The year in review - July 2020
THE QUICK TAKE
- Awareness of responsible investment and sustainability practices is increasing globally
- We believe that engagement with investee companies on ESG issues is key
- The mitigation of climate change and related risks is in sharp focus globally
- Good human capital management is strongly linked to long-term value creation
In 2019, we saw a strong trend of growing interest in, and awareness of environmental, social and governance (ESG) and sustainability issues from most clients and regulators. Today, we live in a more transparent and connected world. Poor practices are more easily exposed, and asset owners and their members are becoming increasingly intole-rant of this.
This translated into our having more robust and holistic conversations, which helped improve and widen the ambit of our own stewardship activities and focus.
It has therefore, understandably, been a busy year within Coronation and our entire investment team has again, during this time, worked tirelessly to improve our stewardship efforts considerably.
In the early years of our stewardship journey, much of the focus was on governance issues, but our processes and analyses have evolved over time to also take into consideration the growing number of social and complex environmental issues.
For all of our portfolios, material sustainability issues are fully integrated and taken into account in the investment decision-making process. But they are not the main driving factor for investments. We do apply exclusions based on issues such as cluster munitions, anti-personnel mines and any client-specified sectors. But, for the most part, our approach is about valuation and driving change through active engagement as opposed to exclusion.
Engagement with companies and voting at shareholder meetings are both powerful tools that we have considered to be an essential part of our active management offering since the very beginning of our stewardship journey. As you will see through this document, we believe that constructive dialogue with the companies in which we invest is far more effective than excluding companies from the investment universe. Only if enhanced engagement does not lead to a desired change do we consider alternative actions that may include collaboration with other shareholders to help achieve the desired outcome. If all else fails, we will look to disinvestment and exclusion.
LAUNCHED SUSTAINABILITY FUND
In 2019, we took our approach to ESG and active ownership one step further through the launch of the Coronation Global Sustainable Equity Income Fund. This is a global equity fund that is designed for investors that require a combination of superior risk-adjusted long-term returns and a dividend yield that is higher than that of the MSCI All Country World Index. Long-term sustainability is a core objective of the fund. This means that, in addition to encouraging responsible business practices through our approach to stewardship and active engagement, the fund also excludes investment in companies that derive a material part of their revenue from activities that cause, or could result in, material harm to society or to the environment. The fund excludes investment into all companies that operate in this sphere, such as tobacco companies, companies that manufacture controversial weapons, and those that operate in the thermal coal or tar sands industries.
THE PRI PEER REVIEW
This year, we achieved the highest Principles for Responsible Investing (PRI) ratings of either A or A+ in all categories. The PRI assessment is an important yardstick for us, as it helps us measure where we stand compared to the rest of the market, and also highlights the areas and competencies where we can improve. For almost all categories, we achieved a score ahead of the median of the market. We are extremely proud of this achievement, but we will not rest on our laurels and will continue to look to improve upon the work that we are doing and the impact we have made.
TACKLING THE ISSUE OF CLIMATE CHANGE
Dire warnings from scientists about the ill effects of climate change have become impossible to ignore and, in January 2020, all of the major risks identified by the World Economic Forum were related to the environment.
This was not surprising following a year characterised by floods and droughts, when fires ravaged Australia and the Amazon, and teenage climate activist Greta Thunberg was chosen as Time’s Person of the Year.
Climate change is already a measurable global reality and our home country South Africa, along with other developing countries, is likely to see a more pronounced impact due to the perceived lack of financial resilience. South Africa has an energy-intense economy and as such is a significant contributor to global carbon emissions. The impacts of climate change are potentially significant if not mitigated. These include, among others, physical, transition and disclosure risks.
As economies change from being predominantly fossil fuel dominated to a lower-carbon world, the transition will impact all aspects of the economy and society as it has become clear that, in the long term, economic, environmental and social risks are linked.
The Paris Agreement of 2015 served notice that companies could not continue with a ‘business as usual’ approach. As active managers with a long history of engaging with companies to drive meaningful change, we believe that we are well positioned to be an active and meaningful change agent to influence favourable climate-related resolutions.
We have had, for example, had several discussions with fossil-intensive companies to fully understand the adequacy and appropriateness of their emission reduction plans.
Over the year, Coronation became a signatories to the Climate Action 100+, which is a large investor-led initiative focusing on systematically significant greenhouse gas (GHG) emitters. As a signatory, investors agree to engage with more than 100 of the world’s largest such corporations to curb emissions, strengthen climate-related financial disclosures, and improve governance on climate change risks and opportunities.
To date, signatories of Climate Action 100+ have been important catalysts for action, alongside significant moves by policymakers and civil society. As part of this initiative, Coronation has joined as a collaborating investor on both Sasol and Eskom.
The complexity of climate change for investors is compounded by factors that include the absence of historical data, the need for an ability to forecast probabilities into the future and a lack of standardised disclosure among companies.
As such, Coronation is an official supporter of the Task Force on Climate-related Financial Disclosures (TCFD), a private-sector international task force formed to develop recommendations for mainstream financial disclosure of climate risks and opportunities across sectors.
We will use their recommendations where appropriate and in engaging with our peers and investee companies on reporting challenges. In this way, we hope to gain improved information and disclosure from companies to help better understand and value climate-related risks.
Given all of the above, it is fair to conclude that the past year has seen major advances in our ongoing goal to understand the risks and opportunities posed by climate change. We are taking action today based on our understanding of the current situation and challenges. We constantly monitor new developments and our approach to climate change will evolve over time.
We have increased the sources from which we collate climate change-related data and have also started to measure the carbon footprint of our portfolios to give us a better idea of the starting point from which we need to launch our engagements. In addition, all our analysts have done a refresh on the ESG-related analyses of the companies for which they are responsible, identifying key risks and opportunities.
REDUCING SINGLE-USE PLASTIC IN SOUTH AFRICA
There is a growing trend of responsible consumption among consumers globally and an increased awareness of how this can positively contribute to a sustainable planet. Plastics have become a resource used in nearly every part of our modern economy, combining superior functional properties with low cost. Its use has increased twenty-fold since the 1970s and is expected to double again in the next two decades. Today, nearly everyone, everywhere, every day, encounters plastic packaging that is only used once. Tackling this issue of wasteful, single use plastic is now a major engagement theme among investors globally.
While delivering many benefits, the current use of plastic has drawbacks that are becoming increasingly apparent. Most of the plastic used escapes collection systems and is dumped – much of it ending up in the ocean, polluting the seas and endangering marine life.
Recognising the breadth and scale of the effort required to reduce pollution and, while remaining mindful of the complexity of the issue, we took the view that South African retailers could do more to reduce the impact of plastic bags on the environment. This view was also informed by the fact that many other countries around the world have already made significant progress in this area and we believed that South African retailers are well placed to make a visible impact.
Together with other asset managers, we wrote a letter to the management of large South African retailers to express our concerns regarding single-use plastics, recommending that management considers accelerating the reduction, or even total elimination, of single-use plastic shopping bags in their stores. This has started a constructive engagement process.
DEMONSTRATING ACTIVE OWNERSHIP
Active ownership is a key part of our investment tenet and our value proposition to our clients. As mentioned earlier, for us, it encompasses two key areas – our engagement with investee companies and our votes executed at shareholder meetings.
The dangers of ignoring poor governance are well understood and are always significant. As such, governance issues have always been considered the biggest of the ESG triumvirate.
As a member of the International Corporate Governance Network (ICGN), a leading authority on global standards of corporate governance and investor stewardship, we are aligned with, committed to, and advocate for the highest standards of corporate governance. It has always been an important part of our investment process to ensure that the companies in which we are invested maintain high standards of corporate governance. As the emphasis on sustainable investing has increased, we have responded through greater engagement with companies. Coronation values the opportunity to join ICGN as a means of further improving our roles as stewards of our clients’ capital.
In addition, our investment team has spent a large amount of time during this year on several matters relating to corporate governance. The most material of these include:
Board composition, functioning and independence: Investors care deeply about good corporate governance and a well-functioning board is an important part of this equation. We believe that companies should be headed by an effective board that is responsible for setting the strategy, direction and risk appetite of the company. Yet, it remains difficult to truly assess the effectiveness of a board beyond the data metrics. Standardised data reporting is an important step forward; however, it provides a very limited insight into the true functioning and effectiveness of a board. Ticking good governance boxes does not necessarily translate into good governance in practice and, hence, as investors, our aim is to try and delve deeper, beyond the basic metrics.
A key part of our assessment is thus focused on trying to gain an understanding of the genuine independence and skills of a board. Our inherent aim is to ensure that boards comprise a diverse range of competencies, knowledge, perspectives and experiences to enable them to effectively carry out their duties and responsibilities. We believe that an independent chairperson is pivotal in creating conditions for overall board and individual director effectiveness.
Executive remuneration: we improved our principles and guidelines on voting in relation to executive renumeration. Consideration was given to important issues that centred on aspects such as enrichment versus compensation, alignment with shareholders, and whether it is sufficiently long term in nature and set against appropriate key performance indicators. Importantly, we pushed for the inclusion of malus and clawback mechanisms in all remuneration structures to ensure that shareholders are protected from fraud and/or material misrepresentations at the company in the context of being able to claw back or implement a forfeiture of executive bonuses.
Mandatory audit rotation: following a number of accounting-related scandals, we are of the belief that a regular rotation of company auditors would serve as a useful tool in safeguarding against fraud and corruption at a company. It is our belief that the audit process should be objective and independent to be effective and maintain market confidence. As such, we have become strong supporters of a mandatory audit firm rotation for all companies after a period of 10 years.
Our initial success in driving mandatory audit rotation has been high and encouraging, and we will continue in our efforts to champion this change.
The social element within ESG considerations is often the most difficult to assess and require case-by-case consideration.
Having said that, we do have an overarching belief that a company’s long-term strategy should take into account the development of its workforce. Labour rights and the treatment of human capital are an important part of an organisation’s culture and are fundamental in driving good business performance. Good human capital management practices include the provision of a fair basic minimum wage, good health and safety standards, and an investment in training and development programmes. These help to ensure that the workforce is well equipped for completing its required tasks, operates under the latest and highest safety standards and regulations, and remains motivated. Good human capital management generates a culture that is demonstrably linked to more stable and productive workforces and, ultimately, long-term value creation.
forms part and parcel of our ongoing investment analysis and, where warranted, of our engagement process with investee companies.
Over the last year, our investment team conducted a detailed deep dive into the mining and resource industry, looking specifically at employee safety records. Besides minimising accidents and fatalities, health and safety also interrogate broader working conditions and the prioritisation of employee well-being.
This has prompted the start of a longer and more nuanced engagement process with a number of companies, aimed at improving the safety of working environments for employees.
The Covid-19 crisis has highlighted, and in many ways exacerbated, some of the major social and political challenges facing the global community. As an immediate response, many of the issues that companies had to deal with had a social dimension, which included actions centred on protecting the health and welfare of individuals affected by the virus and the response.
However, the most vulnerable in society have been hardest hit by this pandemic and we understand that the longer-term social consequences are likely to be devastating, unless dealt with explicitly by governments, business and society as a collective. We cover more of this in a special note on the Coronavirus pandemic on page 16.
TRANSPARENCY ON OUR INITIATIVES
Transparency is an important element of stewardship and is dealt with explicitly by various international codes. Transparency has also been a key part of our culture since our inception in 1993. As part of our stewardship commitment, we provide regular updates to clients on our wider stewardship activities, including our engagement activities, our voting activities and updates on ESG matters.
We communicate the results of these activities in our client interactions and, ultimately, through this document. Most of our engagement, however, takes place behind closed doors in order to preserve trust and achieve the greatest level of impact and understanding.
We also work with our clients individually to ensure that we provide them with meaningful information that they need to fulfil both their stated stewardship objectives, as well as any regulatory reporting required.
Our voting activities are disclosed, and updated on a quarterly basis, on the Coronation website www.coronation.com/institutional/about-us/ stewardship/, along with this annual Stewardship Report.
As PRI signatories, we are required to report publicly on our responsible investment activities each year. These Transparency Reports, together with the Assessment Reports, are accessible to signatories on the PRI Data portal.
Institutional investors are now, more than ever, working collaboratively to move the needle at companies, and the momentum for improving corporate practices in the long term is building.
The regulatory environment around the world has increased scrutiny of and the responsibility for long-term savings in respect of ESG incorporation into investment strategies, which is evidenced through portfolio holdings. Regulatory changes, such as the enactment of the EU Shareholder Rights Directive, the progression of global corporate governance and stewardship code requirements (PRI, UK Stewardship Code, Code for Responsible Investing in South Africa), coupled with mounting social pressures on companies and investors, will bolster the growth and adoption of more sustainable business practices.
As such, we continue to work with our clients on appropriate adjustments to their investment policy statements and their voting policies, as well as mechanisms to improve communication and reporting.
As a company, we believe in proactively engaging with the industry and policymakers to ensure that we help develop an environment that improves outcomes and protects the long-term savings industry. These discussions span a number of different topics and are conducted through various industry bodies in which we are active members and also directly with regulators, where appropriate.
SIGNATORIES TO MULTIPLE CODES
Coronation continues to be a signatory to multiple responsible investing codes, including the PRI and CRISA. In addition, we adhere to the principles denoted in the updated UK Stewardship Code which was published in the latter part of 2019.
As signatory to these codes, we work very hard to ensure that we continue to take cognisance of and champion their tenets and principles.
THE ROAD AHEAD
It is encouraging that the investment industry across the globe has stepped up its overall focus on a wide range of sustainability issues over the past decade. Long-term thinking about the impacts of a business and society across E, S and G has become increasingly important aspects and indicators of investment success. While the crystallisation and awareness of stewardship concepts are improving dramatically across the industry, standardised and useful reporting is still one of the biggest challenges that we continue to grapple with. We predict that this is a critical area that the industry and regulators will work hard at improving in the next few years. We would strongly support this initiative, as it will result in investors having access to improved and more meaningful data that can better inform our investment decisions.
For our part, we will continue to put our resources into growing and developing our understanding of this complex, ever-evolving and challenging field, and we will continually review, interrogate and enhance our processes. As an active steward of our clients’ capital, we believe that this will be integral to achieving our goal of delivering significant and sustainable long-term benefits, not only for our clients but for the generations to come. +
This is an extract from the Coronation Stewardship Report 2019, published June 2020. You can read the full report here