Collaborating with others
Some investment firms will exclude companies who don’t adhere to certain standards, which can be effective, but it then limits the ability to influence and effect real change within that organisation which could benefit everyone in the long run. Which is why we engage for change through collaborative engagement.
This means Royal London Asset Management(RLAM) will engage when there’s an opportunity to improve or change the way a company is run or is behaving. For example, they might encourage them to adopt more environmentally friendly policies.
When would our asset managers collaborate?
RLAM evaluates the benefits of collaborative engagement on a case-by case basis, and will favour working with other shareholders when:
- A company hasn’t responded to one-on-one engagement, or their response has not been satisfactory
- The situation is serious enough that moving to a collective meeting is appropriate
- Partnering with others would lead to greater access to management or the board, or provide them with a greater chance to influence
- Working with local partners could improve engagement efforts through their physical presence and/or understanding of local practices
- The majority of RLAM’s public policy work is focused in the UK, where we have the greatest asset exposure, but they may undertake advocacy in other markets if it’s material to our investments or important for our customers.
Where we are members and signatories
As part of our commitment to collaborative engagement, we’ve become signatories of leading industry bodies and members of investor networks.
Working together with these organisations helps us to not only stay in line with industry best practices, but it also means we can improve our own standards of compliance and reporting when it comes to stewardship, governance and voting.
Governance for peace of mind
Real governance needs to be transparent so you can see what action we've taken and why. That's why all of our investment options have a formal review process, at no extra cost to you.
Our approach to governance means that all our investment options have a formal review process and are monitored by the Investment Advisory Committee (IAC). They meet regularly and review our Governed Range and funds taking a long-term view for our customers. You can also view a copy of the IAC terms of reference.
Using our vote to effect change
When we invest in a company, we become a shareholder of that company, which means we have the right to vote on a range of matters. These can include appointments to the Board of Directors, structural changes to the company, executive pay and compensation, a proposed merger or acquisition, and much more.
Royal London Asset Management (RLAM) look after the majority of the money we invest for our pension customers, managing just over 90% of our pension assets. They actively engage with the companies they invest in, and vote to promote good governance and company behaviour. More detail can be found in their voting policy.
We also work with other asset managers who invest money and vote on our behalf. Listed below are some of the asset managers we work with. You can see how these external asset managers have voted by viewing their voting records:
How we’ve engaged with companies and made a difference
We engage with the companies we invest in to help make a real difference. By challenging them on many different issues such as CO2 emissions and executive pay, we continue to push for positive change to improve outcomes for our customers. Our engagement priorities include:
Climate risk
Innovation, technology and society
Social and financial inclusion
Biodiversity
Health
Governance and corporate culture
“Our ultimate goal is to use our position as shareholders or bondholders to have a positive influence on behaviour because we think that is in the best long-term interests of our clients."
Ashley Hamilton Claxton, RLAM’s Head of Responsible Investment
What is a Just Transition?
We also care about a Just Transition, because without adequate considerations of the social impacts of accelerating the path to Net Zero, there is a risk that people will not be willing to make the hard choices we need to make in order to limit the impacts of climate change.
Just Transition ensures that social issues are taken into account when moving to a low carbon economy. Rapid climate action that limits global warming to below 1.5ºC prevents the worst human and economic costs of climate change. A Just Transition ensures this climate action also supports an inclusive economy and avoids exacerbating existing injustices or creating new ones.
Standing up on diversity
We’re an investor in Adidas, so that means our customers are shareholders in the company. We believe it’s important that Adidas has a diverse workforce. Not only because we believe fundamentally in diversity, but also because a backlash against Adidas could result in a drop in sales, which in turn could impact the value of our customers’ pension.
What’s the background?
In a 2019 New York Times article, it was uncovered that the company faced issues of workplace discrimination. It’s continually received both public and employee backlash over repeated instances of racially insensitive marketing schemes over the past few years.
What action did we take?
Last year the RI team decided to vote against the approval of management acts given the ongoing allegations of Adidas’ failure to address diversity and inclusion issues in both its advertising and across its workforce.
We recognise that the company has already gone some way towards proving their commitment to tackling this issue, and the responsible investment team will keep their approach under review ready for the next Annual General Meeting (AGM). If their concerns persist, and little is being done to improve or embed diversity initiatives, they’ll consider escalating our vote to individual board members.
Amazon case study
A big part of responsible investment is using the power of being a shareholder to improve the standards and practices of the companies we invest in. These could relate to environmental, social or governance issues.
As a pension company managing the retirement pots of millions of people, our power to make a difference is greater than the power of the individual alone.
Here are some examples of how we use this influence:
What do I need to know?
We like Amazon as an investment, but we acknowledge that it has some risks and challenges.
Although it is a very small part of Amazon's overall business, questions have been raised over the use of Amazon’s facial recognition and analytics software: “Amazon Rekognition”, as well as the sale of this software to other organisations, including the US Government.
It is sold to the government for public protection purposes, however the Amazon board has a responsibility to thoroughly consider the impacts of its use.
Why is this a governance issue?
There are concerns that this software violates privacy and other human rights. These potentially have both reputational and financial implications for Amazon.
The product terms of use received a lot of criticism internally. Amazon employees petitioned the CEO to stop providing the product to governments, because of fears it could lead to discrimination.
Amazon’s management defended the use of the technology, stating that the company is supportive of human rights and has in the past protected and rescued victims of human trafficking, reuniting more than 100 missing children. The company also argued that users must abide by its ‘acceptable use policy’.
What should Amazon do?
We backed a shareholder resolution that Amazon prepare a report on the risks associated with government use of the software as we feel that this needs further consideration from both a social and financial perspective. In June 2020, the company placed a one year moratorium on allowing law enforcement to use the software.
How big is Royal London Asset Management’s shareholding in Amazon?
Royal London Asset Management (RLAM) has a shareholding worth £676 million in Amazon (as at August 25, 2020), equivalent to 0.04 per cent of the company.
What happens next?
RLAM will examine the report once published and decide if Amazon has adequately assessed the risks.
Anglo American case study
Company description: Anglo American is the UK’s fourth largest diversified mining company, operating world class diamond, copper, and precious metal assets.
Investment opportunity: RLAM felt there was a high risk-reward pay off driven by Anglo American’s commitment to operational efficiency, and historic investments in high quality assets.
E S or G issue: This standpoint was however undermined by an environmental issue, specifically Anglo American’s coal assets.
RLAM’s Engagement: In September 2019, RLAM met with Anglo American’s CEO to discuss the best ways to manage environmental and carbon risks.
Engagement outcome: RLAM decided to support the argument of Anglo American’s management - that taking money out of coal assets wouldn’t result in a positive environmental and financial outcome. The buying candidates are currently all Chinese entities that would seek to expand coal production, not scale it back, and so removing money from coal would simply result in a financial loss for our customers while the practice continued.
Instead, Anglo American has committed to running these assets responsibly for cash, and reallocating capital into commodities that support the electric revolution.
Since RLAM met with Anglo American, they have announced a £405m acquisition of Sirius Minerals, a mining company focused on the development of sustainable potash mines. These mines are responsible for manufacturing fertiliser that is essential to the global food supply.
Summary: RLAM’s work resulted in Anglo American choosing to take a more environmentally responsible approach when allocating capital, while still keeping the long-term interests of our customers and members in mind.
Barclays Bank case study
What do I need to know?
There is an urgent need to achieve net zero carbon emissions globally, to prevent catastrophic climate change.
Some companies that Barclays lends money to produce a significant amount of CO2 emissions, which contribute to climate change.
So while the bank is not a direct producer of fossil fuels, it is a big part of the process.
Barclays lent £91 billion to carbon-intensive businesses between 2015 and 2019, according to 350.org, the non-governmental organisation.
Why is this an environmental issue?
Carbon-intensive industries such as electricity generators produce significant CO2, which is responsible for climate change. To limit global temperature rises, it's vital to cut emissions substantially and quickly.
What could Barclays do?
A shareholder proposed that Barclays cut lending to big CO2-emitting companies substantially, to the point where it doesn’t lend to the sector at all.
Barclays put forward its own proposal - that it commit to becoming a 'net zero' bank by 2050, and that it would help support energy and power companies transition away from using fossil fuels.
We talked with senior management at Barclays, and ShareAction, the charity that put forward the original proposal.
Both proposals have merit. After weighing up the benefits of both, we decided to support the net-zero plan. We felt that this would have a positive impact on more of Barclay's lending activities, not just those in energy sectors.
How big is Royal London Asset Management’s shareholding in Barclays?
Royal London Asset Management (RLAM) has a total £128 million invested in Barclays (August, 2020), representing 0.67% of Barclays’ market value of £19,151 million (August, 2020)
What happens next?
As a shareholder, we believe the best way we can change Barclays’ lending practices is to stay invested and vote as shareholders on the changes it proposes, rather than sell the shares to a buyer who might not care so much.
Want to know more?
You can find out more about responsible bank lending in general from the UNEP Finance Initiative "Principles for Responsible Banking" project (external link).
Ferroglobe case study
Ferroglobe is a mining and metals company that produces metal alloys, silicone-based alloys and other products.
When RLAM’s high yield team was considering an investment in the company’s bonds in August 2018, the credit analysts were concerned – the financial side of the investment looked fine, but they found a problem and decided to look into it further.
Taking a closer look
Working with colleagues in the RLAM Responsible Investment team, the Global High Yield team found a series of issues that needed to be considered when deciding whether to invest.
They described the company’s ownership structure as ‘opaque’ and with ‘limited financial flexibility’. They highlighted concerns around accounting and reporting transparency. They questioned the financing and payment history to affiliates of the company, including the former Chairman, and pointed out that raw materials were sourced from challenging emerging markets.
At the time, the Ferroglobe bonds were performing well, and the company’s commentaries suggested everything was going well and that there were no problems.
However, with the information provided by the RI team to hand, the Global High Yield team took a different view and decided not to invest.
The importance of governance
The following quarter, unexpectedly, Ferroglobe’s reported financial statistics (such as revenues and profits) that were much weaker than the market had been expecting.
This indicated that there was in fact a transparency issue, and raised questions around how open the management was being with investors. Since then, the bonds have moved down considerably and have, as yet, to make a full recovery.
To us, this shows the clear link between responsible investing issues and their potential financial impact. While Ferroglobe didn’t have glaring ESG issues – such as pollution or the exploitation of workers – they did have more nuanced ones around a company’s reporting and openness. This is still just as key to consider, and is an example of why the ‘governance’ factor in ESG is important.
Maeda Road case study
Company description: Maeda Road is a Japanese paving company with over 60% of its market value held in cash and short term investments.
Investment opportunity: The company had a very attractive risk-reward pay off, as RLAM’s investment process identified a significant valuation anomaly. This opportunity however, was reliant on management returning significant amounts of cash (that ultimately belongs to the shareholders) to the shareholders.
E S or G issue: RLAM felt that poor governance was restricting our ability as shareholders to realise the value of cash held on Maeda Road’s balance sheet.
RLAM’s Engagement: After RLAM failed to get the company to meet with them, they met with the CEO of Maeda Road’s largest shareholder Maeda Corp, another listed Japanese company. They expressed support for steps that would improve governance at Maeda Road (Maeda Corp regularly meet with Maeda Road management).
Engagement outcome: Indirectly linked to RLAM’s push for governance reform at Maeda Road, Maeda Corp announced a hostile takeover of Maeda Road to improve governance of the business. The hostile takeover was at a 50% valuation premium, but needed support from other shareholders; when this takeover occurred, RLAM generated about £15m of gains (alpha) for our customers.
Summary: RLAM’s engagement ultimately improved corporate governance, and resulted in significant investment gains for our customers and members.
Metro Bank case study
Metro Bank is a UK challenger bank that was launched in 2010. It offers retail and corporate banking and was the UK’s first new high street bank in 150 years. RLAM holds shares in the bank passively – this means they’ve not made an active choice to invest in the bank, but hold the shares through our passive tracker funds. These funds are a key building block in our multi asset funds – including the Governed Range that many of our members and clients’ pensions are invested in.
A conflict of interest
Initially the concern was the fact that the bank was using InterArch – a company run by the wife of the Chairman and founder – to design the bank’s branches and branding services. This raised a red flag – how did the bank manage this conflict of interest? RLAM’s RI team wanted to know who was questioning and evaluating the contract to make sure it was appropriate for the business. If this wasn’t being subjected to proper scrutiny, was there anything else that was being overlooked?
At the company’s annual meeting in 2018, they decided to vote against the Chair of the Audit Committee and voiced their concerns publicly. They also voted against the pay report and against the re-election of the founder and Chairman, as well as a number of other board directors because they weren’t happy with the company’s overall corporate governance.
Taking action
The team was invited to a meeting with the company’s directors so they could explain their approach. The directors told them more about the relationships with InterArch, they toured the offices to see evidence of the design work, and had an open discussion about corporate governance at the bank. Although the company was willing to speak to the RI team, when they asked questions about procedures around monitoring these contracts and the details of the annual contract reviews, they weren’t satisfied with the answers.
They also discussed suggestions around improving shareholder communication and disclosure. They held a follow-up call with their investor relations team on how to improve disclosure in the Annual Report and provide more details on the contracts with the Chairman’s wife. In addition, the RI team pushed the company to improve its disclosure on executive pay, as the company would not disclose the performance measures that executives were being judged against in order to receive bonuses.
A costly oversight
At the start of 2019, a £300m ‘hole’ appeared in the bank’s accounts, when it admitted that an accounting error had led to the miscalculation of the risk of a number of commercial loans.
It was deeply concerning that no one had picked it up, which the RI team viewed as yet more evidence of weak governance controls and oversight by the board.
Throughout this process the company’s share price has fallen significantly due to investors’ concerns about the hole in the accounts. “I think they were genuinely surprised by the scrutiny and the media attention,” explains Sophie Johnson, from RLAM’s Responsible Investment Team. “We hold a very small amount of the company’s shares in our passive funds. But at the end of the day, our clients have money invested with this company and they have lost out as a result of the issues at the bank, so of course we’re going to engage.”
A force for change
Since the initial meetings with the company, some changes are now starting to take place. The Chairman and founder has announced that he will be stepping down; the contract with InterArch will be put out to tender for the first time, and positive board changes are being made, including the appointment of an independent Chairman. Although the company’s financial position is tenuous and there is a long way to go to restore investor trust, the RI team does feel the bank is finally taking some steps to improve corporate governance.
Ashley Hamilton Claxton, Head of Responsible Investment at RLAM, welcomed the result:
“We hope this change in leadership will help the Board draw a line under the governance issues at Metro Bank and focus on restoring shareholder trust and improving financial performance. Pension savers, who are invested in listed companies through their workplace pensions, have suffered significantly as a result of the over 90% drop in Metro Bank’s share price since April 2018 when we first raised governance concerns, so we welcome this announcement.”
Persimmon Homes case study
Persimmon Homes Plc is one of the UK’s largest house builders.
Back in 2012, a long-term bonus plan was approved by the company’s shareholders. The aim of the plan was to return a lot of money to shareholders; if they did, executives would be rewarded. The problem was, there was no upper limit on those rewards. Fast-forward to 2018, the plan paid out an astonishingly large amount of money which caught the attention of the newspapers and plunged the company into the spotlight.
So how did this happen?
Bigger bonuses and problematic pay-outs
In 2013, the government introduced the Help to Buy scheme, and house builder share prices have been performing very well since then. The scheme is designed to help people onto the housing ladder, and essentially boosted demand in a sector where supply is limited, helping house prices rise.
As a result, the company performed exceptionally well, easily hitting the targets they set for themselves. This created a bonanza of over £200 million worth of payouts for senior executives, including nearly £100m earmarked for the CEO.
“This was one of the most generous long-term bonus plans in the UK,” explains Sophie Johnson of the RLAM Responsible Investment team. “Many of our funds voted against it in 2012 and have done so every year since. There was no upper limit to the bonus; we knew payments had the potential to be astronomical.
We were opposed to paying out these huge amounts. Not because we are opposed to all large payouts, but because we feel that exceptional pay should reflect exceptional performance. In this case, because Help to Buy was in place, house prices had shot up and all house builders were making a fortune. It wasn’t management that drove exceptional performance, but government policy,” says Sophie.
A restructured result
After Royal London and other shareholders complained, the executives volunteered to reduce their payouts, but the CEO, Jeff Fairburn, still received £75 million in 2018.
He subsequently resigned, after the media furore, in November 2018. Several directors linked to the initial plan also resigned, and the Remuneration Committee has a new Chairman. The company has also changed its pay structure to prevent something similar happening in future.
How we’re helping to tackle the climate crisis
RLAM’s responsible investment team is doing great work to help drive the move to a low carbon economy and leading the way on the Just Transition.
A just transition for Scottish and Southern Energy (SSE)
SSE is an energy utility company that helps produce and distribute gas and electricity to our homes. It is one of the largest producers of wind power in the UK and has committed to become ‘net zero by 2050’ – which means that by 2050 the amount of greenhouse gas emissions produced by SSE will be equal to the amount it removes from the atmosphere.
RLAM’s responsible investment team has been champions of SSE’s strategy to move to wind power and reduce its reliance on coal and gas, which will have a big benefit for our climate. However, they’ve also been talking to SSE about the Just Transition – what the company is doing to ensure that its transition to lower carbon energy also considers any social impact, like job losses or making energy bills unaffordable. Solving the climate crisis is not straightforward, and the responsible investment team is asking companies to take a more holistic view and look at both the social and environmental consequences of taking action.
What action did the engagement drive?
Through a collaborative engagement effort with the Friends Provident Foundation, the responsible investment team met with representatives from SSE to check its progress on Net Zero and a Just Transition. Following their engagement, SSE agreed to publish a formal Just Transition strategy, the first company to do this globally.
This is a great example of how engagement can lead to positive outcomes for society. The responsible investment team is now working with six other utilities companies to encourage and support them in adopting a Just Transition strategy ahead of COP26 and E.ON has now also published its a Just Transition Statement as part of their Net Zero plans. RLAM expect others to join this trend.
Suncor case study
Company description: Suncor is Canada’s largest oil and gas company, with major exposure to Albertan Oil Sands.
Investment opportunity: Suncor’s longevity and history of investing it’s money strategically provided a strong case for our investment, with a promising risk-reward ratio.
E S or G issue: Suncor’s carbon footprint and environmental pollution are material risks to the investment case and business.
RLAM’s Engagement: In October 2019, RLAM met Suncor’s CEO to argue that reducing environmental and carbon risks would not only be beneficial to wider society, but would also improve the long-term profitability of Suncor, making it more appealing to shareholders.
Engagement outcome: In the last 12 months, and since the meeting, Suncor have announced projects that will reduce group CO2e emissions by 10% in the next two years. This is equivalent to the 48 lowest emitting FTSE100 companies going net zero in that same time frame.
Summary: RLAM's engagement contributed to major reduction in carbon emissions, improved wealth creation for shareholders, and provided us with more confidence in Suncor’s top management being ready and able to take proactive steps to address environmental risk.
Standing up on diversity
We’re an investor in Adidas, so that means our customers are shareholders in the company. We believe it’s important that Adidas has a diverse workforce. Not only because we believe fundamentally in diversity, but also because a backlash against Adidas could result in a drop in sales, which in turn could impact the value of our customers’ pension.
What’s the background?
In a 2019 New York Times article, it was uncovered that the company faced issues of workplace discrimination. It’s continually received both public and employee backlash over repeated instances of racially insensitive marketing schemes over the past few years.
What action did we take?
Last year the RI team decided to vote against the approval of management acts given the ongoing allegations of Adidas’ failure to address diversity and inclusion issues in both its advertising and across its workforce.
We recognise that the company has already gone some way towards proving their commitment to tackling this issue, and the responsible investment team will keep their approach under review ready for the next Annual General Meeting (AGM). If their concerns persist, and little is being done to improve or embed diversity initiatives, they’ll consider escalating our vote to individual board members.
Amazon case study
A big part of responsible investment is using the power of being a shareholder to improve the standards and practices of the companies we invest in. These could relate to environmental, social or governance issues.
As a pension company managing the retirement pots of millions of people, our power to make a difference is greater than the power of the individual alone.
Here are some examples of how we use this influence:
What do I need to know?
We like Amazon as an investment, but we acknowledge that it has some risks and challenges.
Although it is a very small part of Amazon's overall business, questions have been raised over the use of Amazon’s facial recognition and analytics software: “Amazon Rekognition”, as well as the sale of this software to other organisations, including the US Government.
It is sold to the government for public protection purposes, however the Amazon board has a responsibility to thoroughly consider the impacts of its use.
Why is this a governance issue?
There are concerns that this software violates privacy and other human rights. These potentially have both reputational and financial implications for Amazon.
The product terms of use received a lot of criticism internally. Amazon employees petitioned the CEO to stop providing the product to governments, because of fears it could lead to discrimination.
Amazon’s management defended the use of the technology, stating that the company is supportive of human rights and has in the past protected and rescued victims of human trafficking, reuniting more than 100 missing children. The company also argued that users must abide by its ‘acceptable use policy’.
What should Amazon do?
We backed a shareholder resolution that Amazon prepare a report on the risks associated with government use of the software as we feel that this needs further consideration from both a social and financial perspective. In June 2020, the company placed a one year moratorium on allowing law enforcement to use the software.
How big is Royal London Asset Management’s shareholding in Amazon?
Royal London Asset Management (RLAM) has a shareholding worth £676 million in Amazon (as at August 25, 2020), equivalent to 0.04 per cent of the company.
What happens next?
RLAM will examine the report once published and decide if Amazon has adequately assessed the risks.
Anglo American case study
Company description: Anglo American is the UK’s fourth largest diversified mining company, operating world class diamond, copper, and precious metal assets.
Investment opportunity: RLAM felt there was a high risk-reward pay off driven by Anglo American’s commitment to operational efficiency, and historic investments in high quality assets.
E S or G issue: This standpoint was however undermined by an environmental issue, specifically Anglo American’s coal assets.
RLAM’s Engagement: In September 2019, RLAM met with Anglo American’s CEO to discuss the best ways to manage environmental and carbon risks.
Engagement outcome: RLAM decided to support the argument of Anglo American’s management - that taking money out of coal assets wouldn’t result in a positive environmental and financial outcome. The buying candidates are currently all Chinese entities that would seek to expand coal production, not scale it back, and so removing money from coal would simply result in a financial loss for our customers while the practice continued.
Instead, Anglo American has committed to running these assets responsibly for cash, and reallocating capital into commodities that support the electric revolution.
Since RLAM met with Anglo American, they have announced a £405m acquisition of Sirius Minerals, a mining company focused on the development of sustainable potash mines. These mines are responsible for manufacturing fertiliser that is essential to the global food supply.
Summary: RLAM’s work resulted in Anglo American choosing to take a more environmentally responsible approach when allocating capital, while still keeping the long-term interests of our customers and members in mind.
Barclays Bank case study
What do I need to know?
There is an urgent need to achieve net zero carbon emissions globally, to prevent catastrophic climate change.
Some companies that Barclays lends money to produce a significant amount of CO2 emissions, which contribute to climate change.
So while the bank is not a direct producer of fossil fuels, it is a big part of the process.
Barclays lent £91 billion to carbon-intensive businesses between 2015 and 2019, according to 350.org, the non-governmental organisation.
Why is this an environmental issue?
Carbon-intensive industries such as electricity generators produce significant CO2, which is responsible for climate change. To limit global temperature rises, it's vital to cut emissions substantially and quickly.
What could Barclays do?
A shareholder proposed that Barclays cut lending to big CO2-emitting companies substantially, to the point where it doesn’t lend to the sector at all.
Barclays put forward its own proposal - that it commit to becoming a 'net zero' bank by 2050, and that it would help support energy and power companies transition away from using fossil fuels.
We talked with senior management at Barclays, and ShareAction, the charity that put forward the original proposal.
Both proposals have merit. After weighing up the benefits of both, we decided to support the net-zero plan. We felt that this would have a positive impact on more of Barclay's lending activities, not just those in energy sectors.
How big is Royal London Asset Management’s shareholding in Barclays?
Royal London Asset Management (RLAM) has a total £128 million invested in Barclays (August, 2020), representing 0.67% of Barclays’ market value of £19,151 million (August, 2020)
What happens next?
As a shareholder, we believe the best way we can change Barclays’ lending practices is to stay invested and vote as shareholders on the changes it proposes, rather than sell the shares to a buyer who might not care so much.
Want to know more?
You can find out more about responsible bank lending in general from the UNEP Finance Initiative "Principles for Responsible Banking" project (external link).
Ferroglobe case study
Ferroglobe is a mining and metals company that produces metal alloys, silicone-based alloys and other products.
When RLAM’s high yield team was considering an investment in the company’s bonds in August 2018, the credit analysts were concerned – the financial side of the investment looked fine, but they found a problem and decided to look into it further.
Taking a closer look
Working with colleagues in the RLAM Responsible Investment team, the Global High Yield team found a series of issues that needed to be considered when deciding whether to invest.
They described the company’s ownership structure as ‘opaque’ and with ‘limited financial flexibility’. They highlighted concerns around accounting and reporting transparency. They questioned the financing and payment history to affiliates of the company, including the former Chairman, and pointed out that raw materials were sourced from challenging emerging markets.
At the time, the Ferroglobe bonds were performing well, and the company’s commentaries suggested everything was going well and that there were no problems.
However, with the information provided by the RI team to hand, the Global High Yield team took a different view and decided not to invest.
The importance of governance
The following quarter, unexpectedly, Ferroglobe’s reported financial statistics (such as revenues and profits) that were much weaker than the market had been expecting.
This indicated that there was in fact a transparency issue, and raised questions around how open the management was being with investors. Since then, the bonds have moved down considerably and have, as yet, to make a full recovery.
To us, this shows the clear link between responsible investing issues and their potential financial impact. While Ferroglobe didn’t have glaring ESG issues – such as pollution or the exploitation of workers – they did have more nuanced ones around a company’s reporting and openness. This is still just as key to consider, and is an example of why the ‘governance’ factor in ESG is important.
Maeda Road case study
Company description: Maeda Road is a Japanese paving company with over 60% of its market value held in cash and short term investments.
Investment opportunity: The company had a very attractive risk-reward pay off, as RLAM’s investment process identified a significant valuation anomaly. This opportunity however, was reliant on management returning significant amounts of cash (that ultimately belongs to the shareholders) to the shareholders.
E S or G issue: RLAM felt that poor governance was restricting our ability as shareholders to realise the value of cash held on Maeda Road’s balance sheet.
RLAM’s Engagement: After RLAM failed to get the company to meet with them, they met with the CEO of Maeda Road’s largest shareholder Maeda Corp, another listed Japanese company. They expressed support for steps that would improve governance at Maeda Road (Maeda Corp regularly meet with Maeda Road management).
Engagement outcome: Indirectly linked to RLAM’s push for governance reform at Maeda Road, Maeda Corp announced a hostile takeover of Maeda Road to improve governance of the business. The hostile takeover was at a 50% valuation premium, but needed support from other shareholders; when this takeover occurred, RLAM generated about £15m of gains (alpha) for our customers.
Summary: RLAM’s engagement ultimately improved corporate governance, and resulted in significant investment gains for our customers and members.
Metro Bank case study
Metro Bank is a UK challenger bank that was launched in 2010. It offers retail and corporate banking and was the UK’s first new high street bank in 150 years. RLAM holds shares in the bank passively – this means they’ve not made an active choice to invest in the bank, but hold the shares through our passive tracker funds. These funds are a key building block in our multi asset funds – including the Governed Range that many of our members and clients’ pensions are invested in.
A conflict of interest
Initially the concern was the fact that the bank was using InterArch – a company run by the wife of the Chairman and founder – to design the bank’s branches and branding services. This raised a red flag – how did the bank manage this conflict of interest? RLAM’s RI team wanted to know who was questioning and evaluating the contract to make sure it was appropriate for the business. If this wasn’t being subjected to proper scrutiny, was there anything else that was being overlooked?
At the company’s annual meeting in 2018, they decided to vote against the Chair of the Audit Committee and voiced their concerns publicly. They also voted against the pay report and against the re-election of the founder and Chairman, as well as a number of other board directors because they weren’t happy with the company’s overall corporate governance.
Taking action
The team was invited to a meeting with the company’s directors so they could explain their approach. The directors told them more about the relationships with InterArch, they toured the offices to see evidence of the design work, and had an open discussion about corporate governance at the bank. Although the company was willing to speak to the RI team, when they asked questions about procedures around monitoring these contracts and the details of the annual contract reviews, they weren’t satisfied with the answers.
They also discussed suggestions around improving shareholder communication and disclosure. They held a follow-up call with their investor relations team on how to improve disclosure in the Annual Report and provide more details on the contracts with the Chairman’s wife. In addition, the RI team pushed the company to improve its disclosure on executive pay, as the company would not disclose the performance measures that executives were being judged against in order to receive bonuses.
A costly oversight
At the start of 2019, a £300m ‘hole’ appeared in the bank’s accounts, when it admitted that an accounting error had led to the miscalculation of the risk of a number of commercial loans.
It was deeply concerning that no one had picked it up, which the RI team viewed as yet more evidence of weak governance controls and oversight by the board.
Throughout this process the company’s share price has fallen significantly due to investors’ concerns about the hole in the accounts. “I think they were genuinely surprised by the scrutiny and the media attention,” explains Sophie Johnson, from RLAM’s Responsible Investment Team. “We hold a very small amount of the company’s shares in our passive funds. But at the end of the day, our clients have money invested with this company and they have lost out as a result of the issues at the bank, so of course we’re going to engage.”
A force for change
Since the initial meetings with the company, some changes are now starting to take place. The Chairman and founder has announced that he will be stepping down; the contract with InterArch will be put out to tender for the first time, and positive board changes are being made, including the appointment of an independent Chairman. Although the company’s financial position is tenuous and there is a long way to go to restore investor trust, the RI team does feel the bank is finally taking some steps to improve corporate governance.
Ashley Hamilton Claxton, Head of Responsible Investment at RLAM, welcomed the result:
“We hope this change in leadership will help the Board draw a line under the governance issues at Metro Bank and focus on restoring shareholder trust and improving financial performance. Pension savers, who are invested in listed companies through their workplace pensions, have suffered significantly as a result of the over 90% drop in Metro Bank’s share price since April 2018 when we first raised governance concerns, so we welcome this announcement.”
Persimmon Homes case study
Persimmon Homes Plc is one of the UK’s largest house builders.
Back in 2012, a long-term bonus plan was approved by the company’s shareholders. The aim of the plan was to return a lot of money to shareholders; if they did, executives would be rewarded. The problem was, there was no upper limit on those rewards. Fast-forward to 2018, the plan paid out an astonishingly large amount of money which caught the attention of the newspapers and plunged the company into the spotlight.
So how did this happen?
Bigger bonuses and problematic pay-outs
In 2013, the government introduced the Help to Buy scheme, and house builder share prices have been performing very well since then. The scheme is designed to help people onto the housing ladder, and essentially boosted demand in a sector where supply is limited, helping house prices rise.
As a result, the company performed exceptionally well, easily hitting the targets they set for themselves. This created a bonanza of over £200 million worth of payouts for senior executives, including nearly £100m earmarked for the CEO.
“This was one of the most generous long-term bonus plans in the UK,” explains Sophie Johnson of the RLAM Responsible Investment team. “Many of our funds voted against it in 2012 and have done so every year since. There was no upper limit to the bonus; we knew payments had the potential to be astronomical.
We were opposed to paying out these huge amounts. Not because we are opposed to all large payouts, but because we feel that exceptional pay should reflect exceptional performance. In this case, because Help to Buy was in place, house prices had shot up and all house builders were making a fortune. It wasn’t management that drove exceptional performance, but government policy,” says Sophie.
A restructured result
After Royal London and other shareholders complained, the executives volunteered to reduce their payouts, but the CEO, Jeff Fairburn, still received £75 million in 2018.
He subsequently resigned, after the media furore, in November 2018. Several directors linked to the initial plan also resigned, and the Remuneration Committee has a new Chairman. The company has also changed its pay structure to prevent something similar happening in future.
How we’re helping to tackle the climate crisis
RLAM’s responsible investment team is doing great work to help drive the move to a low carbon economy and leading the way on the Just Transition.
A just transition for Scottish and Southern Energy (SSE)
SSE is an energy utility company that helps produce and distribute gas and electricity to our homes. It is one of the largest producers of wind power in the UK and has committed to become ‘net zero by 2050’ – which means that by 2050 the amount of greenhouse gas emissions produced by SSE will be equal to the amount it removes from the atmosphere.
RLAM’s responsible investment team has been champions of SSE’s strategy to move to wind power and reduce its reliance on coal and gas, which will have a big benefit for our climate. However, they’ve also been talking to SSE about the Just Transition – what the company is doing to ensure that its transition to lower carbon energy also considers any social impact, like job losses or making energy bills unaffordable. Solving the climate crisis is not straightforward, and the responsible investment team is asking companies to take a more holistic view and look at both the social and environmental consequences of taking action.
What action did the engagement drive?
Through a collaborative engagement effort with the Friends Provident Foundation, the responsible investment team met with representatives from SSE to check its progress on Net Zero and a Just Transition. Following their engagement, SSE agreed to publish a formal Just Transition strategy, the first company to do this globally.
This is a great example of how engagement can lead to positive outcomes for society. The responsible investment team is now working with six other utilities companies to encourage and support them in adopting a Just Transition strategy ahead of COP26 and E.ON has now also published its a Just Transition Statement as part of their Net Zero plans. RLAM expect others to join this trend.
Suncor case study
Company description: Suncor is Canada’s largest oil and gas company, with major exposure to Albertan Oil Sands.
Investment opportunity: Suncor’s longevity and history of investing it’s money strategically provided a strong case for our investment, with a promising risk-reward ratio.
E S or G issue: Suncor’s carbon footprint and environmental pollution are material risks to the investment case and business.
RLAM’s Engagement: In October 2019, RLAM met Suncor’s CEO to argue that reducing environmental and carbon risks would not only be beneficial to wider society, but would also improve the long-term profitability of Suncor, making it more appealing to shareholders.
Engagement outcome: In the last 12 months, and since the meeting, Suncor have announced projects that will reduce group CO2e emissions by 10% in the next two years. This is equivalent to the 48 lowest emitting FTSE100 companies going net zero in that same time frame.
Summary: RLAM's engagement contributed to major reduction in carbon emissions, improved wealth creation for shareholders, and provided us with more confidence in Suncor’s top management being ready and able to take proactive steps to address environmental risk.