, Shell cites external sabotage as the main cause of the spills. In 2011, for instance, it claimed that 98% of spills are caused by sabotage, although it has since revised this figure down to 70%. Meanwhile, Shell is leading discussions with the Nigerian government and other groups to set up a USD 1 billion fund to clean up the heavily-polluted Niger delta.
One complicating factor is that Shell operates in Nigeria as Shell Petroleum Development Company (SPDC), a joint venture that is majority owned by the Nigerian government. Royal Dutch Shell only has a 30% stake in SPDC. This means that it has only limited power to enact change.
Findings on the ground
Moreover, the Niger Delta is challenged with the presence of criminal activity. Well-organised, professional gangs steal oil in huge quantities, damaging infrastructure in the process, and even refine it themselves afterwards. Such gangs have little regard for the environment, resulting in frequent oil spills. Once Shell mends the pipes that the gangs have broken to steal the oil, it often does not take long before the saboteurs damage them again.
However, Shell must also shoulder some of the blame, something the company acknowledges. Its oil infrastructure is often in an extremely poor state of repair, and cleaning up spills resulting from theft and corrosion is its responsibility. It is now addressing these problems, albeit rather late in the day. The question remains whether Shell will pay damages to communities if spills are proven to be its fault—which is the subject of the current lawsuits.
There is also good news. Shell’s gas flaring has effectively halted, as the company has invested around USD 8 billion in the infrastructure necessary to use the gas without burning it. In fact, Exxon and Chevron, which are also active in the delta, are somewhat behind Shell in this respect. Furthermore, Shell has stated that by the end of 2012, it will have cleaned up all leaks emanating directly from its pipelines that
have occurred since 2005. This will not solve all the region’s pollution problems, and the promise is late in coming, but it is nonetheless positive.
Meanwhile, we found that Shell is improving its transparency, thus making it easier for stakeholders to monitor the progress of its clean-up process. Last year, for instance, it launched a website that allows users to track how it is dealing with each confirmed spill from its facilities. In addition, it has agreed to launch an independent panel to review and recommend improvements to its practices in the clean-up of spill sites. Early this year, Shell contracted Bureau Veritas, an international verification organisation, to independently audit its spill-management practices. Furthermore, during our visit, Shell was very open about its practices, and was happy to let us visit NGOs that have been critical of the company.
Conclusions and remaining
challenges
Our visit revealed the considerable efforts that Shell has made to improve its practices and clean up the Niger delta against a backdrop of widespread and extreme corruption.
Nevertheless, Shell remains subject to repeated criticism in the media, which we believe reflects the shortcomings in how the company often frames its challenges in Nigeria to external stakeholders and to the media. While often attributing responsibility for spills and pollution in the region to saboteurs, Shell highlights its activities and programmes for the positive economic and social impacts of its operations on Nigerian society.
Rather than distancing itself from the negative impacts while embracing the positive, Shell would be much better served by adopting a more balanced stance towards its Nigerian operations. Shell needs to recognise that the challenge of illegal sabotage and the resulting pollution is very much a problem that it has the responsibility to address proactively.
By adopting a more balanced perspective that clearly accepts its role and responsibility in both the positive and the negative impacts of its operations, Shell will likely undermine much of the NGO and media criticism directed at its Nigerian operations. But there’s a more important aspect to this. By taking a broader view of its responsibility for the challenges it faces, Shell will make a clearer recognition that the business success of its operations in Nigeria is very much tied to the well-being and success of Nigerian society as a whole.
Based on the findings of our trip, Robeco believes that Shell has an important opportunity to improve its communication on Nigeria, given the positive progress that we witnessed on the ground. The issues will not be resolved quickly, but Shell can already make a considerable difference by changing its overall approach in characterising its challenges to the outside world. For our part, we plan to maintain close contact with the company, urging it to continue to improve transparency and to see through its plans to clean up the Niger delta together with the other parties involved.
6. ESG-Investment risks in Unconventional
Energy Sources
The Canadian tar sands are one of the world’s largest reserves of crude oil and are expected to be an important part of the global energy supply. In addition to the tar sands, new sources are rapidly being developed by the industry, such as shale gas and oil, tight gas and coal bed methane. Collectively we refer to these as unconventional sources of energy. The extraction of these energy sources is associated with various environmental, social and governance (ESG) risks.
Recent developments
In 2012 Robeco ended the engagement collaboration on ‘Investment risks Canadian oil sands’. We arrived at the following conclusions. This collaboration was very successful in lobbying activities to the Alberta and Canadian Federal Minister of Environment where there is now a strong commitment to work together for the implementation of an efficient monitoring system. However we feel that the collaborative dialogue with the specific companies could have been a lot more active and efficient, something we actively promoted within the investors group. Unfortunately we were not able to achieve our objectives to the full extent. Out of the 17 companies only 6 had positive developments and 11 companies had no progress due to lack of dialogue by investor group members or lack of activities in the field of oil sands as a result of market conditions.
Diversification of energy mix and sources In the meantime the companies are in the midst of diversifying their energy mix and sources. In addition to oil sands new sources are being developed such as shale gas and liquids, tight gas or coal bed methane. Collectively we refer to these sources
as unconventional energy sources. We therefore extended this theme in the form of a Robeco-led dialogue on the ESG risks of unconventional energy sources. This theme will run parallel to the existing collaboration on oil sands which we will continue within the investors group. Given the commonality of the engagement objectives between oil sands and other unconventional sources we propose to keep the same objectives and also target most of the original companies. We plan to run the dialogues with the companies for 2 years.
Issues with unconventional energy sources There are several main sources of unconventional energy in the world:
– The Canadian oil sands are one of the world’s largest crude-oil reserves and are expected to become an important part of the global energy supply mix. There are however both climate and social risks attached to the development of these oil sands.
– Shale gas & shale liquids have become increasingly important sources of energy in the US and are set to grow on a global scale as well. After drilling horizontal wells, impermeable shale layers are opened up through what is called hydraulic fracturing (‘fracking’),
whereby the rock is cracked and water mixed with chemicals and proppants is injected down the wellbore to let the oil and gas flow more freely to the surface. Environmental and social issues are directly linked to this kind of energy production.
– Tight gas is developed in a similar fashion and faces the same environmental and social issues as Shale gas; Coal bed methane (CBM) production predominantly faces water challenges.
As an investor in the international oil and gas industry, we focus closely on these energy sources, because these kinds of energy sources may directly contradict the need to develop a ‘low carbon’ global economy and are often associated with social and climate risks. As a result, oil and gas companies involved in unconventional energy sources run a higher reputational risk. Asset managers have a fiduciary responsibility to protect shareholder value and must keep oil & gas companies aware of the relevant aspects of exploring unconventional energy sources.
Principles 7, 8 and 9 of the UN Global Compact asks companies to embrace, support and implement a number of environmental core values within their own sphere of influence. These core values are based on the Rio Declaration on Environment and Development. In addition to this, the first two principles of the UN Global Compact with regards to human rights are relevant for this theme.
Theme progress
Successfully closed Positive progress
x
Not successfully closed Neutral progress Negative progressEngagement objectives
The objective of this engagement theme is to keep companies committed to reducing their environmental and social impact on local populations and their surroundings. We are also concerned that the legislation and regulation in certain parts of the world is not keeping up with the rapid developments in the market. Companies exercise a “frontier” mentality in exploring these unconventional sources with little risk-oversight, disclosure and mitigation measures designed for the increased risks inherent in these new energy sources. We will monitor the disclosure the companies show along those lines. We are allowing two years for the engagement within this theme. The objectives are included below:
Carbon Emissions
We are requesting the companies to produce concrete results on the measures they are taking to tackle the higher CO2 intensity associated with the exploration of unconventional energy sources such as oil sands. Also the extraction of shale is disputed by the alleged release of large amounts of methane leaks during the extraction. The result could be that shale gas during the first twenty years creates more greenhouse gases into the atmosphere than when exploring oil, coal or conventional natural gas. Realistic assumptions relating to the plan to reduce emissions should enable us to assess whether our investment in these kinds of energy sources is sensible from a financial and an ecological point of view.
Local Community
The communities located near the operational areas are increasingly suffering the effects of pollution, deforestation and the degradation of the natural environment. In addition to the costs relating to lawsuits initiated by the local population, there is also a considerable risk that a company’s reputation will be damaged. The company should be able to demonstrate that their
consultations with the local communities are such that the rights of those communities are sufficiently observed. Sustainable Development:
In this context we focus on a range of issues, including the publication of air-quality targets, the assurance of the well integrity, the risks on earth quakes and the reduction and disclosure of the toxic chemicals used in fracturing operations.
Water Policies
The use of water is an extremely important element in the exploration of unconventional energy sources. We expect the companies to have a policy that improve its water efficiency. For example, does the company develop products or technologies that are used for water treatment, purification or that improve water use efficiency? We will closely look at the limitation, recycling and monitoring of water use.
Companies under Engagement in
LPFA’s portfolio are:
BHP Billiton, BP, Chevron, Total, and Royal Dutch Shell.
7. Carbon Disclosure Project
The Carbon Disclosure Project is an independent non-profit organisation that is active on behalf of institutional investors. It strives to encourage companies to be transparent about their CO2 emissions and the opportunities and threats they see in connection with climate change. This collaboration results in support from the companies addressed and ensures that investors receive the pertinent information in a consistent way.
Recent developments
Under the engagement theme Carbon Disclosure Project we have run four different (mainly) collaborative engagements. We encouraged companies to participate in the Carbon Disclosure Project, we requested companies to report on their CO2 emissions and their CO2 reduction plans, we worked together with other investors to improve carbon disclosure at companies and we asked companies to take action with regards to climate change. In this article we will summarise the results from these initiatives over the past three years and look at our plans for the future.
The Carbon Disclosure Project asks companies for information about the risks and opportunities they identify in terms of regulation, corporate strategy, emissions reports, the impact of emissions trading, and the targets and programs for reducing emissions. This information is relevant to investors as companies that are prepared for the changing policy landscape in relation to climate change will be better placed to respond to new threats and opportunities, which can protect shareholder value. At the beginning of 2012, the Carbon Disclosure Project issued its tenth annual questionnaire. The information compiled by the Carbon Disclosure Project is of great value to Robeco. It can be used in the
investment process, but also in the dialogue with companies in which we invest. This is why Robeco and the Carbon Disclosure Project work together.
The quantity of Carbon Disclosure Project responses is increasing year by year, with more than 3,000 responses received in 2012. Given these increasing response rates, we have shifted our engagement focus to the quality of responses rather than on encouraging companies to participate in the Carbon Disclosure Project. Early 2010, Robeco took the initiative for an engagement collaboration on Carbon Disclosure. This engagement aimed to improve the quality of climate change reporting available to investors. The engagement used scores from the Carbon Disclosure Leadership Index (CDLI), which ranks the quality of Carbon Disclosure Project responses, as a means to identify companies with poor quality disclosure. For the past three years, together with other investors, we wrote to more than 350 companies mainly in carbon intensive sectors. In total more than 100 companies improved their CDLI score to the extent that they were no longer included in the lowest quartile. As a result, more relevant information for investors is available on these companies.
In a separate collaborative engagement project we encouraged companies in energy intensive sectors to specifically improve disclosure of their emissions and emissions reduction plans, through the Carbon Disclosure Project. This collaborative engagement was initiated in 2009 and in phase 1 of the project (2009-10) the group sent letters to around 100 companies in energy intensive sectors that had not disclosed their Scope 1 & 2 emissions, or emissions reduction programs, in the CDP questionnaire in 2009. In 2010, 23 of the 100 target companies had improved disclosure in the relevant questions in the CDP questionnaire. In Phase 2 of the project (2010-2011) the group narrowed down the list of target companies to approximately 30 companies which had not improved disclosure. A review of CDP 2011 responses showed that 9 of the companies targeted through follow up engagement improved disclosure of their emissions and reduction plans to some extent.
In 2011 our collaborative engagements under the theme of the Carbon Disclosure Project entered a new phase with the Carbon Action project. Together with other investors we now encourage companies to move from disclosure to action. The program includes an annual letter which in the first year requested that companies make year on year emissions reductions, make investments in emission reduction activities with a positive return on investment, and set and disclose an emissions reduction target. The engagement focused on Global 500 companies with emissions of greater than 1 million tonnes. Following the letter send to a broad group of companies, the
Theme progress
Successfully closed Positive progress
x
Not successfully closed Neutral progress Negative progressinvestors followed up with a subset of the companies making in-depth engagement possible. Generally we see that in-depth dialogues yield better results. In this specific engagement project 10 out of 24 target companies disclosed a target in the CDP questionnaire in 2012. Additionally 3 companies demonstrated through dialogues that they are taking steps toward setting a target. This engagement is repeated in 2012 / 2013.
Going forward we will continue to work together with other investors on the topic of carbon management, but focus on a smaller group of companies and address carbon management in a broader context and with more in depth discussions. This will include the collaborative engagement through Carbon Action.
8. Climate change performance private car
makers
Road transport is responsible for 10% of global emissions of carbon dioxide (CO2). Car manufacturers are increasingly being confronted with regulation (mainly in Europe) aimed at reducing the CO2 emissions of new cars. It is important for investors to have insight into the progress companies make in this respect.
Recent developments
In March 2010 we commenced our three years period for engagement with 16 private car companies, from Europe, Asia and the USA regarding their climate change performance. Road transport is responsible for about 10% of global emissions of carbon dioxide (CO2). Car manufacturers were at that time increasingly being confronted with regulation (mainly in Europe) aimed at reducing the CO2 emissions of new cars. From 2012 onwards, the average fuel consumption of new cars in the European Union must be lower than or equivalent to 130 grams of CO2 per km.
The reduction of CO2 emissions for cars is a capital-intensive challenge, as it calls for an integrated approach of a broad set of measures such as the wider use of biofuels, the development of alternative means of propulsion, improvements in road and traffic infrastructure, promotion of public transport and education for drivers to teach them a more fuel-efficient mode of driving. For investors it is relevant to know how far car makers have progressed with the reduction of CO2 emissions in their production process and their products and how they are responding to (new) regulations. As an illustration of their willingness to change, it
is also important to know how companies deal with their supply-chain responsibilities and how effectively they manage their stakeholders.
At the end of 2012 we close our engagement on this theme earlier than expected. In our engagements with the car makers we learned that the progress on climate change evolved rapidly in the right direction. The latest data shows that the car industry recorded the deepest ever cuts in emissions and biggest gains in fuel efficiency in the past 3 years. We can conclude that out of the engagement with 16 companies 12 dialogues were closed successfully. Three companies (Mitusbishi Motors, Suzuki Motor and Honda Motor) were closed unsuccessfully and one (Volvo Group) was closed due to a take-over.
The main problem with the Japanese companies was the fact that their public reports and websites contained very limited information. We spoke numerous times with these companies and they assured us that they would no doubt comply with the EU and US regulations; however this was not sufficient to us to obtain a clear outline of the company’s targets, strategies and activities.
We are particularly impressed with the developments of the German car manufacturers (Volkswagen, BMW, Daimler). At the start of the engagement they generally produced cars with relatively high CO2 emissions (sporty and big cars) and they clearly progressed rapidly towards more efficient cars. Transparency and the development of energy-efficient technologies are strengths of these companies.
The engagement with General Motors took the longest time because of the delisting and again listing on the stock exchange during the engagement period. At the end of the year 2012 we conducted a final check of the status of the company regarding their performance on climate change. General Motors noticed that customer and regulatory demands for cleaner and more fuel-efficient transportation has progressed around the world. They mention that new cars and vans in the European Union must produce one-third less carbon dioxide within eight years under proposed new rules. It also has become clearer to the company that reducing waste and increasing efficiency is good for the bottom line of the business. The company now takes climate change seriously.
With the closing of our engagement with General Motors we are able to close this theme very successfully. Part of the success was attributable to the EU directive that all international car makers had to oblige to. The continuous reduction of CO2 emissions for cars was (and still is) a capital-intensive challenge, which makes it very relevant for investors to monitor how far car makers have progressed.
Theme progress
Successfully closed Positive progress
x
Not successfully closed Neutral progress Negative progress9. Collaboration in the Sudan Engagement
Group
Companies operating in conflict-affected controversial regimes such as Sudan are increasingly becoming a matter of concern to investors because of the extraordinary risks posed to operations, staff and the company’s reputation. Corporate activity may influence the prospects for long-term stability in the region.
Recent developments
In early 2010 Robeco along with 22 other investors joined a collaborative engagement coordinated by the UN Principles for Responsible Investing on responsible business practice in Sudan. Many investors were faced with strong divestment campaigns by NGOs and civil society regarding the complicity of their investee companies in human rights abuses carried out by the Sudanese government, this was mainly in the form of royalty payments to the Sudanese government. Investors had a clear case for engagement on human rights issues in this conflict-affected region as the regions’ volatility also impacted the operations of the companies. In March 2010 Robeco together with 5 other investors participated in a study tour of companies operating in South Sudan. We had the opportunity to meet with many companies and the operations of the WINPOC consortium. In addition to this we participated in a three day workshop hosted by the UN Global Compact concerning responsible business practice in conflict affected regions. The workshop enabled us to gain insights into the challenges of operating in this type of environment, to meet with high-level officials of the Sudanese government (including several
ministers) and to gain insights from civil society on the desired outcome for responsible business practices. Subsequent to the workshop Robeco actively participated in the development of a guidance document titled “Responsible Business practices in conflict-affected and high-risk regions”. Over the next two years we set out to mainstream the guidance through engagement with our investee companies operating in these regions. We commenced engagement with Total, Schlumberger, Petrofac, ONGC, Petronas and Petrochina, two companies Total and Schlumberger were in LPFA’s portfolios. With the exception of Total, all companies had operations in South Sudan. Total was granted an exploration license nearly 30 years ago, however with the conflict and instability in the country the company put further exploration activities on hold. The focus of our engagement with all companies was to encourage businesses which operate in Sudan to operate responsibly and be a positive force for change in the country. We had a number of engagement objectives that we addressed with the companies, in collaboration with other investors and they included post-referendum wealth sharing, strategic social investments
by the company’s in-line with national sustainable development goals, stakeholder engagement, reporting on activities undertaken in Sudan, undertaking impact assessments and the management and monitoring of security forces.
Engagement with all companies proved difficult, many companies were unwilling to undertake a constructive dialogue with the investors. In addition to this some of the engagement objectives were seen as being beyond the realm of the company to control or have impact on such as post-referendum wealth sharing. In the lead up to the referendum on independence the oil and gas companies operating in Sudan were sidelined from the discussions between the Government of Sudan and the soon to be Government of South Sudan. Following the referendum in July 2011 the country experienced increased conflict near the oil operating facilities due to ethnic violence and uncertainty over wealth sharing from the oil operations. Many of the companies were also awaiting the new oil bill that would set a price for transport of oil from South Sudan to the North. In January 2012 the violence escalated and the Government of South Sudan shut down the oil production of all companies with operations. All companies were adversely affected by this move; Total which had not resumed full exploration activities faced uncertainty over the future of its license for exploration in Block B. The general consensus was that the Government of South Sudan was aiming to renegotiate the license agreements with most of the companies. In November 2012 the Government of South Sudan announced
Theme progress
Successfully closed Positive progress
x
Not successfully closed Neutral progress Negative progressthe splitting of concession Block B into three concessions as a means of raising capital. Total aims to continue exploration activities of their concession once the violence subsides. We closed the dialogues unsuccessfully with all companies except for Total given the lack of demonstrable success resulting from engagement. The dialogue with Total proved successful as they had addressed two of our engagement objectives on strategic social investment and impact assessment at the community level. At the end of the three year engagement many observances and lessons can be drawn concerning engagement with companies operating in conflict-affected and high-risk regions.
By not playing an active role in facilitating peace and a new wealth-sharing agreement between the two governments the companies were adversely affected by the shut-down of the entire industry in January 2012. It is clear that companies need to take a more proactive role in government relations in this regard while maintaining objectivity and transparency. Governments of listed companies either through embassies, consulates or trade missions should play a more visible and constructive role in brokering peace and a responsible business culture. In many engagements involving conflict-affected countries the role of the development bank or reconstruction bank in developing a responsible business culture is absent; investors need to take a more proactive role in engendering these ideals within development banks to influence loan conditions in a more positive way. Engagement in difficult circumstances should be seen as dialogue with a broad set of actors involving not only investor and company but the key players who are instrumental in the success or failure of particular aims. In this case, a responsible business culture in a conflict-affected and unstable region.
10. Soy supply chain
The high protein content and versatility of the soy bean means that it is a valuable food resource. However, it is also regularly associated with reputational, operational and legal risks. Companies operating across the soy value chain will need to ensure that, at a minimum, their operations comply with relevant legislation. Companies may be required to go beyond compliance to adequately mitigate risks and to maintain community support – particularly when operating in higher risk business environments – in order to secure and maintain a strong social license to operate.
Environmental and social risks relevant to soy have reputational, operational and legal implications for companies operating across the soy value chain. Issues that are relevant for both companies and investors include land use change, the use of agrochemicals, labour standards and conflicts over land use. Land use change for soy production is associated with key environmental concerns, presenting a potential reputational risk for companies within the soy value chain. As identified in the case of Brazil, land use change is associated with habitat conversion and deforestation, presenting significant threats to biodiversity.
The use of agro-chemicals is associated with the potential pollution of land and water sources, as well as health and safety risks for farmers and local communities. Environmental and social risks relating to the use of agrochemicals present legal and reputational risks for companies directly involved in soy production. In addition, reputational risks may extend to companies sourcing soy from suppliers.
Inadequate labour laws or weak enforcement of relevant laws potentially expose companies to risks of actual or perceived complicity in labour rights violations within their operations and supply chains. This is particularly relevant to soy as workers within the agricultural sector are often employed on an informal basis and therefore typically fall outside the remit of social security protections and are more susceptible to exploitation.
Conflicts over land use and threats to indigenous peoples’ land rights present a risk of complicity for companies active within the soy value chain. If companies or their business partners are perceived to be benefiting from activities that have undermined the land rights of indigenous people or local communities, it could present a legal or reputational risk for companies. Increased international awareness of these risks is likely to present further risks for companies failing to uphold best practice standards.
Environmental and social risks relating to the soy value chain may be exacerbated through global and national increases in soy production. Although the US remains the largest soy producer, soy production is growing rapidly in countries such as Brazil and Argentina. The 2012 drought in the US has exacerbated this trend by driving an increase in global soy prices, which in turn has provided an incentive for South American soy farmers to increase production.
In the third quarter of 2012, UK based research provider Maplecroft assessed the environmental and social risk management proficiency of eight companies active at different stages of the soy value chain. The companies assessed include two seed producers (Monsanto and Syngenta), two producers, processors and traders (Bunge and Noble Group) and four final buyers (Carrefour, McDonald’s, Yum! Brands and Associated British Foods (ABF)).
Companies included in this assessment
generally provide limited evidence that specific environmental and social risks relating to soy have been assessed and are being monitored. This is reflected in a lack of evidence of soy specific policies. It is, however, recognised that risks relating to soy may be covered to an extent through more general policies such as those covering labour rights within the supply chain. Five companies have a comprehensive Supplier Code of Conduct that applies across their operations, while the three remaining companies provide some evidence of supply chain policies.
Third-party verification, for example, through certification or external supply chain audits can provide assurance that environmental and social risks have been managed during the production of soy. However, the only company in this assessment to have made a public commitment to certified soy is Syngenta, which has committed to supporting farmers in the achieving certification to standards such as that provided by the Round Table on Responsible Soy (RTRS). Certification initiatives for soy are not as well developed as for other commodities and therefore to achieve best practice in the sourcing of sustainable soy, companies will need to proactively support nascent certification initiatives such as that developed by the RTRS. This will in turn offer corresponding reputational and commercial benefits for supportive companies.
Increased commitment to external reporting initiatives is identified as a potential area for improvement for a number of companies in
this assessment. Such disclosure provides an opportunity for companies to demonstrate transparency and accountability in relation to environmental and social risks relevant to soy. For example, while six of the eight companies in this assessment were sent a disclosure request through the Forest Footprint Disclosure Project (FFDP), Carrefour was the only company to respond. Participation in the FFDP provides an opportunity for companies to disclose to investors, evidence of supply chain policies and management initiatives relating to deforestation, including those relevant to soy. In addition, the value of reporting against more general reporting initiatives such as the UNGC and the GRI has been recognised.
The emergence of collaborative initiatives that bring together companies and other stakeholders from within the soy value chain, suggests an increasing potential for companies to work together to manage environmental and social risks relevant to soy. Six of the companies in this assessment are participating in the RTRS, although for Noble Group and ABF participation is limited to one subsidiary. Despite this, it has been recognised that there is scope for more collaboration within the soy sector. In the fourth quarter we contacted all companies included in this engagement theme. E-mails were sent to either the investor relations officer or the CSR manager. The emails outlined the theme research into the soy supply chain. We also shared the individual research profiles with the companies. We have commenced engagement with four companies: Associated British Foods, Bunge, Carrefour and Yum! Brands, only Associated British Foods is in LPFA’s portfolio’s. Several conference calls are scheduled for early 2013. During these conference calls we will ask the companies specific questions relating to our engagement objectives.
11. Themes and companies
Eco-efficiency in the Metals and
Cement Industry
ESG-Investment risks
Unconventional Energy Sources
BHP Billiton BP Chevron Royal Dutch Shell Total
Soy Supply Chain
Associated British Foods Plc McDonald’s
Syngenta AG
Supply chain of Electronics
TOSHIBA Corp.
Carbon Disclosure Project
Adecco SA Danone Honeywell International McDonald’s Schlumberger Smiths Group Plc Thales SA Verizon Communications
Water Management in textile
related companies
Hennes & Mauritz
LVMH Moet Hennessy Louis Vuitton
Water Management in the Food,
Beverage and Tobacco Industry
Altria Danone Diageo H.J. Heinz Mondelez International Pernod Ricard Reynolds American
Climate change performance
private car makers
Biodiversity Dependency in the
Pharmaceutical Sector
Bayer Novartis Pfizer Roche
Employee Satisfaction & Health
Microsoft
Verizon Communications Vodafone
Walt Disney WPP
Forced labour in the supply chain
LVMH Moet Hennessy Louis Vuitton Vodafone
Sustainability reporting
Compagnie Financiere Richemont Natura Cosmeticos Nestlé Samsung Electronics
UN Global Compact
American Express Merck KGaA PfizerCollaboration in the Sudan
Engagement Group
Schlumberger Total
The energy and resources sector in
controversial regimes
BG Group BHP Billiton BP Chevron Eni Rio Tinto Royal Dutch Shell TotalFood and Health
Coca Cola Enterprises, Inc. Danone
Dr. Pepper Snapple Group, Inc. H.J. Heinz McDonald’s Mondelez International Nestlé PepsiCo, Inc.
Remuneration policy
AkzoNobel Heineken Holding Nestlé RocheRoyal Dutch Shell Samsung Electronics
Risk-management reporting
AkzoNobelIndividual engagements
AkzoNobel ASM International NV ASML Carrefour DE Master Blenders 1753 BV KPN Nestlé PfizerThe Hershey Co. TNT Express NV Total Unilever
In the overview below all themes are listed for which Robeco exercised active dialogue on behalf of LPFA. Relevant companies in LPFA’s portfolio are listed per theme. In some cases dialogues are still running, are to be started or are already closed.
United Nations Principles for
Responsible Investment
Robeco signed the United Nation’s Principles for Responsible Investment (PRI) in December 2006. The PRI comprise six guidelines for good practice in responsible investing. The principles are as follows:
P1. We will incorporate environmental,
social and governance (ESG) issues into our investment analysis and decision-making processes.
P2. We will be active shareholders and
incorporate ESG issues into our ownership policies and practices.
P3. We will request the entities in which we
invest to provide appropriate disclosure on ESG issues.
P4. We will promote acceptance and
implementation of the Principles within the investment industry.
P5. We will work together to enhance
our effectiveness in implementing the Principles.
P6. We will each report on our activities
and progress towards implementing the Principles.
The United Nations Global Compact
The PRI provide a framework for responsible investment. The fundamental principles of the United Nations Global Compact offer companies (not necessarily investors) a framework for responsible entrepreneurship. The Global Compact requires companies to embrace, support and adopt a number of core values within their own sphere of influence in the field of human rights, labour standards, the
environment and anti-corruption measures. The Global Compact consists of ten universal principles:
Human rights
1. Companies should support and respect the protection of human rights as established at an international level, 2. They should ensure that they are not
complicit in human-rights abuses.
Labour standards
3. Companies should uphold the freedom of association and recognise the right to collective bargaining.
4. Companies should abolish all forms of compulsory labour.
5. Companies should abolish child labour. 6. Companies should eliminate
discrimination in employment.
Environment
7. Companies should adopt a prudent approach to environmental challenges. 8. Companies should undertake initiatives
to promote greater environmental responsibility.
9. Companies should encourage the development and diffusion of environmentally friendly technologies.
Anti-corruption
10. Companies should adopt measures to counter all forms of corruption.
International Corporate
Governance Network (ICGN)
1Robeco buys shares in companies, thereby making us co-owners of these companies.
12. Codes of conduct
Each share entitles the owner to vote at shareholders’ meetings. By making active use of this right, we can increase control over the company’s management and improve the company’s sustainability, which may eventually result in higher shareholder value. This is of course good news for our clients.
Robeco bases its voting policy on the principles of the International Corporate Governance Network (ICGN). This is an internationally recognized code for good corporate governance, the basic principles of which allow sufficient scope for assessing companies according to local standards. The national laws and codes of conduct for corporate governance, such as the Dutch Corporate Governance Code in the Netherlands, which was anchored in legislation in 2009, are leading in the assessment of companies. Circumstances specific to individual companies also play a part in this.
1. Aim of the company – to create sustainable value for shareholders:
The company aims to achieve optimal sustainable returns for its shareholders in the long term.
2. Corporate boards: The board’s
responsibilities include corporate strategy, risk policy, monitoring implementation and performance, major capital expenditures, governance practices, selecting key executives and aligning their remuneration with the longer term interests of the company and its shareholders. Members of the management or supervisory boards must act independently in the best interests of all shareholders of the company; they are accountable to the shareholder body as a whole.
3. Good citizenship; relations with
stakeholders and ethical business conduct: The executive board is responsible for maintaining relations with stakeholders. Companies should comply with a widely recognised national corporate-governance
Robeco uses national and international codes of conduct as guiding principles and anchors for responsible investing.
code and carry out their activities in an economically, socially and ecologically responsible manner.
4. Risk-management: The executive board
is responsible for the effective and dynamic risk management of a company.
5. Corporate remuneration policies:
Corporations should follow the best practices for remuneration as set out in ICGN2.
6. Audits: The annual audit should be
carried out by independent, external auditors who should be proposed for approval at the shareholders’ meeting.
7. Disclosure and transparency: Companies
should disclose relevant information that is pertinent to them on a timely basis.
8. Shareholders’ ownership responsibilities and voting rights and legal remedies:
Shareholders should be able to exercise their rights and should be given reasonable notice of all relevant matters.
9. Responsibility of shareholders:
Shareholders actions should be oriented towards achieving long-term value creation and the company’s targets. Shareholders should observe the national and international best practices for corporate governance.
1 This text is a summary of the ICGN statement on global principles for corporate governance, as amended on 18
November 2009 (Washington, DC, USA). The complete text can be found on http://www.icgn.org/files/icgn_main/ pdfs/best_practice/global_principles/icgn_global_corporate_governance_principles-_revised_2009.pdf See http://www.icgn.org/files/icgn_main/pdfs/best_practice/exec_remun/2006_executive_remuneration.pdf 10 52 -0 2’13
