Welcome to our Q4 2019 ESG newsletter, which aims to keep you informed of developments across the industry and Investec Asset Management (becoming Ninety One) within the ESG space.
Revision to the UK Stewardship Code
After Sir John Kingman described the UK Stewardship Code as ‘well-intentioned but not effective’, it was clear that it needed a significant revamp. We welcome the evolution of the code, and the shift away from simply explaining policies and processes to focusing on outcomes and effectiveness. The new code sets a higher standard of stewardship and raises the bar for ESG communications.
- The code’s focus has been extended to include asset owners, such as pension funds and insurance companies, service providers and asset managers. This will help align the approach of the whole investment community in the interests of end-investors and beneficiaries.
- There is now a requirement to report annually on stewardship activity and its outcomes. Signatories’ reports will show what has been done in the previous year and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments. This greater transparency will allow clients to see how their interests are being served.
- Signatories will be expected to integrate environmental, social and governance factors, including climate change, within investment analysis and to ensure their investment decisions are aligned with the needs of their clients.
- Signatories are now expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.
- Signatories are required to explain their organisation’s purpose, investment beliefs, strategy and culture, and how these enable them to practice stewardship. They are also expected to show how they are demonstrating their stewardship commitment through appropriate governance, resourcing and staff incentives.
The updated code can be found here:
Sustainable Development Goals: a valuable framework for all
In September 2015, 193 countries endorsed a set of 17 Sustainable Development Goals (SDGs), which serve as a roadmap towards a more sustainable future. They address issues such as poverty, education, climate action and equality, and include specific goals and success metrics. The SDGs provide a common framework that empowers everyone to take part in working towards sustainability, with data and measurement that can be translated into investable themes that both individual and institutional investors can embrace. The United Nations estimates that it will take between US$5-7 trillion annually to achieve all 17 SDGs. For comparison, annual global development aid reached a new high in 2016 of US$142 billion.
At Investec Asset Management, we believe that the SDGs provide an important framework. We understand that, as a business, we need to think broadly about sustainable development priorities in the markets that we invest in, and how we can contribute meaningfully to society. We have approached the SDGs from a framework/tools perspective, which can be particularly valuable in markets where we invest with both additionality and intentionality. For example, all of our investments in Africa, through our private market capabilities, have a unique developmental angle which is guided and reported through the SDG framework.
Within our public-market strategies, various teams use mapping and scoring approaches that combine an understanding of developmental impact priorities with a recognition of what is realistically achievable.
Launch of the OEIC Global Environment Fund
On the 2 December 2019, we launched the UK-domiciled OEIC Global Environment Fund. The Fund is a replica of the GSF Global Environment Fund that launched earlier in 2019. The OEIC has already attracted a high level of client intertest, with current assets of £20million and a strong pipeline.
In brief, the Fund is a global equity fund focused on decarbonisation, seeking to invest in companies that are driving the transition to a low-carbon world.
ICGN conference in London
In November 2019, David Couldridge, Head of ESG Engagement, attended the ICGN’s Global Stewardship Forum in London. He has summarised his top five takeaways from the event:
- UK FRC: The FRC Director Corporate Governance & Stewardship, David Styles, is concerned that investors are not considering the long-term implications of material ESG factors for the beneficiaries of funds. The revised UK Stewardship Code requires asset managers to communicate a well-defined purpose, strategy and culture that focuses on the beneficiaries of funds they manage.
- UK Stewardship Code 2020 and reporting: The FRC wants any stewardship action to be anchored in the foundation of sound governance. Reporting on activities and outcomes should follow from the foundation of investment-manager governance, investment philosophy and investment process.
- Engagement: It is always about purpose and strategy — having an engagement objective and a well-thought-out strategy are the keys to success. Climate Action 100+ has been successful due to its clear purpose and narrow focus.
- Asset owners: Resources are too limited and generally asset owners do not know what they want from stewardship. Their focus has been on scandals and the number of engagements and votes, rather than strategic focus and quality.
- Credit: Global bonds/credit exceed equities (there is c.US$100 trillion of credit vs. US$85 trillion of equities). Companies need to be well governed to attract both credit and equity capital and keep the cost of capital as low as possible. Engagement opportunities for both asset classes include:
- Clarity on financial policy and capital allocation
- Strategy and use of debt and equity
- Risk, including ESG factors
- Audit, accounting and reporting
On 21 November 2019, we welcomed 47 clients to our inaugural Sustainability Workshop. The presentations and panel discussions covered a broad range of topics, including the ‘just transition’, tackling climate risk in portfolios, and the advances being made in sustainability data and research. The evening saw the annual Tusk Conservation Awards, which highlighted the phenomenal work being done in the face of great danger to protect Africa’s natural heritage. The awards ceremony was attended by some 370 people, including our clients.
New joiner to the ESG team
Strengthening our ESG capability within the private market space, we were delighted to hire Wendy Mlotshwa during the quarter. Wendy will focus on environmental and social due diligence and portfolio monitoring to ensure that our infrastructure projects adhere to our ESG policies.
COP25: letter to governments on climate change
As a member of the Institutional Investor Group on Climate Change (IIGCC), we co-signed a letter to governments (along with 630 other investors) to encourage stronger and faster action on achieving the goals of the Paris Agreement.
As background, governments have been slow to act on reducing emissions. The world is on a trajectory that will lead to an average temperature rise of well above 2 degrees Celsius above pre-industrial levels. In this scenario, the risk to investments is expected to increase materially.
At Investec Asset Management, we are developing tools and data to help us understand climate-risk exposure to better inform investment management.
Engagement with Japan Ministry of Finance (MOF)
Japan proposed an amendment to its Foreign Exchange and Foreign Trade Act (FEFTA) that requires prior-notification by foreign investors intending to acquire 1% or more of shares in listed companies in sectors such as aircraft, electricity/gas, communications and many more. This is down from the current ‘10% or more’ requirement. It also requires prior-notification by foreign investors intending to influence management on governance or business strategy.
We were concerned that the amendment could:
- Impact foreign investment into Japan.
- Increase the complexity and administrative costs of investing in Japan.
- Negatively affect valuations and market liquidity.
- Slow the improvement of corporate governance in Japan.
Investec Asset Management took the following action:
- We wrote to the Ministry of Finance (MOF) listing our concerns and requesting a careful review of the proposed amendments prior to implementation.
- We shared our letter and concerns with the Asian Corporate Governance Network (ACGN) and encouraged action.
- We also shared our letter with the International Corporate Governance Network (ICGN) and again encouraged action.
ACGA and ICGN followed up as follows:
- ACGA wrote to the Japanese MOF, supporting the need to strengthen Japan’s national security but warning that the amendment could prove highly detrimental to Japan’s capital markets and corporate governance.
- ICGN wrote to the Japanese MOF expressing its deep concern with the proposed amendments to FEFTA.
- ICGN’s CEO and a Japanese member of the ICGN Board of Governors met with the MOF in Tokyo and reinforced the concerns listed in the ICGN letter.
- Following that meeting, ICGN offered to host a webinar on behalf of the MOF, which the Ministry accepted.
- The MOF participated in an ICGN webinar on 12 December 2019, clarifying the purpose of the FEFTA amendment and introducing an exemption for investments that are deemed to pose no risk to national security. In addition, the MOF confirmed there would be no restriction of shareholder rights under the Act, other than those necessary to achieve the specific purpose of the legislation.