EXIT GREATER MANCHESTER / MERSEYSIDE / WEST YORKSHIRE STEWARDSHIP REPORT Q4 2020 2 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org INTRODUCTION

AMERICA TURNS THE PAGE

t took more than a month after the he must contend with deep economic regulations on coal fired power stations. Ielectorate went to the polls before Joe contraction and the worst global health All of this was predicted to increase Biden was able to seal his place as 46th pandemic in recent history, of which the carbon emissions by 1.8 billion tonnes by President of the United States. More than US is one of the worst affected countries. 2035. 159 million Americans voted in what Managing the coronavirus pandemic In stark contrast, Biden is committed proved to be the highest electoral turnout will be a priority with Biden expected to to achieving a clean energy economy with in US history and one which marked a roll out millions of vaccines to citizens net zero emissions by 2050. major change in direction for policy. and provide extra financial support in a The Democrats’ ambitions include While President Donald Trump Covid-19 relief package. providing financial incentives to the clean continued to contest the election with However it is expected that irrespec- energy industry and investing in ‘smart baseless claims of fraud, Biden taking tive of the demands from Covid-19, infrastructure’ which ensures US build- office will lead to make major changes to Biden will waste no time in returning ings, transport and energy are equipped the county’s policy direction on areas of the US to the Paris agreement on climate to manage climate change. significant interest to NLGPS including change. President Trump withdrew from These commitments are significant. climate change and labour standards. the accord and his administration also Scientific analysis from Climate Action weakened the limits on greenhouse gas Tracker says Biden’s net-zero emissions Climate change emissions from cars and trucks and pledge by 2050 could shave 0.1˚ degrees Biden faces a challenging start to his encouraged more drilling for oil and gas. Celsius off global warming by 2100. term in office. Not only does outgoing Trump was also keen to breathe life The new administration will has also President Trump dispute the result, but back into the coal industry by relaxing pledged to ‘stand up to the abuse of 3 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org RESPONSIBLE OWNERSHIP

results have been predictable: rising income inequality, stagnant real wages, the loss of pensions, exploitation of work- ers, and a weakening of workers’ voices in our society.” In terms of practical policy, Biden is in favour of a $15 minimum wage and guaranteeing workers 12 weeks’ paid family and medical leave. He also supports comprehensive legislation to help workers to unionise. So early move- ment in these areas will provide a sense of how far policy will match pre-election rhetoric. Biden has also promised to check the abuse of corporate power over labour and hold corporate executives personally accountable for violations of labour laws. Any changes at the National Labor Rela- tions Board will be watched closely.

Proposition 22 One particular area that might be a focus of Biden’s attention is Proposition 22 which passed in California at the end of the year. Both Biden and Vice President- elect Kamala Harris opposed the initiative which allowed app-based companies such as Uber and Lyft to reverse the extension of employment rights to gig workers in the state. Defining them as contractors means employers do not need to pay minimum wage nor provide basic benefits such as sick pay. Uber and Lyft were among the companies that financed the Prop 22 legislation with as much as USD 200m and were since awarded contracts by the Trump administration to provide taxi services to public agencies. Biden has not spoken publicly on Prop 22 but given his earlier opposition and his support for worker rights, there is a strong chance the legislation could be overturned. polluters’ and will take action against Labour policy New leadership boosts fossil fuel companies that disproportion- We also expect to see a significant shift in ESG hopes ately harm communities ‘of colour and relation to the S in ESG, and labour policy low income’. in particular. Biden pledged to be ‘the The election of Joe Biden as president And while the Biden campaign did most pro-union president’ and his elec- could also see a reversal of controversial not make reference to the just transition tion campaign made clear his support for legislation making it harder for pension initiative specifically, it did commit to unionisation and collective bargaining. plans to vote on environmental, social ‘Fulfilling our obligation to workers and There are indications that this may and governance (ESG) issues at company communities who powered our industrial affect shareholders. For example, Biden meetings. revolution and subsequent decades of has argued that share buy backs are rein- Ahead of the November election, economic growth. This is support they’ve forcing the disparity of wealth between President Donald Trump had rushed earned for fuelling our country’s indus- boards and directors, and that CEOs are through new Department of Labor rules trial revolution and decades of economic failing to invest in workers or in creating which come into force in January and growth. We’re not going to leave any quality jobs. oblige fiduciaries to put pecuniary inter- workers or communities behind’. He has been quoted as saying: “The ests ahead of all others when exercising 4 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org RESPONSIBLE OWNERSHIP

shareholder rights. responsible investors, would prefer. We to ensure that shareholder-proponents Ultimately the rule is meant to hope that Biden will look at ways to clarify demonstrate a sufficient economic stake challenge pension funds investing in if not reverse the rule. or investment interest in a company funds that exclude certain industries or NLGPS also hopes there will be revi- before they are able to submit propos- companies on the basis of ESG concerns. sion of SEC rules increased the thresholds als to be included in a company proxy’s However, opponents argue that the rule investors must pass to raise propos- statement, paid for by all shareholders’. would just make it difficult to invest in als and stage interventions at AGMs. However, NLGPS is concerned that the any ESG funds at all. Introduced at the end of the last quarter, changes make it even harder to influ- Following intervention from trustees the rules are supposedly to stop small ence US corporate behaviour. As larger and asset managers, which NLGPS shareholders or activists making their shareholders we will continue to exercise supported, much of the more draconian voices heard. our vote and we support any action by language in the rules has been dropped, Commissioner Elad Roisin told the SEC the new US administration to rethink this but they still run counter to the direction that the amendments to Rule 14a-8 ‘aim particular rule.

Moving forward after Juukan Gorge

taking its social impact more seriously. For too long mining companies have caused devastation in the countries in which they operate. It is especially rewarding to know that shareholder pressure played such an important role in improving governance. And it seems the Rio Tinto’s negative publicity has caused other mining companies to take stock of their own relationships with the local communities in which they operate. In October BHP became the first company to agree a deal with the It is difficult to find any good news in campaigning by investors including First Nations Heritage Protection the Juukan Gorge disaster which the Local Authority Pension Fund Alliance set up in the wake of the saw mining company Rio Tinto Forum to force Rio to take Juukan Gorge disaster. destroy two 46,000-year-old sites of responsibility for the disaster. In response to BHP’s cultural significance. An Australian Parliamentary engagement, the Australasian However, as the quarter drew to a enquiry last quarter revealed that Centre for Corporate Responsibility close, Rio Tinto and traditional Rio’s top executives had failed to withdrew a resolution to landowners based in the Pilbara read reports detailing the cultural shareholders demanding all mining region of Western Australia took the importance of the site. Initially cease in the area which could first steps towards rebuilding members of the board lost their further devastate cultural heritage relationships. bonuses and issued an apology, sites. Puutu Kunti Kurrama and Pinikura which investors subsequently made NLGPS hopes that this is just the traditional owners in co-operation clear was insufficient. beginning of a move towards with Rio have been involved in Chief executive Jean Jacques has greater corporate responsibility. We remedial work at the Juukan Gorge since forced to step down, along continue to actively support LAPFF’s site in Western Australia. with several senior colleagues. engagement work with mining This follows many months of NLGPS is pleased to see Rio companies as part of our RI activity. 5 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org RESPONSIBLE OWNERSHIP

Climate focus:

…and say on Green bonds Climate need to avoid greenwashing As the Paris agreement on climate change approaches its fifth birthday, NLGPS is pleased to support the ‘Say on In November Chancellor Rishi Sunak Climate’ initiative. announced a string of ‘green initiatives’ Initiated by Sir Christopher Hohn promising to make it easier for pension founder of the Children’s Investment funds to invest in the zero-carbon Fund Foundation, the initiative encour- economy. ages all listed companies to develop a Speaking at the Green Horizon climate transition plan and put it to a Summit, the Chancellor also announced shareholder vote at their AGM. robust environmental disclosure stand- NLGPS backs These plans will give investors more ards which the government says will opportunity to influence how listed give investors greater transparency into Make My Money companies will transition to net zero and the material financial impacts from their reduce the chance for corporates to pay lip exposure to climate change. Matter… service to managing climate change risk. This means the UK will become the Launched in December, the initia- first country in the world to make the In October NLGPS partnered with Make tive has already secured support from Task Force on Climate-related Finan- My Money Matter (MMMM) as part of our numerous investors, including the Local cial Disclosures (TCFD) fully manda- commitment to investing 100% of our Authority Pension Fund Forum, and from tory across the economy by 2025, going assets in line with the Paris agreement companies including Unilever. beyond the ‘comply or explain’ approach. on climate change. Companies’ failure to manage their Chancellor Sunak also touted a long- The MMMM initiative is designed to climate risk remains a key threat to term asset fund which would channel help pension fund members understand shareholder value yet only 0.5% of the pension fund investment toward illiquid where their money is invested and how 40,000 listed companies globally have and private market opportunities. it can be to use responsibly without set validated targets in line with the Paris According to the Chancellor, the compromising on return. Agreement goal of 1.5°C, and of those series of announcements represents the These are views shared by NLGPS that do, only 8% include any form of government’s ambitions to make the UK and by partnering with MMMM, it will interim target. a ‘world leader’ in green finance. be easier for members to understand the Ahead of the UN Climate Change NLGPS welcomes the government’s importance of sustainable investing and Conference COP26 next year, ‘Say on efforts to allow for more green invest- how it can make a positive difference, Climate’ will target the following ment, particularly since the Chancellor notably in achieving net zero carbon objectives: emphasised the need for a ‘fair transi- emissions by 2050. 1. Secure asset owners and major tion’ to a net zero economy. Speaking at the time the partnership asset managers public support for However, we await more detail on the was announced, NLGPS Chair Cllr Ged the concept; green gilts and the long-term asset fund Cooney said: “Collaboration is criti- 2. Voluntary adoption of ‘Say on to ensure these align to our own strict cal in driving positive change. NLGPS’ Climate’ by leading companies; investment criteria. partnership with Make My Money Matter 3. Shareholder resolutions filed on This is particularly important at a confirms our commitment to sustainable 20-40 companies in the US, time when environmental, social and investment. We are confident through Canada, UK, EU and Australia in governance investing is afforded so our work with other likeminded investors 2021 and 200-300+ in 2022, to much attention. We are conscious of the and organisations, that a just transition force adoption; dangers of green washing and will expect to a zero-carbon economy is completely 4. Build pathway to mandatory complete transparency from government achievable.” regulation in key countries; in this area. 5. Establish ecosystem to hold investors and companies to account on quality of their climate plans. NLGPS is listed as a supporter here: https://www.sayonclimate.org/supporters/ 6 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org OTHER NEWS

Vanguard BlackRock USD 6.1 USD 7.81 trillion trillion assets under management assets under management

“Institutional investors typically have much larger stakes than the average individual investor, they also have more clout to effect change at the companies in which they invest. The shift toward a more institutional shareholder base can be seen as a positive development.” Duncan Lamont, Head of Research, Schroders

ESG policies and use them as a bench- should ultimately lead to more share- Time to mark to hold fund managers to account. holder engagement. Further the report says investment As large shareholders in assets across enfranchise consultants could potentially downgrade the globe, investment managers clearly fund managers that are unwilling to have a duty to use their proxy voting asset owners accept client voting policies. rights effectively. And compared to indi- The AMNT’s full report can be found vidual investors, institutions are far more Barriers to shareholder voting in pooled here: https://amnt.org/report-2020/ likely to use them. Institutional investors funds could finally be removed following vote on 90% of the shares they hold; a a pivotal report endorsed by Pensions major difference to individuals who cast Minister Guy Opperman. Globalising votes representing less than 30% of the Tackling what has long been a frustra- shares they own. tion for NLGPS, a November a white ownership That said, we cannot ignore the domi- paper from the Association of Member nance of a handful of investment manag- Nominated Trustees (AMNT) – Bringing The trend to foreign ownership of ers who own an ever-growing proportion shareholder voting in to the 21st century UK listed companies has seen British of the world’s assets. US domiciled fund – made clear a strategy for effective pension funds fall steadily down the list managers BlackRock and Vanguard have stewardship in pooled funds. of beneficial owners of domestic quoted USD 7.81 trillion and 6.1 trillion in assets In response, the Department for Work companies. under management respectively. This and Pensions (DWP) will set up a working More than half (55%) of the UK stock gives just two investment houses signifi- group to address ‘the overly complex and market is owned by foreign investors cant influence over corporate behaviour, archaic voting infrastructure; underin- according to the Office for National Statis- but evidence from our RI advisers PIRC vestment in the stewardship function in tics, while individual investors account suggests they are not leaders in voting on fund management; and transparency of for 13.5% of domestic share ownership. In ESG issues. In addition, more explora- voting policies and outcomes’. the 1990s more than half of the UK stock tion is required of whether international Mr Opperman agreed that it was market was held by domestic pension ownership of UK shares brings with it a time for the investment management funds and insurance companies; these different approach to certain issues. For community to take this issue seriously. institutions now account for 8.1% example, US managers have in general He said trustees are not the only actors in This has clear implications for UK been far more tolerant of high executive the investment chain, adding that ‘fund corporate governance, but according to a pay than their European equivalents. managers also need to step up and to report from asset manager Schroders, not The other side of the trend highlighted play their role, for their clients’. all of them are necessarily detrimental. by Schroders is that, as domestic owner- NLGPS supports many of the views In Global Britain: should the dramatic ship of domestic equities has fallen, UK put forward by the AMNT, most notably shift in ownership of the UK stock asset owners are increasingly exposed that ‘while barriers do exist to effective market be feared or cheered? Duncan to international companies. This brings stewardship on pooled funds, they are Lamont, head of research and analytics its own challenges, since engagement not insurmountable. It is mainly down to at Schroders, argues that rather than is less developed in other markets, and fund manager unwillingness to imple- viewing the increase in foreign ownership asset owners also have to be mindful of ment client policies’. as a threat to stewardship, the increase balancing general ESG principles with The AMNT proposes trustees develop in international institutional investment local conditions. Withhold

Abstain

Oppose

For

Withhold

Abstain

Oppose

For

7 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | OCTOBER - DECEMBER 2020 northernlgps.org Q4 VOTING & ENGAGEMENT REVIEW

were redistributed back to Votes on remuneration policy, Votes on remuneration reports, shareholders. The board considers Abstain Q4 2021 Q4 2021 their pay structure is well aligned with the interests of shareholders Oppose Oppose Oppose For Opposgenerally.e Cllr Cooney questioned For Oppose For 34% 40% 41% the extent to which alignment is 42% Abstain Abstain Abstain possible given performance is benchmarked on a relative basis Oppose For Foras opposed to the actual return as

For experienced by shareholders. The company pointed to a number of metrics within the remuneration policy to balance a compensation structure that is geared towards relative returns. In December NLGPS engaged Abstain Abstain 24% 19% with Synthomer plc, a UK-based chemicals business, to discuss a Auditor appointments, Q4 2021 Director elections, Q4 2021 range of sustainability issues. The Oppose company manufactures aqueous Oppose e Oppos Oppose polymers the demand for which 40% For 22% has increased dramatically during 41% thhold Wi Abstain 2020 in response to the world’s need for personal protective Abstain For Withhold equipment (PPE). 2% Cllr Cooney questioned the r Fo Abstain company in relation to its supply 5% chain management, particularly its provision of polymer to PPE Abstain Abstain manufacturers in Malaysia, one of Oppose Oppose For which has been accused of major 71% breaches of basic human rights. For Abstain For 19% The company reported it had good traceability of its product and actively engaged with their customers on these issues. It will Overall, NLGPS funds voted at 467 meet- Engagement with not tolerate modern slavery ings during the third quarter. In its role as large holdings anywhere within its value chain. responsible investment adviser to NLGPS, In October, NLGPS engaged with Cllr Cooney also questioned Man Group plc to discuss concerns the company with regards to its PIRC engaged with 172 companies around raised by NLGPS with regards to environmental and sustainability issues relating to meetings during the quar- variable remuneration. Man Group practices, specifically the ter, in addition to engagement activity that plc, which operates in the company’s dependency on the was not meeting-related. alternative investment petrochemical industry and the Abstain management sector. risks associated with this reliance Cllr Cooney questioned the over the medium to long-term. As Oppose Director elections to 24% abstain and 42% for. company on the extent to which well as pushing for TCFD For During Q4, NLGPS voted on the they view their businesses alignment Cllr Cooney also Abstain election of 1380 directors. In total, Auditors compensation structure as questioned the company with 71% of directors were supported, During Q3 we voted against 40% of contractual issue, with regards to regardsOppose to its strategy on with 22% opposed. In the auditor appointments, and the fulfilment of fiduciary mitigating water risk. The r Fo remainder of cases NLGPS supported 41%. We abstained or obligations in operating in the chemical industry is notoriously abstained, or withheld support. withheld support in the remainder interests of all stakeholders, as water intensive and Cllr Cooney of cases. opposed a means by which to requested that the company Executive remuneration motivate and retain talent. The undertake and disclose a NLGPS opposed companies on Shareholder resolutions company outlined performance- comprehensive water risk advisory votes on remuneration in We voted on 50 shareholder based incentive schemes is very mapping exercise to outline areas 40% of cases, and abstained on resolutions in Q4, supporting 40, much ingrained in the culture of of the business that may struggle 19%. We opposed 34% of abstaining on 4 and opposing the the business and argued profits in future scenarios in which fresh remuneration policies, compared remainder. resulting from good performance water is scarce.