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F&C5649 Avgr Responsible Investment Report 2011 Shale Gas Driving operational standards higher and environmental footprints lower in a booming industry Bank Bonuses Striking a better balance between performance and risk management in financial sector executive pay Nuclear Safety Pressing companies to learn the lessons from the Fukushima disaster Contents Introduction 3 Investor Engagement in 2011 4 Voting and Corporate Governance in 2011 8 Public Policy 12 Outlook for 2012 14 Appendix 16 Responsible Investment Report 2011 Introduction The second decade of the 21st century has got off to a rocky start. 2011 has seen revolution sweep through the Arab world, economic crisis in the Eurozone, street protests against the capitalist system, and the birth of the seven billionth human being – all of which raise fundamental questions about the ability of mankind to reconcile economic prosperity with the planet’s ever-tighter resource constraints. In a world facing such economic, social and environmental challenges, what is the role of investors? Often perceived as part of the problem, investors can and should, in our view, be part of the solution. As a pioneer in ethical funds and Richard Wilson Head of Investment and investor engagement, and a founder signatory of the UN Principles for Responsible Investment, F&C is committed to Institutional Business being an active owner and to using its influence to drive better management of the environmental, social and governance risks facing businesses and society. This year’s Responsible Investment Report sets out how F&C has exercised this influence on behalf of its reo ® clients 1. Our engagement has spanned over 1,200 companies in 54 countries. Where we have identified issues of systemic importance, we have sought to make our voice heard in the public policy arena. Areas of particular focus have included: ■ Calling for improved pay structures in the banking sector that encourage a better balance between risk and reward ■ Protecting listings rules from being compromised in London ■ Limiting the environmental and social impacts of shale gas operations ■ Challenging companies operating in high-risk areas to improve their management of human rights We also exercised voting rights on behalf of reo ® clients at a total of 5,381 companies in 64 countries. In just over one-fifth of our votes, we either abstained or opposed management, using our clout as shareholders to call for improvements in governance. This report ends with a look ahead to 2012. We expect to face greater political attention on resource scarcity and commodity prices; continued questions over the social validity of the financial system; a lively debate over the future of energy; and a sharp focus on sound risk management systems. F&C will seek to join with fellow investors to identify where these and other challenges present risks to long-term investor value, and to translate them into a practical agenda for action. reo ® is operated on behalf of: 1 ® F&C applies its reo approach to both the funds it manages directly on behalf of its clients, worth £25.9 billion / €31.0 billion as at 31 December 2011, and to a further 3 £59.8 billion / €71.6 billion of assets that are managed by third parties. Responsible Investment Report 2011 Investor Engagement in 2011 In today’s volatile and risk-conscious world, F&C sees the principle of investor engagement as more relevant than ever. Gaining a rounded understanding of the entire spectrum of risks facing businesses, including environmental, social and governance (ESG) risks, is a crucial part of a robust investment decision-making process. Having identified which issues present the greatest threats to long-term investor value for shareholders and bondholders, we engage in in-depth dialogue with investee companies to encourage them to improve their performance. Our engagement encompasses a broad spectrum of environmental, social and governance risks, covering companies across sectors and geographies. Here we summarise the outcomes of some of our key engagement projects from 2011. Engagement by numbers 2011 480 instances Engaged 1,222 of change achieved companies one-to-one 121 meetings at board level 7,740 companies contacted to explain our responsible Engaged companies in 54 countries investment approach F&C reaches out to all companies in our clients’ portfolios to Our approach is globally balanced, with roughly one-third of outline our overall approach to responsible investment and companies engaged located in Europe, one-third in the Americas, corporate governance. In 2011 this meant contacting 7,740 and the remainder in Asia, Australasia and Africa. We saw a companies. significant growth in our engagement in Central and South America, reflecting in part our work to assess the risks associated with This broad outreach is complemented by in-depth dialogue with operations in Colombia (below). 2011 also saw a broadly even split carefully selected companies, focused on the environmental, social between our work on environmental, social and governance themes 2. and governance (ESG) issues that we identify as having a material impact on their long-term performance. 1,222 companies were This engagement resulted in tangible outcomes in terms of engaged by F&C in total over the year, sometimes working with companies adopting our recommendations, and in so doing, other investors through collaborative initiatives, and sometimes by reducing the ESG risks facing their business. In 2011 we recorded F&C directly. Our dialogue involved us in 410 company meetings, 480 instances of change achieved at companies (“milestones”), up 121 of which took place at Board level. from 432 the year before. “Often perceived as part of the problem, investors can and should, in our view, be part of the solution ” 4 2 See full breakdown of 2011 engagement activity in the Appendix. Investor Engagement in 2011 Engagement Programme: Business Ethics Issue: Responsible sales in the pharmaceutical sector Outcomes Background We have seen significant improvements in the Driving profitable sales growth is essential to the success of pharmaceutical major multinationals including: companies. However, inappropriate sales practices such as recommending doctors write prescriptions for therapies not approved by regulators (aka ‘off-label ■ Disclosure of data from employee marketing’), over-generous ‘gifts’ to doctors, and the outright payment of bribes can hotlines (‘whistleblowing systems’): lead to disruptive enforcement actions, fines, reputational damage and ultimately GlaxoSmithKline, Roche and restrictive legislation. These risks have been compounded by pharmaceutical AstraZeneca companies’ rapid expansion into emerging markets, where regulations are more lax, ■ Publications of payments to doctors corruption risk can be higher and the judicial system less reliable. for speaking engagements and Engagement objectives consultancy: Merck and Eli Lily To press companies to improve policies, strengthen internal controls and board ■ Review of pay structures for sales oversight, create anti-corruption functions, and reform pay structures to avoid forces: GlaxoSmithKline inadvertently incentivising unethical drug sales practices. Overall, we see a positive direction of travel F&C action amongst most of the major companies, although 2011 saw the culmination of a three-year programme of engaging the major this remains a high-risk area. multinational drug companies as well as generics producers to press for better practices. We held one-to-one meetings with twelve global companies including Generics companies are a different matter. Our a deep dive into responsible sales controls at Pfizer’s Brazilian operations; wrote outreach so far suggests this issue is not high on individually to five Asian generics manufacturers to urge greater disclosure of their agenda: one company reported that F&C standards to ensure responsible sales and safe products; and joined with fellow was the first investor to enquire about responsible investors to invite the chairmen of seven of the largest global drug firms into a sales. The generics are increasingly vulnerable dialogue on responsible sales and methods to enhance legal and regulatory given their strategic plans to penetrate further into compliance. developed markets and partnerships with branded drug makers, and can expect to face rising scrutiny. Engagement Programme: Health & Safety Issue: Nuclear safety post-Fukushima Outcomes Background TEPCO has implemented a number of The earthquake and tsunami that struck Japan on 11 March 2011 resulted in the biggest nuclear incident since the Three Mile Island and Chernobyl disasters. The measures in line with our recommendations share price and credit rating of Tokyo Electric Power Company (TEPCO), the and following government intervention, operator, plunged as the full extent of the disaster became clear. Whilst some of including: the circumstances surrounding the accident were particular to the site itself and to ■ New safety standards Japan, there were also important wider lessons that the global nuclear industry is still getting to grips with – and the accident triggered a worldwide political and ■ A roadmap for disaster recovery public backlash against nuclear power. ■ Structures for compensation payment Engagement objectives However one year on, TEPCO remains mired To press for a robust management response by TEPCO, and to engage in dealing with the aftermath of the disaster. nuclear operators globally to understand how they are incorporating the The true extent
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