Active Ownership

Responsible Investment Philosophy:

Responsible investment (RI) is an umbrella term used to describe a broad range of approaches that can be used to incorporate ESG considerations into the investment process. RI is also sometimes referred to as sustainable investment. PH&N views ESG integration as systematically incorporating ESG factors into investment processes with the goal to identify potential risks and opportunities and improve long term, risk-adjusted returns.

Their approach to RI is comprised of three pillars, and PH&N takes specific actions under each of these pillars to deliver investment returns without undue risk of loss.

• Fully integrated ESG: All investment teams integrate relevant ESG factors into their investment processes.
• Active Stewardship: PH&N conveys its views through thoughtful proxy voting, engagement with issuers and regulatory bodies, and collaboration with other like-minded investors.
• Client-driven solutions and reporting: PH&N aligns solutions with client demand and provide transparent and meaningful reporting.

Integration in the Investment Process:

Rather than applying a top-down ESG investment screen, PH&N teams assesses the risks and opportunities associated with issuers’ ESG practices throughout the due diligence process. A team’s main goal is to understand the impact of such practices on the company’s overall sustainability and credit quality. The teams employ a wide range of resources to expand their insight of pertinent ESG information, including management and rating agency engagement, as well as third-party research. PH&N does not force themselves to look for ESG factors in order to fulfill an arbitrary requirement but, instead, believe it is prudent and vital to look at a corporate bond in its entirety. This research naturally includes ESG considerations to the extent that they reflect the quality and value proposition of an investment.

Consumer Staples Firm Case Study:

Objective: Due diligence on a potential new investment. 

Analysis: The RBC Global Equity team conducted several information-seeking engagements with the company’s management team, including in areas of corporate culture and employee well-being, net-zero strategy, biodiversity, water, and regenerative agriculture strategies.

The team noted:

1. The company has clear sustainability goals, including SBTi commitments in line with a 1.5°C warming scenario, and significant visibility across the management team and board.
2. The company has a comprehensive biodiversity strategy, which includes anti-deforestation commitments and a regenerative agriculture strategy that targets social co-benefits along with emission reductions.
3. The company has board- and management-level oversight of its sustainability strategy.

Outcome: The team incorporated its ESG analysis into its fundamental analysis process.

The investment team determined that the potential climate-related risks, which have the ability to create contingent liabilities–including for the products the company sources and grows–are minimized and well controlled.

As a result of its analysis, the team believes that the company’s industry-leading measures should put the company in an advantaged position to capture market share. This contributed to the team determining that the company was an attractive investment opportunity, and it initiated investment in the first quarter of 2022.

ESG Philosophy:

Whether one calls it corporate governance, corporate social responsibility, ESG, responsible business conduct, or sustainability, the underlying concept is the same: a company’s character matters. In our experience, the odds of a company achieving a successful combination of growth and longevity cannot be separated from its corporate character. Good corporate behaviour can increase the probability of exceptional returns.

Being long-term investors with an investment horizon of 5-10 years and beyond, Baillie Gifford seeks to ask the right questions and get to know companies deeply. Business fundamentals – such as a company’s market opportunity, returns, capital deployment, and sustainability of competitive advantage – are considered together with the intangible notions of business culture, adaptability, and role in society. In other words, an analysis of corporate character is intrinsically built-in to our investment approach.

Integration in the Investment Process:

Baillie Gifford integrates potentially material ESG issues affecting holdings through its 10 Question Stock Research Framework. Specific questions target a company’s sense of wider responsibility and ESG considerations are embedded into several questions.

Moderna Case Study:

A shareholder proposal was filed at the Moderna 2022 AGM requesting that the company commission a third-party report to analyse the feasibility of promptly transferring its intellectual property and know-how to facilitate the production of its Covid-19 vaccine in low and middle-income countries. Prominent proxy advisors recommended supporting the proposal. Baillie Gifford held nearly 10 per cent of voting shares at the time, meaning the firm's decision would be important for the result.

Baillie Gifford first discussed the resolution with its proponent, Oxfam, to ensure the firm fully understood the charity’s concerns and to help guide their further engagement with Moderna management. The Baillie Gifford then met with the chair of Moderna’s board in Edinburgh and engaged with the firm’s senior management to thoroughly explore the nuances of the situation before coming to a decision. They gained sufficient comfort that Moderna’s leadership had deeply explored the feasibility of safely licensing its technology and to whom, in consultation with stakeholders, including the World Health Organization. The firm trusted management’s view that further technology transfer to companies in low- and middle-income countries is not the best use of its limited resources in the immediate future. However, the firm will continue to consider this where appropriate. Furthermore, the main bottlenecks to ending the pandemic are no longer in vaccine supply but in last mile distribution.

The firm also trusted management’s decision to take a cautious approach to enabling the proliferation of the mRNA platform around the world due to legitimate safety concerns. Moreover, they felt that the steps Moderna had announced to expand access to mRNA technologies in the future and ensure the world is better prepared for future pandemics are commendable. These include a commitment to never enforce its Spikevax patents in 92 low- and middle-income countries, to establish a manufacturing capability in Kenya, and to open up its platform to scientists through its mRNA Access programme.

Baillie Gifford considers each portfolio company’s unique characteristics and circumstances when determining which issues to prioritise in their engagements and voting. The firm cares deeply about equitable access to vaccines. While they could have voted in favour of this proposal, their research and engagement ultimately led them to oppose it. The firm did not come to this decision lightly. But they felt that the company should instead focus its efforts on its commitments described above, as well as its extensive product pipeline, to ensure it realises the enormous potential of the mRNA platform over the long term.

Responsible Investment Philosophy:

Since 1986, C WorldWide has been investing in sustainable companies which is the essence of its active and long-term focused investment philosophy and process. Anchored in their long-term investment horizon, proactively focusing on good business practices has been core to their approach – not just to do less harm or to avoid risk, but to fully understand the long-term merits and viability of the investee company.

As active stock investors, C WorldWide favors a proactive engagement approach rather than an approach based on extensive exclusion lists. Its objective is to have an ongoing dialogue with invested companies. Integrating environmental, social and governance (ESG) factors in its investment decisions is an essential part of our fundamental analysis process as they evaluate what is material to all stakeholders of the investee company over the long-term and not just the next few quarters or even years. Addressing stewardship with investee companies results in a dialogue that will assist the investee companies’ adaptability to changing markets. There is no doubt, after 30 plus years’ experience, that shareholders are the first to benefit from a longer-term approach.

Integration in the Investment Process:

• ESG equals sustainability. Although the focus on the term ESG has increased significantly over the past years, ESG has always equaled sustainability and been aligned with active, long-term portfolio management.
• C WorldWide believes that a strong ESG company profile starts with the G – i.e. governance. Good corporate governance is typically anchored with good company managements. A good corporate governance foundation is a key steppingstone to a good ESG profile. For companies to improve their social and environmental agenda they require, first and foremost, a robust governance framework.
• ESG factors make a difference to long-term active portfolio management and the firm believes there is no conflict between stock returns and sustainability. It believes that investments in sustainable companies are drivers for higher, longer term risk-adjusted shareholder returns. This mitigation of risk is a key contributing factor when ESG considerations are taken into account.
• C WorldWide’s active, high conviction equity portfolios reinforce its commitment to ESG. This is because the firm’s focus on concentrated stock-picking lifts company specific ESG awareness. Its experience is that sustainable companies often make a good stock resulting in higher returns at a lower risk and therefore outperforming over the longer term.

Novo Nordisk Case Study:

In a dedicated ESG meeting with Novo Nordisk, C Worldwide received further details on the company's ESG developments, which they are also keen to highlight on quarterly briefings and investor days. Novo Nordisk is one of the more advanced companies integrating ESG throughout its business areas. In all Danish modesty, they started the meeting by saying they were in a good place but still had room for improvement. Novo Nordisk's focus is to increase transparency and reporting of ESG matters and address that solid growth also brings increased use of plastic and water, which are used to produce insulin and obesity drugs.

Additionally, C Worldwide discussed the recent use of its obesity drug, Wegovy, which has been seen used by influencers and models to prep for public events and promote the incorrect and unapproved use of the products on social media like TikTok. Novo Nordisk can only control its products and suppliers but is trying to combat the off-label use of products by taking back the dialogue stating that drugs are for chronic diseases and not a slimming agent to look fit. Important to note is, despite the media coverage of off-label use of products, most patients are still severely obese. Finally, the firm discussed Novo Nordisk's focus on recycling and educating consumers/patients to sort waste properly. Specifically, insulin pens can be recycled, and materials such as plastic can be reused. Ongoing work across the industry is currently taking place to find optimal solutions for producing and recycling product components.

Responsible Investment Philosophy:

Responsible Investing is central to what Walter Scott does and what it believes. The firm understands that Environmental, Social, and Governance factors, as much as financial metrics, determine the long-term success of an investment. It believes integrity, sustainability, and governance factors are important in assessing a company’s ability to prosper over the long term. Because of this, Walter Scott fully integrates its assessment of these factors into the firm’s investment process. Walter Scott is member or signatory to a number of select groups that it believes best represents the industry in pushing for meaningful change or where it feels the educational element will complement its own research in a material way.

• Principles of Responsible Investment (PRI) Walter Scott has been a signatory since 2017. Our 2020 rating is A+, A, A.
• Carbon Disclosure Project (CDP)member
• UK Investment Associationmember
• Climate Action 100+member
• International Corporate Governance Network member

Integration in the Investment Process:

• Responsible: The firm is entrusted to invest on behalf of our clients over a long-term investment horizon. As such, it has a duty to understand each company in which it invests, including its approach to Environmental, Social, and Governance (ESG) matters. Water Scott’s experience has taught them that only those companies that strive towards appropriate ESG standards are likely to prosper over the long term. Companies that do not meet the firm’s rigorous standards will not be considered as potential investment candidates.
• Integrated: The research team assesses the ESG factors that may affect the operating and financial performance of each company. ESG considerations could include air and water pollution, human rights, labour standards, safe development of medicines, board leadership, remuneration, and conflicts of interest among others. The list is not exhaustive and not every factor considered will apply to every company. The firm’s assessment is a key part of our engagement discussions with company management. Given the importance of these factors in determining the long-term sustainability of a business, we do not delegate ESG analysis to a separate team. We believe it is essential that each member of the firm’s Research team has responsibility for understanding a company’s ESG profile.
• Engaged: Engagement with companies is pivotal to good stewardship. Walter Scott expects every company it invests in to engage on issues of sustainability. By actively engaging with a company, the firm gains a better understanding of its business, including its ESG credentials. It also means Walter Scott can use its influence as investors to effect meaningful change. Through its long-term investment horizon, and very often long-term tenure through the firm’s clients as significant shareholders, Walter Scott has built excellent relationships with corporate management teams. The firm’s direct engagement with companies allows better assessment and understanding of how they approach ESG issues. The firm expects management teams to assess the materiality of ESG factors and to target, disclose, monitor, and provide progress reports accordingly.

Johnson & Johnson Case Study

During October, Walter Scott met with senior representatives of Johnson & Johnson (J&J) to discuss several governance issues. One of these concerned the poor support the company’s non-binding, say-on-pay proposal received at its 2021 AGM. Following from this, J&J engaged with shareholders to better understand their concerns, one of which was the exclusion of compliance and litigation costs from executive remuneration targets. In response, J&J’s compensation committee revisited the compensation paid in 2020 and declared itself satisfied that the original decision was appropriate.

After providing details around the rationale for the decision in advance of its 2022 AGM, the company received widespread support on executive pay from both proxy advisory firms and shareholders. While this represented positive progress, another proposal at the same AGM, requesting that the company cease excluding compliance and litigation costs from compensation performance measurement, received a surprisingly large 46% backing from shareholders and was supported by ISS, the proxy advisory firm.

While Walter Scott voted against this item (having considered and been in broad agreement with J&J’s arguments for continuing use of discretion on exclusion), we suggested to management that the vote was an example of the power wielded by proxy advisory firms and highlighted the importance of forging good working relationships with them.

Responsible Investment Philosophy:

Brookfield’s business philosophy is based on its conviction that acting responsibly toward its stakeholders is foundational to operating a productive, profitable and sustainable business, and that value creation and sustainable development are complementary goals.

Brookfield defines material ESG considerations as those that have the potential to have a direct, substantial impact on an organization’s ability to create, preserve or mitigate erosion of economic value, environmental or social value for itself and its stakeholders. The elements on which we focus may differ across certain industries, activities, geographic locations and types of business (i.e., control, joint control, minority, public equity or debt). Its approach to ESG incorporates leading ESG frameworks and standards, including Sustainability Accounting Standards Board (“SASB”) standards and the Taskforce for Climate-related Financial Disclosures (“TCFD”).

Integration in the Investment Process:

Brookfield embeds material ESG considerations and evaluate risks and value creation opportunities throughout its investment process. The firm actively looks to advance ESG initiatives and improve ESG performance in driving long-term value creation throughout the lifecycle of our investments. Its investment processes align with the PRI’s six Principles.

Arteris Case Study:

Brookfield invested in Arteris in 2012, a diversified portfolio of seven Brazilian toll roads with 3,200 km in operation. Throughout its operating history, Arteris has planted more than 2 million native seedlings, or the equivalent to 1,200 hectares of reforested areas.

Beginning in 2016, Arteris began work on the Restinga Viva (or Living Coast Forests) Project, a habitat restoration project covering 166 hectares where Arteris operates, to replant native species while removing harmful invasive species. The project focuses on conservation, the recovery of degraded environments and increasing biodiversity and education. Partnering on this project reflects Brookfield’s focus on striving to protect biodiversity throughout the lifecycle of its investments.

Responsible Investment Philosophy:

Macquarie believes the identification, assessment, and responsible management of ESG risks and opportunities is essential to the sustainable long-term development of assets and the communities in which they operate.

ESG considerations are embedded within Macquarie’s investment decision-making approach and the asset management frameworks that inform the way in which portfolio companies assess and improve their performance. Macquarie partners with its portfolio investments to share best practices and drive positive change. They seek to improve working conditions, minimize environmental impact, and preserve the cultural heritage of the communities in which they invest.

Integration in the Investment Process:

To ensure the consistency and adequacy of these assessments they have comprehensive due diligence scope checklists and external expert advisers are engaged as needed on specific ESG issues.

Results from ESG due diligence assessments include:

• Permit and license requirements and issues arising from investigations;
• Key ESG risks and potential liabilities;
• Recent regulatory actions taken, reviews and/or third-party actions or claims against the company;
• Ongoing obligations/regulatory standards to be met post-acquisition;
• Assessment of the ESG risk management framework in place against accepted good practice; and
• Recommendations for any remediation actions.

Engagement Case Study:

Issue: MAM’s Climate Solutions strategy focuses on investing in two "buckets" of companies: High-emitting companies actively working toward reducing, displacing, and/or sequestering their GHG emissions ("Reducers") and companies who are helping others to reduce emissions through development of products and services ("Facilitators"). In late 2022, the firm became concerned that one of the companies that they identified as a facilitator was not advancing their efforts to further direct capital towards solutions to reduce carbon emissions.

Actions: MAM arranged a meeting with the company’s Chief Financial Officer and Investor Relations and Sustainability staff to gauge the company’s commitment towards developing products that will help drive reduction in GHG emissions.

Outcome: The firm discussed the main areas of the company’s business and their impacts on emissions savings. Although the company does offer products, such as towers for wind turbines, that ultimately assist in the reduction of GHG emissions, the firm reached the conclusion that the company was not investing capital to substantially grow the business nor looking to develop new products and services to promote GHG emissions reduction. As a result, they exited from the position in early 2023.

Responsible Investment Philosophy:

BentallGreenOak (BGO) is guided by its purpose as a fiduciary to create sustainable spaces that deliver long-term value for our clients, tenants, and the communities that we serve. Empowered by this responsible investment mindset, the firm is committed to realizing ESG goals that enhance asset value, ensure compliance, promote industry-leading management practices, and drive superior performance. This commitment to responsible investment and ESG integration is carried across BGO’s global real estate debt and equity investment platform, at both the portfolio and property levels.

While BGO’s decade of ESG leadership has achieved global recognition to date, the increased focus over the last several years on the climate crisis, social unrest, and the COVID-19 pandemic have brought ESG risk management to the fore. To successfully respond to these critical ESG issues and continue to be at the forefront of environmental and social change, the firm incorporates ESG considerations throughout an asset’s entire lifecycle. Through this approach, BGO is building a portfolio of the future that recognizes the relationship that we all have to our buildings, and our desire for safer, healthier, and more inclusive cities.

Integration in the Investment Process:

BGO’s approach to responsible investment is built on the following core pillars:

• Operational Efficiency:

Data Analytics, Target Setting, and Green Building Certifications

State-of-the-art sustainability data management system and comprehensive ESG programs to drive operational excellence and support data-driven decision-making.

• Climate Risk and Resilience:

Climate Risk Analysis and Portfolio Planning

Climate risk profiling and customized adaptation planning tools.

• Social Impact:

Socially Impactful Investments, Equity, Diversity, and Inclusion, and Community Engagement

Proprietary Social Impact Assessment Tool, sound supply chain policies and practices, community engagement activities, and an extensive suite of equity, diversity, and inclusion (EDI) initiatives to drive positive impact for our stakeholder partners and society.

• Tenant Experience:

Tenant Engagement and Health and Well-Being

Bespoke tenant engagement programs that further drive sustainability performance, enhance occupant health and well-being, and strengthen tenant loyalty and satisfaction.

• ESG Governance:

ESG Policies and Disclosure

Firm-wide policies that delineate our approach to sustainable investment, environmental stewardship, responsible procurement, and ethical conduct, and robust disclosure practices that enable us to manage ESG risk, strengthen transparency and accountability, and create value for our clients and stakeholder partners.

Net-Zero Ready Development Case Study:

Project Overview: Redevelopment project that involved the demolition and replacement of three 1960’s industrial buildings with two new warehouse buildings

Net-Zero Ready:

• ‘Net-zero ready’ designed building, meaning it has enhanced aspects that are able to easily transition to achieve net zero in the future
• Targeting LEED Certified
• designed to host future solar panels
• Stormwater will be reused on site and for irrigation
• Around 94% of the demolition waste was recycled and diverted from landfill