As global head of stewardship, what do you think the main priorities should be when it comes to engaging with companies? Would it, for example be climate change, exec remuneration, corporate tax, or something else entirely?
It is important that we engage on material issues, as we want to be sure that we are raising issues that could impact long-term value creation. Due to the range of issues, there isn’t a one-size-fits-all approach.
Climate change is one of the major long-term issues and now that COP 21 has been ratified by so many countries we are going to start to see policy implementation that will create a very different backdrop for the extractive industries. We are pushing with partners like the Aiming for A coalition to get much better disclosure and reporting on companies’ transition plans.
There are also geographic differences. For example, with emerging markets we have just completed a project looking at bribery and corruption risk and have had a number of good interactions with companies on the topic. We have identified potential weak spots in our holdings and entered into discussions on the topic.
One of the most important things for us is that the requests we make are founded on strong economic logic.
What about executive pay? How important is this factor and what will it take to bring about meaningful change in terms of excessive executive pay packages?
A lot of column inches are devoted to executive pay. However, a focus on pay should not diminish shareholder engagement on other issues, particularly strategic direction or quality of management which are significantly more important for long-term value creation. We see evidence of this through the engagement we have with companies in which we invest and, to a lesser but noticeable extent, how our own shareholders wish to engage with us.
Having said that we are voting against more pay packages because we have concerns about them. Where we have voted against pay for two years in a row we are also voting against the Remuneration Committee Chair, to hold them accountable. While some companies who receive large votes against remuneration go on to engage constructively, this is not always the case. We would like to see a register of these offenders kept centrally and have suggested in our recent response to the Government’s green paper on corporate governance reform that companies who do not receive a supermajority on the pay report have to face a binding vote on their policy.
How important do you think it is that bondholders begin to really build stewardship and engagement into their ownership approach?
Hugely so. As active credit investors, engaging companies’ management teams is part of our fundamental investment process. Our process relies on our fixed income analysts developing a clear and thorough understanding of company business models to identify those that may benefit or suffer as investment themes play out over various time horizons. Our engagement concentrates on each company’s ability to create sustainable value, and we question or challenge companies about issues that we perceive might affect the future value of the issuers’ bonds, including those relating to ESG factors. We have also done engagement projects for our fixed income team on cyber security.
As well as our fixed income specialists, we also meet companies alongside colleagues from our ESG and equity teams. This ensures an issuer’s strategy and messaging to all stakeholders is consistent. It also helps us to leverage the benefits of ownership across the capital structure.
Following a controversy, Schroders’ in-house researchers can be especially helpful in delivering insights as to the long-term impact of such incidents.
Do you expect the change in the interest rate cycle to mean companies are more willing to engage or take more of their investors’ messages on board as financing becomes a more expensive and potentially harder to secure? I would imagine that will mean investors’ influence will grow as having loyal finance providers would become more important to those corporate borrowers.
What is interesting is that we are seeing all providers of finance across the capital structure step up on ESG issues. As investors in banks we are pressuring them more on their lending policies, particularly to carbon-intensive industries. A number of banks have already announced that they are curtailing lending to certain projects or areas. So I don’t see this as a cyclical change, but more structural, as a result of greater awareness regarding these issues and increasing transparency.
In 2015, Schroders did a lot of work on sugar. How has that informed what you, and other, investors are doing?
For example, we have done a huge amount of work in the food and drink sector, engaging on the risks around sugar. In 2015 we published a thematic research note exploring ‘is sugar turning Big Food into the next Big Tobacco’. We believe that as global obesity, diabetes and other diet-related diseases continue to increase, this will be a real headwind from the sector. Therefore, to gain a better understanding of the issue we established a ‘Sugar Roundtable’ that allowed investors and companies to discuss the issues and challenges in adopting healthier product portfolios.
As investors, this allowed us to build expectations about what future reporting around the broader health and wellness trends could look like. We held several discussions between investors and companies and then drafted an Investor Expectation (IE) document which provides an engagement framework for investors to use when engaging with the food and beverages sector. In 2016 we worked with the Principles for Responsible Investment to host a webinar and communicate our findings with fellow investors. Following the webinar we received support from investors representing over £1 trillion in assets under management, who have committed to using our IE document to help guide their own engagements with the food and drink sector.
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund