RESPONSIBLE CAPITALISM REPORT 2020 AND STEWARDSHIP CODE 2020 RESPONSE
Annual Report to 31 December 2020 ATWELCOME A GLANCE WELCOME
MAJEDIE: WHO WE ARE EVIDENCE OF OUR ESG WORK IN 2020
Employees £8bn 600+ 3,900 Assets under management (Total, approximately, 62 Over 600 engagements during the year, Approximately 3,900 votes cast as at end December 2020) covering financial and/or ESG topics (Total, to end December 2020) 70 Independent; employee owned Approximately 70 surveys and requests for proposal completed, many of which included ESG questions 21 Established in 2002 21-person investment team, Launched first fund in 2003 A for Strategy and Governance including two Environmental, A+ for Listed Equity Incorporation Social and Governance A for Listed Equity Active Ownership (ESG) specialists
INVESTMENTS WE OFFER CLIENTS
Primary focus on UK, US, global and Rigorous, disciplined Conviction-led Evidence-based Focus on Tailored client ESG-specific information long-only equities international strategies investment process investing ESG approach engagement outcomes service and reporting and analysis
2 3 UK-based asset manager with a truly global investment remit
This map indicates some of the locations to which our investee companies have a link.
Source: MAM as of 31 December 2020 All locations are for illustrative purposes only.
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WELCOME
Stewardship overview 9
What is Responsible Capitalism? 10
STEWARDSHIP Stewardship with regard to: – Who we are 12 – Our clients 18 – Our investments 23 – ESG integration process 26 – Engagement highlights in 2020 38 – Escalation of issues 58
Proxy voting in 2020 62
Proxy voting statistics for our pooled funds 66
Our investments’ support for the SDGs 67
Our service providers 68
Our governance of stewardship: 70 – Conflicts of interest 77 – Our stewardship and ESG-related policies 78
Promoting well-functioning financial markets 82
Associations and collaborations 84 We welcome your feedback Majedie’s Responsible Capitalism team Index 88 Cindy Rose [email protected] Matthew Jowers [email protected] +44 (0)20 7618 3900 majedie.com
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Introduction Stewardship overview
What this 2020 report covers • Undertake the type of investment analysis that is Our Responsible Capitalism 2020 report covers our intended to be forward-looking instead of historically stewardship work for our equity holdings during the 2020 focused. Our analysis helps us understand what a calendar year. Like last year, we outline the updates to our company’s future performance will be across the ESG integration process for our mainstream funds, provide spectrum of its business and not solely in terms examples of our engagement on key issues, cover our of share price. engagements on proxy voting issues and provide our proxy voting record for the period. New this year/2020 stewardship highlights We have made advancements in our ESG integration This year, we also include our response to the Stewardship this year, particularly in terms of how it: Code 2020 which covers a wide spectrum of our business • Links directly to our buy/sell/hold decisions with regard to Responsible Capitalism. By reporting these • Is evidence based (for which there is an audit trail) together, we hope to demonstrate the high degree to which • Has helped improve the oversight of our funds from Rob Harris CEO Cindy Rose Head of Responsible Capitalism stewardship and sustainability are integrated into our a client-outcome perspective daily investment thinking as well as our routine business • Has enabled us to provide more accurate and detailed Welcome to our Responsible Capitalism 2020 report. Matthew Jowers Stewardship Manager operations. The Stewardship Code principles are structured reporting to our clients. This has been an exciting year for the development of in an Overview/Background, Action and Outcome format. our ESG integration and this report highlights that We are pleased to publish this update on our ESG We have retained this structure in some of our answers This year we also: progress. As with every year since 2012, we also report on integration developments which also contains our to provide continuity across our processes and activities. • Developed our proprietary IT systems to accommodate our ongoing engagements with our investee companies response to the Stewardship Code 2020. We have worked References to the Stewardship Code 2020 principles can our ESG integration advancements and our proxy voting. We are active members of the ESG continuously this year to make our ESG integration be found in the index to this report. • Engaged our clients on a more diverse range community and trust you will find this update helpful in approach one that fulfils our clients’ needs, follows a clear of ESG topics understanding our process and the important work we do process and is evidence based. This year, we’ve also tracked Continuity from 2019 • Increased our provision of quality information across our stewardship platform, which we call Responsible engagement outcomes and have linked every step of our In 2019, we reported on our view and definition of on ESG factors to stakeholders Capitalism. As always, we welcome your feedback on our ESG integration to our conviction level – and investment Responsible Capitalism. This position has not changed – • Helped companies understand how to report reporting. We look forward to continuing the ESG journey decisions – for our holdings. if anything, it is even more important and ingrained into effectively on their material issues. with you in 2021. our investment processes, stewardship efforts and business We are also working with multiple parts of the market culture than it was in previous years. Stewardship targets for 2021 – investors, companies, government, NGOs and service • Link pay at Board, senior management and providers – to help people understand what ESG is and In 2020, we continued to: fund manager level and divisionally more closely how it can be used not only to make long-term investment • View Responsible Capitalism as our obligation as fund to stewardship decisions but also help to solve some of the world’s managers to invest in and allocate capital to companies • Increase our expertise on issue management so problems. The ESG landscape is changing quickly and we that demonstrate sound, longer-term investment we can engage our holdings more effectively are equipping our investment and client teams to be well opportunities for our clients. This includes integrating • Ensure our client outcomes are clearly identified placed to meet the changing demands of our clients. climate change and inclusive growth factors into our and followed in our investment process investment decisions. • Provide more information to clients on ESG-related • See companies as people – we believe each group has topics and how these impact our investment thinking its own, unique set of material risks and opportunities, • Undertake and integrate scenario testing on climate some of which can be subdivided into environmental, change into our investment decisions social and governance issues. Managing these issues is • Enhance our ESG reporting on carbon emissions and crucial to the overall success of the business. the extent to which our holdings “do no significant • Be active owners of the investments we make on behalf harm” as defined by forthcoming legislation of our clients, so that they, in turn, can be active • Introduce and report on more real-world outcomes participants in the investments they own. in 2021.
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What is Responsible Capitalism? Materiality assessment At Majedie, ESG integration is about understanding the separate slices of the pie and are given, arbitrarily, equal individuality of a company: its strengths, its weaknesses weighting. We feel that random attribution of importance and what makes it tick. Some of these strengths will be can lead to poor investment decisions. By looking Responsible Capitalism is our obligation as fund So, where does ESG fit in? ‘ESG’ related and some won’t. But a risk is a risk and an holistically at a company, we can identify and prioritise the managers to invest in and therefore allocate capital opportunity is an opportunity no matter what additional most material issues for each investment. This prioritisation Environmental, Social and Governance (ESG) investing is labels might say. drives our engagement with a group and enables us to to companies that demonstrate sound, longer-term all about risk and opportunity. It’s about knowing how a investment opportunities for our clients. These have the most up-to-date, accurate understanding of the company can manage these issues as an indication of how Running through the life cycle of our investment decisions companies in which we invest for our clients. companies also manage their businesses in a way that it will perform monetarily, socially, environmentally and benefits the environment and broader society. is a core thread – our evaluation of a group’s key issues and from a governance perspective, going forward. how well each company is equipped to manage these. We Our model below reflects our analysis of a company’s ability All companies are unique examine financial and ESG issues together, on the same to manage its key issues. Groups that manage these issues Looking forward, not backward matrix, weighed against each other. This is quite different should demonstrate better performance over the longer We see companies as being like people. Like individuals, ESG should be about looking forward, not backward. We from most approaches, where ‘financial’ and ‘ESG’ are term, as well as across the ESG spectrum. companies come in many different shapes and sizes. take this approach by looking at how a company is equipped They all have different cultures, different strengths to deal with its own unique set of issues. This is how we assess and different personality traits. But, also like people, the forward trajectory of a company and get a better feeling all companies make decisions, identify issues, prioritise for how it will perform in the future. We can assess more Companies their time and ultimately reap the rewards and the accurately the upcoming needs of each company as well as consequences of their actions. the potential skills each company will develop. Critically, Identify and prioritise issues we also gain an understanding of the individuality of each — Each company in which we invest faces its own set of company, which enables us to prioritise our engagement Manage material issues. These issues include risks and opportunities topics with each group and have a positive ongoing issues effectively that define them as companies and need to be managed relationship with each of our holdings. creatively and dynamically. Naturally, some companies Secure IT Exemplary are better at managing issues than others. Too often, ESG is diminished to a checklist or a box-ticking systems customer service process. It becomes a formulaic list of what a company Our job as an investment manager is to understand must do to be ‘ESG compliant’. Sometimes, it even looks Strategy all the strengths and weaknesses that a company at specific data points or topline ESG scores as a proxy for Positive stakeholder demonstrates and to assess the issues that each company Low environmental ERM performance as a whole. Whatever the case, historical data are Enterprise risk engagement/ impacts Targets faces in the nearer and longer term. This helps us management relationships about the past. While they can be used as a monitoring tool, platform determine how each is placed to act, no matter what they do not represent the whole story. We feel a box-ticking comes its way. or cherry-picking approach is short term and can even be Culture misleading in terms of true materiality. We are already seeing What do we look for? High employee Pay KPIs Law-abiding early signs that the industry may choose the lowest-common- Exec/Board/ Key performance We aim to invest in companies that show promise across denominator approach to ESG, as a box-ticking mechanism. satisfaction senior management indicators practices the scope of their business. It’s not just about their Opportunity balance sheet and cash management. It’s also about how We are an active owner of our companies set a group identifies and prioritises its unique set of issues – For us, being an active owner doesn’t mean sending a mail- things that are so material to its business that they Dependable/ Promotes diversity merge letter to corporations about pay or automatically reliable products of thought could impact the group’s stability going forward. It’s asking all companies the same questions about climate change about how a company minimises its principal risks and during engagement. We talk with companies about the issues maximises its key opportunities. These issues can come that matter most to each investment – the areas that will have Majedie on a daily basis or in cycles – or even in waves. The best the greatest long-term impact on the company’s ability to companies not only have the strength and expertise to perform in the long run. For us, performance isn’t just about Analyse make sound (and sometimes controversial) decisions, but share price – it’s also about the impact that each company — they also – importantly – link their management of issues has on people and the planet. As investors on behalf of our Engage to strategy, reward and to their culture. clients, we want our investments – all of them – to be better — tomorrow than they are today, in as many aspects as possible. Form conviction level — Buy/sell; weight appropriately
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Stewardship is simply a part of Who we are
We began as independent thinkers institutional investors, wealth managers and charities. related to specific voting decisions. Believing that the to track and evidence our ESG integration work. At Majedie Asset Management was established in 2002 as an Majedie embraces its role as an active equity boutique based management of assets goes hand in hand with engagement the end of 2019 and start of 2020, our investment team independent, employee-owned investment boutique. At in London, where our team of 62 employees comprises a and proxy voting, we made our own voting decisions from undertook materiality assessments on all of our holdings inception, we managed UK-only equity portfolios with a diverse and motivated group of investment professionals. the start, using Institutional Shareholder Services (ISS) as so that we could link directly the key issues for each team of four portfolio managers. Our goal at that time was our voting platform. Over the years, as our interest and our holding with our engagements. By the second half of 2020, to manage money in a way that challenged the status quo. Our purpose and our stewardship are intertwined client’s interest grew in ESG, we increased our engagements we were successfully linking our fundamental analysis We didn’t blindly accept conventional investment norms. Majedie has a clear sense of purpose: to make money for and called our stewardship platform ‘Responsible Capitalism’. and materiality assessments on our holdings with our From the beginning, we voted our proxies and engaged our our clients, responsibly. As owners of our business, we take We became more focused on the risks and opportunities conviction levels. Our conviction level impacts our trading, holdings on a wide spectrum of investment topics. Over this sense of responsibility to heart. It’s why for so long that our investments faced. In early 2019, following Vale’s meaning that our ESG integration is linked directly to our the years, our stewardship activities developed as we we’ve engaged meaningfully with our investments and Brumadinho dam disaster in Brazil, we engaged all of our investment decisions. adopted the position that our investee companies are always voted at AGMs, before it was common practice to mining holdings to understand the integrity of their tailings accountable for how they run their businesses and what do so. It’s why we’ve built long-term relationships with storage facilities as a matter of financial materiality. We Today, our dedication to making money for our they do. In 2012, our purpose naturally evolved into clients, founded upon transparency and trust, so we can don’t expect our investments to save the planet or solve all clients responsibly is even more important than ever. ‘Making money for our clients, responsibly’. understand what matters most to them. It’s also why the world’s problems, but we do expect them to contribute The developments we have made in ESG integration Responsible Capitalism has been a strategic priority for positively by managing their risks and opportunities in a way developments have helped solidify our goal of making Today, we remain active equity specialists, independent us for a number of years. that means their businesses can benefit shareholders and investments for our clients that ensure longer-term value, thinkers, and hold to our belief in accountability and wider stakeholders. not just for our clients, but for all stakeholders. responsibility. While our remit has broadened to include Our stewardship journey global and international equity strategies, our challenge When we first startedexplicitly incorporating responsibility In 2018, we also made a strategic decision to substantially But there is still more to do. Going forward, we aim to of established customs and expectation for best practice into our stated purpose, we examined ESG factors on an ad strengthen our existing commitment to ESG by enhance further our tracking of engagements with our continue. We have embraced climate transition hoc basis, considering news on environmental, social and/ commencing a search for our first Head of Responsible investments to ensure client outcomes are part of our and inclusive growth in our fundamental thinking. or governance issues where they dominated or overshadowed Capitalism. In 2019, we constructed a uniform ESG conviction scores. Our clients have always been and will Supporting our integrated approach to ESG are our the investment. At the same time, we undertook heavy integration process covering all of our mandates and continue to be at the heart of our ESG integration work, clients, both domestic and global, who consist largely of engagement on governance matters, especially as these fortified this platform with enhanced internal IT systems our investment decisions and our business as a whole.
Majedie’s stewardship timeline Majedie’s purpose developed Gained Tier 1 signatory Systematically into: making money status to the UK Participated in the Investment integrated ESG into our mainstream Gradually enhanced for our clients, responsibly Stewardship Code Association (IA) workstream on stewardship investment process our engagement on Published first for all strategies Majedie began with governance and stewardship report the aim of making voting issues on proxy voting Responded to the United Focused money for our clients and engagements Kingdom’s Stewardship Code Became a member of approach the Investor Forum (IF) to carbon
Hired our Head of Environmental and Made ESG Responsible Capitalism Began proxy voting social issues were Published first annual integration and engaging our evolving into larger stewardship report Became a a strategic Officially supported holdings on areas of engagement under Responsible signatory to business Taskforce on Climate-related investment topics Capitalism title the PRI priority Financial Disclosure (TCFD) and Climate Action 100+
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Our transition-focused alignment
As the world faces complex challenges from the twin pillars Our business model strengthens our stewardship platform Our culture reflects our ESG integration approach Our progress on climate transition of climate transition and inclusive growth, we have taken an As a single entity (not a group structure), a limited Our culture is shaped by our values, our business Majedie’s ultimate goal regarding the environment is to active stance to these areas in our portfolios. In Q 4 2020, company (not an LLP), and based in the United Kingdom model, our employees and our stewardship platform. At be climate positive. In 2020, we offset our emissions for we built on our materiality assessments by: (not a lower tax jurisdiction), Majedie has created a Majedie, we strive for excellence across every aspect of the second year in a row to ensure that we minimise our • Focusing on the carbon exposures of our energy business model that is intentionally straightforward. our business. This can be seen in our superior service to current environmental footprint. We are also looking at companies determined by: We have no debt and through the deliberate retention clients, nurturing teams of professionals who shine in the best way to negate all of our business-related carbon emissions since we began in 2002. We feel this is critical, – Their level of CO2 emissions of distributable profits have built a strong balance their respective fields, challenging conventional thought sheet; surplus capital equates to several multiples of our and doing the right thing, simply for the sake of doing it. given our Responsible Capitalism stance and the requests – Their carbon reduction targets regulatory requirement, while net assets equate to several In this environment, it is instinctive to seek a similar idea that we make of our holdings. Our job is to set an example, – Their setting of clear goalposts to meet their times our annual fixed cost base. of responsibility and accountability in our investments. rather than ask companies to do things that we would not targets that impact pay The result is that we support the type of structural out- do ourselves. Our independence and strong financial position mean that performance and increased stakeholder value that results • Engaging our holdings directly on their diversity Our efforts on inclusive growth measures, including: we can consistently put our clients first and can drive their from genuine planning and expert issue management. We desired outcomes in our ESG integration efforts. As such, actively do not choose a quick road to making money which We also want to own the responsibility of achieving – Female representation at board level we have: comes at the expense of both planet and people. We are not inclusive growth. Over the past 14 months, we added – Independence of the board about ephemeral share price gains. another female analyst to our investment team; our female • Restricted the size of our funds through capacity discipline Head of Responsible Capitalism was appointed to our – Steps to promote women and ethnic minorities • Offered only those investment strategies for Management Group and our female Head of Clients joined already within the business (promotion/progression) Our business strategy underpins which we have a proven track record Responsible Capitalism our company Board. Our goal across our own business – Programmes supported by the business to provide • Considered only those new strategies for which we is to represent, by gender and ethnicity, the wider UK work experience and other opportunities to Majedie’s strategy has always been to invest in those population and our increasingly diversified client base. have a genuine belief that we can manage effectively companies that show the greatest promise for underprivileged and/or under-represented and for which there is natural demand We feel that this will be imperative to helping us provide groups (start of career). outperformance over the medium to longer term. To the best service to our clients. • Advocated performance fee structures for our larger/ determine this, we include as part of our fundamental institutional clients with which our income is strongly analysis, an examination of a company’s ability to manage These decisions underscore our responsibility to our clients aligned with the medium-term returns of the client its key, material risks and opportunities, many of which in considering all risks and opportunities as we make longer- are environmental, social and/or governance related. We term investment decisions on their behalf. Ultimately, we • Borne the administration costs of our UK open-ended investment company (OEIC) funds since their inception engage our holdings constantly on these issues, weaving believe that those businesses which manage their material into our dialogue feedback on the issues with which our issues well and demonstrate forward thinking by offering • Consistently driven engagement objectives that benefit clients are most concerned. solutions for climate transition and inclusivity should also our clients in the longer term. be the ones that thrive, create shareholder value and be From a business perspective, our support for the twin sound investments for our clients, over the longer term. pillars of climate transition and inclusive growth has driven our goal to become carbon neutral as a business Our core values support our stewardship work and to push for greater diversity within our own business We find true merit in: and the wider financial sector. • Working honestly and with integrity – this drives Also, in the first half of 2020, we sponsored our inaugural everything we do. Next Generation Investor competition to encourage • Challenging the status quo/established norms – university-age women into the finance sector. For this, we refuse to box-tick. teams of female students competed in managing funds • Promoting transparency – we push for better over a six-month period. The winning team demonstrated information enabling improved analysis. both financial outperformance as well as an ability to • Harvesting the strengths of teamwork – multiple points integrate ESG considerations into their investment of view create a stronger approach. decisions. Our competition was highlighted in the IA’s • Being bold and decisive – we invest with conviction. report from May 2020 on Addressing the Gender Pay • Putting clients first – they consistently influence and Gap Industry Initiatives (page 10). drive our stewardship platform.
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Ensuring our stewardship is increasingly effective – Treatment of executive and board remuneration Stewardship-related outcomes Effectiveness of our stewardship platform in 2020 In 2020 we took the following actions to ensure that our in the context of reduced revenues and treatment During 2020, our purpose and investment beliefs We strive consistently to serve the best interests of our investment beliefs (listed on page 23), strategy, investment of employees have guided our stewardship, investment strategy and clients. Under recent legislation, the needs of our clients process, engagement and culture enable and promote – How to report more effectively on managing key issues. decision-making by ensuring we: are evolving. We estimate that we have been successful in effective stewardship: • Continually evaluate how we make money for our serving the best interests of our clients this year. Taking into • In terms of client engagements, we focused more heavily clients, responsibly account our future plans, our understanding of upcoming Investment beliefs on ESG topics, including: legislation and our engagements with our clients, we believe • Consider our product offering and how we can better we’re on track to be highly successful. • Client outcomes are material to our – In February 2020, we sponsored the Intentional meet the needs of our clients investment decisions. (See also page 76, ‘Targets for stewardship governance in 2021’ Endowments Network (IEN)’s annual event. • Speak with our companies about their key, material for information on our ‘next steps’.) This event provides ESG-related information to issues (as determined by our materiality assessments) Strategy endowments, family offices and universities to enable • We formally linked our ESG integration process them to make better investment decisions. • Track our outcomes from engagement and link these to our investment decisions to remuneration for our investment team and – In May 2020, we undertook a client survey to ask our group directors. clients about their investment objectives and their • Adhere to our ESG integration process and ensure • We became supporters/members of client transition interest in ESG-related areas. this is evidenced by an audit trail groups: TCFD and Climate Action 100+. – In September, we hosted a webinar with Guy Opperman • Increase our communications with clients, specifically MP, Parliamentary Under-Secretary of State at the on ESG topics, and ask for feedback Investment process Department for Work and Pensions, on the positive • Ensure that we are doing in our own business what • We more formally integrated ESG into our investment impact that asset owners and managers have, especially we ask our investee companies to do. process and engagement in 2020 by: in pushing companies to reduce their carbon emissions. – Using materiality assessment to evaluate ESG – In November 2020, we began our Active Owners series in considerations as part of our fundamental analysis. which we communicated virtually with our clients by webinar This process covers all of our funds. on the topic of decarbonisation. This will be an ongoing – Enhancing our internal IT systems to: series of webinars, focusing on a variety of ESG topics. What we did in 2020 What we can do to serve clients better, going forward – Record our materiality assessment of holdings Culture Increased our client communications Expand our client communications on ESG-related topics and education; – Link key issues to engagement • In the first half of 2020, we sponsored the Next on ESG topics; surveyed clients on ESG seek more client feedback; take clients with us on our ESG journey – Track engagement outcomes Generation Investor competition to help female Focused on the twin pillars of climate Drive this through our engagements with companies, on a bespoke basis – Tie all our analysis with our conviction level, university students gain experience in managing funds. transition and inclusive growth which impacts our investment decisions, asset • Our Diversity and Inclusion Working Group met Reported on our stewardship efforts on a Increase our reporting detail and frequency with regard to engagement outcomes allocation and individual stock weightings. several times in 2020 and our Diversity and Inclusion quarterly basis to clients and on an annual and how these affect the conviction level of our holdings Committee met to approve a new D&I policy which sets basis to stakeholders Engagement out our future diversity and inclusion plans. While we have more work to do in this area, we are broadening Advanced ESG integration for our Consider product development that would serve our clients’ needs • In a year of global pandemic, we increased our mainstream funds engagement with companies on these specific topics: our horizons and planning our actions to increase the diversity across our business. – Cash levels and cash management positions Integrated KPIs for ESG integration Integrate KPIs for ESG as appropriate across the business into appraisals for the investment and for the senior management team – Relationships with debtors and any outstanding team and some directors covenants Took steps to ensure our Investment Make ESG a full component of IOC oversight – Supply chain disruption and oversight; sourcing Oversight Committee (IOC) oversees of labour and materials more of our ESG programme – Treatment of employees during lockdown and in terms of health and safety – Whether or not they accepted money from the government’s furlough scheme in the United Kingdom (or similar in other countries) – Dividend policy in a tumultuous year
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Our stewardship is driven by Our clients
Rhiannon Collis Head of Clients Understanding what our clients want We cherish direct interaction with our clients. Ours is an Department of Work and Pensions’ updated legislative For us at Majedie, clients come first. Our clients have put their trust in us to manage their active and direct approach. This approach suits our style as requirements. This includes details on our outcomes from assets and we take this responsibility seriously, every day. The world is changing and so a house, and we feel it shortens the distance between us as engagements with our holdings, proxy voting records and are the needs of our clients. We work hard to stay closely connected to our clients and an asset manager and our clients. By speaking with clients exposures that our funds have to various factors, such understand how their requirements are changing. This has been especially true in 2020 directly, there is no middleman; all conversations are direct, as carbon emissions. In response to the implementation as our clients faced the financial and communication chaos caused by a pandemic. At the open and frank. This allows us to quickly deliver what our requirement statements that institutional clients are required same time, they are cognisant of the upcoming disruption from global warming and the clients need and helps formulate our practices, going forward. to make, we responded to a range of questionnaires asking for need to act sooner rather than later. Whatever the situation, we are here for our clients: we details on our stewardship activities during the year. listen, we act and we keep them informed. It is our role to help our clients be active owners ESG survey We also work with our clients in terms of fees, exclusion lists of their investments, keeping them at the heart of every investment we make. During our regular catch-ups, we ask for their views on a and their individual quarterly reporting requirements. From variety of ESG topics. In order to take a more indicative a performance perspective, we outline clearly the targeted measure of our clients’ views, we undertook a client survey return range of each fund in the prospectus and key investor in May 2020 to understand their priorities regarding ESG- information documents. related reporting, communications, engagement topics and performance expectations. Breakdown of our client base Our AUM, which stands at approximately £8.2 billion The survey disclosed that our clients are keenly interested at 31 December 2020, predominantly derives from UK Our desired outcomes for clients and aware of ESG issues in investment and would like to investors (80%). When investing on behalf of our clients, we want: find out more. However, there is still a relatively high level of uncertainty around ESG definitions and what ‘success’ looks Our client base is almost entirely institutional in nature, like in terms of integrating ESG into investment decisions. with 96% of our clients in the pension, wealth, and Goal How we achieve this While many clients say they would like to see their managers intermediated retail sectors and only 4% in direct retail. report higher-quality information on ESG topics and talk Source: MAM as of 31 December 2020 A return on investment, over the Fundamental, bottom-up analysis combined with engagement more frequently about their active investment decisions and longer term, as designated by the fund with our holdings; integrating ESG considerations into our engagements with companies, they are uncertain as to how investment decisions to measure what managers are saying and doing. Our clients Our assets under management (AUM) are also interested in receiving information on a variety Our companies to perform well across the spectrum Engagement with our holdings on their key, material issues. Our AUM, which stands at approximately £8.2 billion of ESG-related topics and understanding how our ESG of their operations Patient, focused discussions on adopting best practice in as at 31 December 2020 can be broken down, as follows: integration directly impacts our investment decisions. issue management as needed We have taken all of this feedback on board and it has had Country % of AUM a direct bearing on our communications programme for 2021. To deliver the best possible service to our clients Using our flexible and smaller size to tailor our services to our clients and their evolving needs United Kingdom 77.7 Delivering what our clients need North America 11.4 To meet our clients’ stewardship needs, we provide a Other 10.9 range of information on ESG topics and seek to provide any information our clients need following on from the Source: MAM as of 31 December 2020
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Our investment time horizon Communication methods and frequency We consider the investment time horizon appropriate to Frequently, clients request quarterly (or annual) We communicate with our clients on a regular basis deliver the needs of our clients to be three to five years. information on their fund’s performance and updates on on all aspects of their investments. This includes: We are longer-term investors and this investment horizon our engagement and proxy voting decisions. We post this means that we can: information on our clients’ web portals where they can find up-to-date information on their fund(s). Clients can • Be patient in terms of the unfolding of our Communications with What it covers Frequency Where it is published also find information on our website, including our annual investment theses ESG information Responsible Capitalism report covering our engagements • Engage meaningfully with company management teams and outcomes, along with our proxy voting records. Fund Factsheets Basic fund information Monthly Website, client sites • Track our engagement activities and outcomes over time These publications and communications help ensure that we remain aligned with our clients’ stewardship and • Consider wider ESG factors that percolate from our Quarterly commentary Performance, asset allocation, Quarterly Client sites investment policies. materiality assessments. stock selection, ESG considerations Ensuring our stewardship processes align with client We also monitor our own investment holding data to time horizons ensure alignment between portfolio behaviour and Proxy voting updates Proxy voting decisions Monthly, one month Client sites, website what we communicate to clients to be our investment As our investment time horizon for clients is three to five in arrears time horizon. years, we have ensured our ESG integration process is aligned with this time frame. Our materiality assessments Engagement summaries Our engagement with Quarterly Client sites and engagements cover both the more immediate time companies on their key issues Managing assets in line with clients’ stewardship and period of one to three years and the longer period of three investment policies to five years; the latter is aligned with the time horizon Quarterly team videos Summary of quarter from Quarterly Website, client sites Many of our clients, who are predominantly institutional of our funds. In our fund literature, we also state that investment perspective; in nature, have their own stewardship and investment investors may need to remain invested for three to five ESG snapshots, information policies. We also keep a close eye on the stewardship and years to benefit from our funds achieving their stated on fund(s) ESG-related statements that our clients include in their performance targets. For our core UK and global equity statements of investment principles and/or investment funds, this is substantially borne out in 3-year average Client newsletter Macro, stock theses Quarterly Website, client sites policy statements. While the majority of these state that 12-monthly portfolio turnover of approximately 30% institutional clients lean on their managers to undertake (data to 31 October 2020). Half-year fund Summary of half year from Bi-annually Website ESG integration, engagement and proxy voting on their (For more information on our ESG integration process and commentary an investment perspective; behalf – which Majedie’s practices fulfil – in instances materiality assessments, see pages 24–30 of this report.) information on the fund(s) where clients are more specific about their needs, then we work closely with them to ensure that their requirements ESG newsletter ESG-related topics Quarterly (from Q1 2021) Website are met. Insights Investment cases, general Ad hoc Website, client email themes, including ESG (roughly two a month)
Webcasts Fund specifics, stock theses; Ad hoc Website, client sites, client email conviction levels, ESG themes (roughly quarterly)
Podcasts Fund and market discussion, ESG Quarterly Website, client email
US blog Stock/sector thought pieces Weekly posts Dedicated website
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Stewardship of
Communicating with our clients as per SRD II In keeping with the Shareholder Rights Directive (SRD) II, interactive webinar clients learnt about the challenges Our investments we also communicated with our clients via email in July and opportunities of embedding ESG into investment 2020 to provide links to the information on their client processes from industry thought leaders. sites and/or on our website with regard to: the medium- • Bespoke workshops; we continue to invite clients to James de Uphaugh CIO to longer-term risks associated with their investments; bespoke workshops with our Head of Responsible the composition of our portfolios; portfolio turnover and Capitalism to address their specific ESG needs. ESG is at the heart of our investment process and our service to clients. We have come related costs; how we consider material issues (including a long way in standardising our processes in 2020, ensuring our work is evidence based ESG-related areas) that our companies face; and proxy • In November 2020, we launched our Active Owners webinar series. These virtual roundtables cover a range of and relevant to the companies in which we invest on behalf of our global clients. The voting information that covers the use of proxy advisers world is changing quickly, not only in terms of client expectations with ESG activity and stock lending. engagement topics, the first of which will be the key part of the climate transition challenge: decarbonisation. We and reporting, but also in terms of our responsibility to understand the ever-changing will discuss our engagement road map within the context landscape our companies face and also how they are approaching the twin pillars of Effectiveness of our client communications of our wider ESG approach and the broader industry climate transition and inclusive growth. Like everyone else, we are on an evolutionary As a boutique asset manager, we have close client picture. We hope that these will be interactive sessions path with Responsible Capitalism. Our journey will continue, as client demand and relationships. The relationship manager who has the first and that clients will share with us their engagement regulations require us to report in ever-greater detail. We welcome these changes contact with a client will continue to look after the client priorities, which we will aim to filter through to our which will only highlight the depth and breadth of our integrated ESG activity. once they are onboarded and will develop the relationship company engagement programme. By doing so, we with the client’s field consultant (if relevant). This end-to-end intend to strengthen the link between our clients and Investment beliefs approach means that we have deep and trusted associations our engagement outcomes. with clients, evidenced by the longevity of our relationships The following investment (many of our clients have been invested with us for over a Furthermore, just as we have embedded ESG factors beliefs guide our activities: decade). In fact, clients often ask us for help or guidance on in our investment process across the team, so too we matters outwith our immediate investment remit. are embedding ESG commentary across all of our Investment belief Desired outcome Reason communications collateral; it is a permanent feature, All client directors meet weekly to discuss clients’ short- for example, of all our standard update slide packs. and medium-term needs. They meet monthly for a strategic Materiality assessment is a key component Key issues derived from materiality assessment How companies manage their key issues and of our investment process drive our engagement. We track outcomes how they respond to our engagement may review of client relationships and to evaluate whether any Unaligned assets from this. Our ESG work is linked directly indicate how a group will perform, going adjustments to our client service offering is merited. We are not aware of any instances where we have not to investment decisions forward. This impacts our clients Improvements can always be made in this area, especially managed assets in alignment with our clients’ stewardship Companies should be able to manage their We engage to understand how groups manage Providing feedback and making requests of as client requirements are constantly changing. Going investment policies. forward, we can enhance our client offering by providing material issues well their issues and to escalate engagement for groups is designed to help them manage their improvements, as required key issues better. This could help performance, more topical ESG-related information (on client web How our stewardship activities have best served longer term portals) as well as on our website. our clients Responsible allocation Invest in those companies which demonstrate Enables us to make longer-term investment At every point in the life cycle of our investing in an asset of capital growth that is inclusive and sustainable decisions that benefit clients and stakeholders. Client views and our actions (prior to holding, during the holding period and exiting) This is also a client requirement On the back of our client ESG survey, we plan to enhance we gather and update the information that helps us make our educative approach to ESG by producing a regular ESG the best investment decisions possible for our clients. This Longer-term, fundamental analysis Genuine, structured, sustainable growth from Allows us more accurately to determine what (including ESG factors) is the basis of our our investments a group’s risks and opportunities are and how newsletter addressing ESG-related topics as they arise either information includes fundamental analysis, materiality equity investment approach they may impact the business. This is also a in our funds or in the press. These newsletters are designed assessments, macro- and micro-related data, share price, client requirement to take a deeper dive into the practicalities of integrating engagements and engagement outcomes. We also vote ESG in a meaningful way and how our engagement and our proxies where permitted by clients and take into Exploit the inefficiencies of the market; Take advantage of valuable opportunities the Challenges us to find opportunities for our investment decisions are impacted by this. Other actions consideration at every step of our process the needs and/ benchmark aware but agnostic; employ all market may not have identified; understand clients and gives us flexibility to manoeuvre of our analysis in our investment decisions but not be limited by benchmark weightings; while understanding what the benchmark we took in 2020 included: or requirements of our clients. All the information we understand how our funds perform in an ESG is doing • A live webinar with Guy Opperman MP (Minister for gather helps to form our conviction level, which steers our context versus the benchmark Pensions), Anastasia Guha (Director, PRI) and Andy investment decisions. In this way, our stewardship activities have served the needs of our clients in 2020. Our clients’ desired outcomes are material We understand and integrate our clients’ Our clients are the reason we exist. Our Griffiths (Executive Director, IF), hosted by Cindy Rose factors in our investment decisions needs and desired outcomes when making first priority is their benefit and promotion (Majedie, Head of Responsible Capitalism). At this investment decisions of their beliefs
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We believe that ESG integration is best employed when it: same investment team. We practise this belief daily. Our Just as important as the factors we look for are the potential fundamental analysis and prioritisation of material issues for red flags we note that may signal poor fundamentals, declining • Pinpoints the key, material issues that companies face so that each of our holdings links directly to our engagement with valuation or ineffective issue management. In addition to the we can make better investment decisions for our clients those holdings. Furthermore, our analysis and engagement negatives of the factors listed above, we consider these to be • Links directly our ESG integration with our trading directly impact our conviction levels which affect our buy/ potentially critical from a stewardship perspective: (buy/sell/hold decisions) sell/hold and weighting decisions in our funds. • Focuses on our responsibility to be part of the climate transition solution and engage on this We track our engagements, monitor engagement outcomes Potential red flag Why it causes concern and report on these on a quarterly and annual basis to our • Helps us invest in the type of economic expansion that clients and wider stakeholders. We also actively vote our Pricing promotes fair, inclusive growth. proxies in line with our corporate governance principles. Pricing products too cheaply May be done to attract sales. Questions the sustainability of a group’s We believe that combining these important ownership roles supply chain and future revenues Active share ownership, engagement and proxy voting means not only that we have greater influence with our Accounting practices go hand in hand investee companies but also that we have increased oversight Low margin contract businesses Management may have too much control over revenue and profit recognition We believe the ownership of companies, engagement on and control – and ultimately, more accountability – for the Cash earnings are much lower than P&L earnings Potentially highlighting over inflated earnings. Might be paying employees key issues and proxy voting should all be done by the investment decisions we make on behalf of our clients. with stock options Depreciation/amortisation is treated in an unorthodox way Factors we consider when investing Consistently not changing auditor Increases risk of deceptive accounting practices As part of our mainstream investment process, we examine a number Off-balance sheet financing It can be an attempt to hide leverage and create opaque financial of factors when making investment decisions. These include: management of business Factor we consider Why we consider it to be important Issue management
Fundamental/Quality Top management have little familiarity of key issues Could indicate poor management of material issues that impact the business, longer term Thorough understanding of a business and its operations Creates the basis of our investment; critical in understanding all of the company’s issues Not enough disclosure on ESG data Questionable regard for and consideration of areas that are potentially material to the business Ability of a company to manage its key issues Potentially determines competitiveness and going concern of business; demonstrates understanding of operations, creativity and management skill Lack of coherent approach to managing climate Could signal mismanagement of business and strategy in a world change issues increasingly impacted by global warming Strong balance sheet Demonstrates longer-term financial health of business Management Relatively low debt/gearing Provides greater stability and flexibility; increased operational control Promotional management teams Excess optimism can lead to disappointment Healthy margins Signifies pricing power and business stability provides optionality to expand or develop the business Low levels of alignment by CEO, CFO, or FD Demonstrates lack of alignment with shareholders and company Experienced, stable and appropriate board/ Make the critical decisions for a company which can hugely impact the group’s High levels of management turnover Could indicate difficult management structure or inability of group to executives and management team future/direction have common strategy/goal Growing market share Can signify strong strategic position in industry; potentially provides for improved Insider selling Could be waning conviction in business or not having skin in the game; margins and cash flow misalignment of outcomes Longer-term time horizon with regard to capital Enhances genuine, structural, longer term growth; can signify Little board independence Lack of challenge to the executives expenditure and strategy the long-term strengthening of strategic position Strategy Strong capital allocation discipline Ability to pay dividend and/or reinvest capital. Signals on-going strength of business Mergers and acquisitions (M&A) outside core strategy Could indicate lack of growth in core areas, potentially increases risk in Economic growth tailwinds Help stimulate business; provide opportunities the business and could point to lack of challenge at board/executive level Valuation Potential adverse impacts
Valuation gaps between share price and intrinsic Signals potential investment opportunity – seek catalyst for narrowing of the gap Potential harm caused by activities of the companies These could have a negative impact on the group’s longer term profitability, value of the business in which we invest, due to the mismanagement especially where additional costs or reputational damage is incurred through Willingness to work with minority shareholders or improper management of the group’s businesses mismanagement or improper management of these risks or areas. Such areas may include carbon emissions, poor supply chain practices, discriminatory (or exclusive) growth, and/or the harmful impacts on public health from products Willingness of a company to listen and take on board Knowledge that our investee companies will hear our feedback, consider the feedback and requests of a minority shareholder their actions, and make changes that genuinely benefit the business Potential adverse impacts
Potential harm caused by activities of the companies Potential adverse impacts could undermine the longer-term financial stability in which we invest, such as carbon/GHG emissions or profitability of a company and/or directly or indirectly negatively impact or health risks from products a group’s reputation
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Our ESG integration process 2020 updates to our ESG integration process event happening (y-axis) as well as its overall impact In 2020, we strengthened the process above by: on the business (x-axis). We weigh together all risks and opportunities, on a qualitative basis, regardless of the • Formalising the process and using it for all of our investments subclassification of the issue (operational, financial, For the purposes of completeness in this report, we This is part of our mainstream investment process and • Building in-house IT structures to enhance our ESG environmental, social, etc). This enables us to have a more reiterate our ESG integration process. We included this is used across all of our strategies for both pooled and integration capabilities accurate matrix of a group’s exposure to various areas. It is information in our Responsible Capitalism 2019 report, segregated mandates. • Linking our annual appraisals for our investment team important to note that we see materiality as what is important as well, on pages 9–11, (https://www.majedie.com/wp- from the investment perspective as well as what is important content/uploads/2019-Responsible-Capitalism-Report.pdf). to their application of the ESG integration process, the completion of company notes (with materiality to our clients. assessments) and the completion of engagement notes Idea Generation: (with ESG components). Scouring the market for companies that can Example: Unilever create sustainable wealth for our clients. Materiality We mapped the following key issues for Unilever in 2020: Fundamental Research: How we use materiality in our fundamental analysis (the summary of our engagements with Unilever on these issues As part of building an investment thesis, we undertake can be found on page 49) a materiality assessment, explicitly incorporating ESG We take a holistic view in assessing investments, prior factors. These data are dynamically captured and tracked to investment. Ours is a bottom-up approach in which Risks Opportunities on our proprietary research system, MajHive. we examine the fundamentals of a company, taking into 5 5 consideration the macro environment as well as regional 4 4 and sector information. As part of our assessment of a Purpose Resiliency: Each company is assigned a proprietary company, we identify and prioritise the key, material issues 3 3 7 3 1 To make money for that the company is facing. These consist of both risks and clients responsibly, resiliency score. 2 6 2 2
opportunities which may be subdivided into financial, Likelihood Likelihood supported by deepening Engage: environmental, social, governance related, etc. By looking 1 4 1 5 our commitment holistically at our holdings, we essentially construct a Engagement topics feed from the materiality 0 0 to our ESG materiality matrix that covers the whole of the business. 0 1 2 3 4 5 0 1 2 3 4 5 assessments. We dynamically track and monitor capabilities We examine the exposure level that companies have to Impact Impact our company engagements, via MajHive. issues, along with the impact that those issues might have 1 Management plan to return to the 3–5% range for sales growth Portfolio Construction: on companies over the medium to longer term. By taking this approach, we feel we have a much more accurate 2 Risk that remaining food businesses are in categories which as Our ESG work links our engagements with conviction understanding of the issues our holdings face, rather ex-growth (ice cream, mayonnaise, stock cubes) levels, through a conviction score. This affects Scope for driving market share gains given renewed focus on than looking at issues through separate lenses of 3 innovation, product quality and recent acquisitions investment decisions and portfolio weightings. ‘financial’ and ‘ESG’ which can, we feel, lead to a hugely 4 Has the business been run too hot in the aftermath of the Kraft erroneous assessment of the issues that are material to the approach and a margin reset is needed Risk Monitoring: Potential for additive M+A as industry responds to lower growth underlying company, from an investment perspective. 5 environment through rationalisation Independent and robust oversight from the 6 Palm oil – guilt by association in an industry which has not moved performance and risk team and the IOC. Materiality helps us prioritise our engagements as quickly as Unilever 7 Unilever providing more granular data to link objectives of the The issues that we prioritise as key and material to the sustainable living plan (SLP) to be compared more effectively with peers What makes our ESG integration process unique: wellbeing of each company are those that we prioritise Source: MAM as of 25 November 2020 for engagement with that company. We do not take a • We complete a company note, outline our prioritised is recorded on our in-house engagement platform which top-down, box-ticking approach to determining what is enables us to track outcomes over time. issues for each company (financial and ESG, weighed material or to deciding engagement topics. Each company During the year, these issues guided our engagements with together), assess how well the group is managing its key • We escalate engagement with companies, as necessary. has its own materiality matrix. Our focus in engagement Unilever. Our engagements, feedback and requests of Unilever issues (resiliency score) and assign our conviction score This may be to restate our requests, encourage quicker is issue management: how is each company managing the were recorded in our in-house IT system, MajHive, which based on all relevant information. action or engage on an item that becomes more pressing particular material issues it faces? enables us to have an audit trail of all our investment analysis • Our prioritised list of key issues guides our engagement from an investment or client perspective. and track, over time, our engagements and outcomes, as well with a company. During engagement, we provide • Our conviction score directly impacts our investment How we determine materiality as the trend of resiliency and conviction scores. Over the feedback and/or make requests which focus on ensuring a decisions (buy/hold/sell) as well as the weights of We map the materiality of each company’s issues. Exposure course of 2020, we updated our key issues for Unilever and company is managing its key issues well. Our engagement holdings in our funds. levels to individual areas are measured by the likelihood of the our engagements with the group reflected this update.
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Tools we use to help determine materiality Materiality is dynamic Qualitative and quantitative data We use several tools to help us determine a group’s exposure a variety of tools, including those listed below. While this For us, materiality is dynamic, changing over time, and We examine data not only to understand the ultimate to a vast array of issues or areas. To understand better the table describes the tools that we use for ESG-focused issues, should be determined in the context of the group’s other exposure that a company has to a particular area/issue, but likelihood and impact on our holdings of any one issue/area, that does not mean that we view ESG issues in isolation. key issues. Also, we realise that there is no one set way that also to understand the significance of each area/item within whether that issue is internally or externally driven, we use companies need to manage an issue; companies deal with the context of the group’s other issues. In establishing the risks and opportunities differently. While there is certainly likelihood and impact that any one issue might have on a best practice – which we frequently share as part of our company, we consider both the nearer term (one to three years) engagements – we also realise that business management is and the longer term (three to five years), as these have varying an art as much as it is a science. As we take all of these factors significance to particular issues and to the company, itself. Tool/Resource How it is used by our investment team How widely used by into consideration, we feel that our assessments give the most our investment team accurate picture of where our holdings currently are (status) We use a range of information and data points when identifying and where they are headed (forward trajectory). and prioritising the key issues of our holdings. Quantitative Published reports by investee Analyse these to understand what the company sees as its material issues Frequently data helps us determine a group’s exposure to particular risks company (annual reports, and how it is managing these; also refer to these for ESG-related data; also and opportunities. Our quantitative data includes: sustainability reports) use these to help determine some of the factors we look for in companies (as listed on page 24) Environmental Social Governance Balance sheet/ Sustainable Accounting Sometimes refer to this, as a starting place, for potential ESG-related To some degree (trends over time) (trends over time) Operational Standards Board (SASB) issues by sector; this is not used, de facto, as determining what is material materiality map to the company Carbon intensity Pay gap Separation of Chair and CEO Share price, NAV, price/book, TSR
Bloomberg financial and Bloomberg’s ESG data are sourced from company reports; refer to these Daily Energy assets remaining No. of women/percentage No. of women/percentage ROE, ROA ESG data (where available) to help determine trends over time as well as current in the ground ethnicity on board ethnicity on board exposure levels Electricity usage Workforce stats on women Independence of non-executive ROC, ROCE, WACC Majedie’s proprietary This provides questions the team can ask to determine the extent to To some degree and minorities directors (NEDs) in-house ESG tool which/the approach used by companies to manage different issues Water usage Lawsuits (number and fines Parity in pension pay to execs Debt/equity resulting from) concerning and wider workforce ESG experts on Responsible In-house resource to undertake a deep dive on a company from an ESG Frequently labour-related issues Capitalism/investment team perspective to help determine potential material issues; investment managers can then determine what is most material to the group from Waste to landfill Amount of time and money Shareholding requirement Dividend a holistic (financial and ESG) perspective spent on employee training (in terms of years and quantum)
Carbon data from ISS Helps the team understand the carbon/GHG emissions of our holdings Frequently Air/water/soil contamination Promotional structures in Percentage of shareholding EBIT, EBITDA; and at fund level so we can determine a group’s exposure to climate risk place for women/minorities required by execs FCF conversion
Broker pieces on sectoral-related May provide a read-across to our holdings in terms of upcoming risks and Occasionally Timber usage/deforestation Lost time injury frequency rate Executive pay; director incentives Covenants (leases, loans) ESG topics opportunities from an ESG/macro perspective by hectare (LTIFR); no. of deaths; no. of serious (quantum and nature) and minor accidents, near misses Clients’ ESG-related concerns As client concerns (including ESG-related) increase, we include these in As we receive them our engagement priorities for companies with greatest, related exposures Certification percentage of Stoppages due to trade Gender pay gap Total sales; sales growth; R&D sustainability of raw materials union disruption to sales; opex to sales; capex Our internal IT platform Enhances our key issue tracking process and helps produce stats from a Daily (cotton, sugar cane, palm oil, to sales/depreciation (capital (MajHive) top-down perspective on our funds (e.g. number of key issues relating to wood, cocoa, etc.) intensity); advertising to sales the environment or social areas; how long issues have been prioritised; etc.) Brownfield/greenfield Heritage site/indigenous Money spent on diversity and Gross margin; EBIT margin hectare usage peoples relationships inclusion (D&I) programmes
Percentage of tailings dams Supply chain breaches/ Number of people returning to Off-balance sheet exposures: audited during the year fines/instances work following career break special purpose vehicles (SPVs), JVs, associates, factoring
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We also use qualitative data when looking at risks and Our materiality assessments over the life cycle Materiality and the impact of Covid-19 opportunities. These include: of our investments Prioritised issues Prior to holding an investment: Following the outbreak of the global pandemic, many Environmental Social Governance Balance sheet/ • Our key issues are determined by our materiality companies, including several of our holdings, had sudden (trends over time) (trends over time) Operational assessments. The process for this is qualitative and and large disruptions to their operations, supply chains and described above. revenue streams. As such, we prioritised financial resiliency Management’s understanding Relationship of group with its Quality of expertise, judgement Brand strength (may speak topics when engaging with our companies, as these moved and response to climate risks (as suppliers, contractors, and leadership of board and to economic moat) While we own the stock: quickly up the agenda in terms of our companies’ investability. well as its other material issues) labour union executive team • We reassess our holding’s key, material issues at least annually, but in practice this can happen As part of this escalation of issues and the immediacy Quality and depth of the group’s Employee engagement surveys/ Culture on the board/at the top; Companies, own assessment much more frequently. of the impact of the pandemic, we asked our companies environmental reporting indices/sources (Glassdoor) how decisions are made; inclusive of their material/significant • We use the key issues to lead our engagement. Where about (inter alia): (correct use of tools and or exclusive culture risks and mitigations we believe companies need to take additional action • Their cash management and cash reserves reporting metrics) and communications or make improvements in managing their issues, then • Covenants, loans we challenge and/or encourage the group to take Degree of transparency/ Degree of transparency/ Degree of transparency/ Quality of the enterprise corrective action. • Rental payments overall disclosures overall disclosures overall disclosures management system; degree to • Payment and treatment of employees which it is used across the group • We monitor what a company does following our feedback or requests. Change requires time and patience; • Disruptions to supply chains and business operations some companies respond more quickly than others. • The degree to which each company accepted • Where a company has acted positively to our government financial assistance. engagement, our conviction may increase. Conversely, In assessing these data points and in seeing the bigger Materiality assessments and issue management where a company does not take action or refuses to We also asked, especially in the context of whether picture, we make qualitative judgements about the When qualitatively judging how well our companies consider our feedback or requests, this may decrease likelihood (y-axis) and the impact or severity (x-axis) of that or not a group accepted furlough payments and/or manage their most material exposures, we use an issue our conviction. other government financial assistance, how or if it: particular issue/area on the underlying company over one management framework which has key components, to three or three to five years. (See the example of our matrices • Changes in our conviction levels impact the position • Paid bonuses regardless of the area or discipline in which the issue lies. sizing of our holdings. for Unilever on page 27.) Qualitative and quantitative data These common elements include oversight, reporting line, • Issued dividends inform our viewpoint and we use these fluidly in making measurement enterprise risk management framework (or When exiting a position: our assessments. Some information weighs more heavily • Undertook enhancements to increase its similar), gap analysis, escalation facility, reporting, audit • We don’t typically make changes to our prioritised competitiveness during the disruption. than others, as exemplified by the fact that we care about and direct link to strategy and pay. To do a deep dive list of engagement topics when exiting. growth/margins/returns more than absolute numbers in into any single area, we use a more bespoke approach to operational metrics. evaluating the management processes (e.g. cyber security Possibility of future disruptions risks differ from climate change risks). We engage our On the back of the pandemic, we have thought more about Our qualitative judgements tend to focus on our estimation holdings on their management programmes and structures events or disruptions to business that could potentially of exposures and how a company is managing their most for their specific key issues. Where we see there are occur – either from subsequent waves of Covid or from material exposures, which may be financial and/or ESG- gaps, inconsistencies or inaction regarding these issue other, similar, events, such as climate change or geo- related. One example is brand or intellectual property. management structures, we will increase on our matrices political changes – that could bring Covid-like disruptions. These are somewhat intangible in nature but are assessed the likelihood and/or severity in terms of how the area or As such, we have been asking our investee companies with both qualitative and quantitative metrics, including issue could impact the business. about their defences against future disruptions or marketing and R&D spend to sales, and unprompted brand devastating events, including with regard to cybersecurity awareness. Another example is alignment of management robustness; supply chains; cash management and capital with shareholder interests. For this, we might think in reserves; pay for executives and the board; the extent to terms of quantitative metrics (such as quantum of pay; which the group’s management of key issues is linked to how stretching the performance targets are; how long the remuneration; and how executive pay fares in light of a lockup is on shareholding post-employment) as well as group’s treatment of its employees. These discussions help qualitative (does the company use metrics that shareholders us gauge how companies are thinking about the resiliency care about; whether or not the group demonstrates and robustness of their business operations. adequate disclosure on strategic objectives).
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Materiality of topics our clients care about Global warming We recognise our clients’ increasing concern in climate Our climate or carbon-related engagements are also linked related issues. As such, we approach climate-related risk directly to our participation in Climate Action 100+ and Company Date of What we addressed and our Status/Outcomes Impact on and opportunity management as we would with other our support for TCFD, against which our own business engagement specific requests (if any) conviction issue management areas, focusing on oversight, (Majedie Asset Management) will report in 2021. measurement, audit, gap analysis, reporting, transparency BP February and We addressed: BP’s decision in February Decreased (rising cost and link to pay. For fossil fuel and mining companies, Examples of our climate-related engagements August 2020 • The group’s strategy; link to pay; publishing a 2020 to be carbon neutral of capital as negative we also expect to see greater indication that these We undertook a number of engagements in which materiality assessment; goalposts for achieving by 2050; promise of more externalities in oil and 2050 net zero target; identifying a single energy detail on reaching this gas business are priced, companies are proactively managing their specific we discussed climate-related issues, including: metric to use for energy types target at the capital manifested in increased climate-related issues. In determining our companies’ We specifically requested: markets day in September. investment in renewables exposure levels to these issues, we: • A heat map showing what the group’s focus is on Group needs to provide at uncertain returns and • Clarity on goalposts to achieve the 2050 net solid details on goalposts reduced shareholder • Look holistically at our investee companies to see the zero target cash flow) whole picture on materiality • Direct link between targets and pay • Engage our holdings, where there is substantial exposure Royal Dutch July 2020 We addressed: Shell is actively engaging Increased to climate-related issues, breaking down the issue into its Shell • Transition to greener fuels; change in shareholders on its energy applicable parts for the company itself strategy to meet customer needs transition steps • Assess the group’s approach to managing these issues We specifically requested: • Increased weighting of climate transition over the shorter and medium term. We ask specifically and HSE elements in LTIP about how/if companies: Unilever – Determine their own exposure levels to January, June We addressed: Group is considering how Increased and August • Management changes; refinement of to publish ESG data so they carbon-related issues 2020 business strategy are more comparable with – Mitigate the risks (offsetting, product • Structures for managing climate change risks other companies or process substitution) We specifically requested: • Reporting on ESG data in a comparable format – Link the issues to executive • Improved climate change transparency and remuneration and overall group strategy discussion around management structures (See page 49 for full summary) – Report (or will report, going forward) on their efforts to reduce emissions and/or develop new Breedon June, July and We addressed: Breedon is using more Unchanged technologies or products to help others reduce August 2020 • Greener energy use for kilns and clinkers; energy-efficient tech and or offset their own emissions supplier code of conduct alternative fuels for cement production – Manage any carbon-related targets with interim goalposts and reporting. Anglo November We addressed: Ongoing Unchanged American 2020 • Group’s thermal coal holding • Its carbon emissions as compared to the sector average for mining We specifically requested: • Speeding up the sale of its Cerrejon assets (thermal coal) • Linking the group’s climate transition targets more closely to pay, LTIP (See page 40 for full summary)
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Supply chains Company Date of What we addressed and our Status/Outcomes Impact on In 2020, following client interest in supply chains and to supply chain, engaged with them on these facets and, in engagement specific requests (if any) conviction also revelations that certain companies in which we are some cases, requested that companies take additional steps not invested had issues with their suppliers, we undertook to make their supply chains more robust and resilient in the Dunelm July and We addressed: Company will consider Increased additional engagement with our companies for which supply face of further Covid-19 disruption and future stoppages or September 2020 • Human rights issues in the group’s supply chain; more transparent chain could become a material issue. To do this, we examined disruption from climate-related issues. oversight and reporting; repaying furlough money reporting on its We specifically requested: supply chains systematically the supply chain management practices of • Better transparency on raw material sourcing our companies heavily dependent on their supply chains. Examples of our engagements on supply chains and on carbon emissions We analysed the companies’ specific exposures with regard Specific goals or targets with regard to supply chains included: (See page 51 for full summary)
Team17 May and We addressed: Group monitors potential Unchanged July 2020 • Employee benefits, pay, working hours overworking of employees (See page 48 for full summary)
Avon September 2020 We addressed: N/A Unchanged Rubber • Human and raw material supply chains
March, April, We addressed: N/A Unchanged DFS May, July and • Supply chain oversight and sourcing of September 2020 raw materials
Hotel February, March We addressed: Cocoa is sourced sustainably; Increased Chocolat and August • Management of supply chain working to publish specific 2020 • Board expertise, independence audit data; traceability for • How long auditor has been in place cocoa and paper We specifically requested: • Expand supply chain expertise on the board • Link material issues to strategy and pay
Associated May and We addressed: Good oversight of supply Decreased (much of the British September 2020 • Oversight and transparency of supply chain; chain; working towards full hidden value in grocery Foods fast fashion use of sustainable cotton has been realised and We specifically requested: risks to the intrinsic • Increase transparency on supply chains value of Primark have and approach to fast fashion increased given • More use of sustainable cotton consumer habit changes (See page 46 for full summary) around e-commerce)
Marks & March, June and We addressed: N/A Decreased (while the food Spencer August 2020 • Reporting on and oversight of supply chain; business continues to trade sourcing of raw materials; oversight and strongly, clothing is losing responsibility of the group’s Head market share, even of Sustainability after adjusting for its older demographic)
Burberry September 2020 We addressed: Group aims to publish more Unchanged • Transparency and oversight on global supply chain details on supply chain and We specifically requested: raw material sourcing • Increase transparency on oversight of supply chain • Publish a materiality matrix that includes sustainability and financial issues (See page 47 for full summary)
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Helping companies report better on issue management
During 2020, we worked with companies to improve the Our engagement and ESG integration approach is the same quality of their reporting and transparency. We did this by for all of our long-only funds and strategies, including both helping them understand what we look for in their reporting pooled and segregated mandates. Importantly, we also apply with regard to their prioritisation of issues and linking our considerations of climate transition and inclusive growth these to the discussion on risk management, strategy and across all of our long-only funds. remuneration. Companies that we engaged with on this topic, either briefly or at length, include (listed by month): Why we prefer face-to-face (or virtual) contact • BP (January 2020) We choose to meet face to face (or virtually) with our • Electrocomponents (March 2020) clients as we see this as fundamental to our investment • Central Asia Metals (CAML) (June 2020) philosophy of knowing as much as possible about a company during the life cycle of the investment. By using • Centrica (June 2020) this approach, we can ask questions of management to • Essentra (June 2020) enhance our holistic understanding of the company, its • Dunelm (July 2020) operations and its potential future. Of course, in some instances, email correspondence is more appropriate, • Stock Spirits (July 2020) as mentioned above. While this allows for additional • Ideagen (September 2020) disclosures, email is not a replacement for in-person/ • Fevertree (October 2020) virtual meetings. • BAE Systems (October 2020) We make precise requests during engagement • Gold Fields (November 2020) For each area (prioritised issue) on which we engage with • Hotel Chocolat (November 2020) a company, we aim to encourage the group to adopt the best management framework possible for that issue. This Our engagement approach ensures our conversations and requests of companies are specific in terms of both the action point and time frame. Over the course of 2020, we engaged companies via face- Of course, we adopt a degree of flexibility and work with to-face meetings (prior to the pandemic), virtual meetings the individual companies when setting steps, targets or (post-Covid), group meetings, emails and letters. By far, goals. These are set with an appropriate time frame in the greatest majority of our engagements took place which companies can complete these actions. Where our virtually, or by phone, whereas prior to Covid, the requests focus on transparency on reporting (e.g. producing majority of these were face to face. We also participated a heat map or greater clarity on issue management) then in meetings with companies in which multiple investors we understand that the outcomes will take a year or more were present. We often email companies with questions to achieve, due to reporting cycles. Examples of our precise after a meeting with them to ask further questions. requests to companies follow in the sections below on our climate-related and supply chain-focused engagements. In our meetings, we speak with a variety of company representatives, including members of the C-suite, board members, including the Chair, and Chair of the Remuneration and/or Nominations Committee(s), Investor Relations, Head of Sustainability (or similar), and/or heads of individual business units. Occasionally, we also meet with the heads of an acquired part of a business to understand more how those operations will function within the wider group.
36 37 STEWARDSHIPENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Stewardship reflected in our Engagement highlights in 2020
We engaged many of our clients in 2020 on their key issues. Engagement hot spots As with last year, we provide a summary on the following Many of our ESG-related engagements this year have pages of our engagement work and have divided these focused on environmental impacts and supply chain by sector. This year, we provide more detail on the key issues, due largely to disruptions from Covid. We took issues we identified for our holdings and on the feedback the opportunity to do a deep dive with several of our and requests we made. To convey a sense of the depth, companies on these issues, as indicated in our supply chain breadth and universal approach to our ESG integration engagements summary on page 35 and our climate-focused in our mainstream investment process, we have included engagements summary on page 33. an engagement highlight from most members of our investment team. We used each company’s key issues Conviction scores and changes to monitor its activities and progress during the year: There are many elements that go into our conviction scores, • Key issues are in bold in the text to show how they including (but not limited to) our ESG-related assessments drove our engagement and engagements, share price, quality of management, • ESG-related key issues are highlighted in green competitiveness of the business, ability to evolve and adapt • Outcomes are highlighted in blue (in some instances, and competitors’ performance within the sector. outcomes are the result of engagements that began in 2019) For the purposes of this report, we are indicating the • We indicate how our conviction level changed during changes in our conviction scores during 2020 in our 1H 20, based on our engagement, fundamental analysis engagement summaries. Obviously, not all of the changes and valuation of the company. in conviction scores will correspond directly and solely with the engagement that we have undertaken or the What we cover outcomes from these meetings. However, because our materiality assessments, prioritised key issues and This section includes the engagement summaries from dialogues on these issues can and do impact our conviction our investment team. The following section includes scores, we include them as evidence that our ESG-related instances where we have escalated engagement during considerations are a vital component of our mainstream the year (page 59). Details of our proxy voting-related investment process. engagements and voting follow on pages 62–65.
38 39 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Tom Hosking Anglo American (Anglo) Tinger Wen Gold Fields (GFI) Equity Analyst Equity Analyst
Background: Background: • Multinational mining company; the world’s largest producer of platinum group metals • Headquartered in Johannesburg, South Africa • Major miner of diamonds, copper, nickel, iron ore and coal. • One of the world’s largest gold mining companies.
Investment rationale Investment rationale A well-diversified miner, Anglo has assets which are mostly positioned in the second During the first half of 2020, the price of gold rose steadily on the back of uncertainty quartile of the global cost curve. The group has further optimisation potential to from Covid, low interest rates and strong actions from central banks around the world. boost volumes and increase its margins and has better growth prospects than many We believe the economic backdrop remains supportive for the gold price over the medium of its peers, supported by its mine, Quellaveco, in Peru. Shares are also slightly term. GFI itself has been emerging from an investment phase into a cash generative phase. cheaper on EV/EBITDA and NAV metrics than some of its competitors. This transition, in the context of a higher gold price, should help the group deleverage its balance sheet quickly over the next few years. Operationally, GFI has performed well during Key issues: a very difficult year in terms of its gold production, health and safety performance and its 1 Cost improvement execution; smart mining approach supply chain management. 2 Commodity prices MINING & 3 Thermal coal ownership; carbon emissions MINING & Key issues: 4 South African political risk – relationship with government. 1 Safety and diversity MATERIALS MATERIALS 2 Operational performance and leverage Engagement & outcomes 3 Government relations. We met with Anglo in August and discussed the group’s smart mining approach. Anglo ESG-related issues – green has 400 people working on tech improvements across its mining operations. Many of the ESG-related issues – green Engagement & outcomes ESG-related outcomes – blue technical advances and upgrades the group is making have a direct link to Anglo’s ESG-related outcomes – blue In 2018, we travelled to Ghana to visit GFI’s mines in person. We saw first-hand the work reduction in water usage and environmental impacts. In August and November, we GFI had undertaken to benefit the local community along with its mines, including the also discussed the group’s divestment from thermal coal. Anglo is looking at various provision of paved roads, which are rare in Ghana. These roads often provide an economic possibilities for how to reduce or eliminate thermal coal from its portfolio. These include boost for the community. continuing to look for a buyer or possibly undertaking an in-specie distribution in which Anglo would give shareholders ownership in a new entity containing the thermal coal assets. Under Management in the GFI Ghana operations is dominated by Ghanaians, important in this scenario shareholders themselves, would be able to decide what to do with the investment. a mining industry so often criticised for expat leadership of local workforces. GFI’s Certainly, reducing its dependence on Eskom, the electricity monopoly in South Africa, also Ghana operations are led by a native Ghanaian, Alfred Baku, who previously climbed has helped Anglo reduce its emissions. We asked the group to continue to reduce its carbon the ranks after joining as a miner at the Damang Mine over 25 years ago. We saw first-hand emissions, especially as compared to the sector average emissions for mining and to the respect he has earned from the company and the community. Having local leadership is increase the link between the group’s carbon targets and pay. a boost for group culture and government relations.
We engaged the group on its relationship with the South African government, which has We have reiterated our preference over the years that GFI move to a net cash position improved over the last five years. Anglo has worked constructively with the government on to provide some protection from the volatility of the gold price. GFI has been in a period its mining charter and this year turned its attention to the provision of energy. Over the past of heavy investment on a variety of projects, but management agrees that an unlevered few years the state energy provider, Eskom, has become increasingly unreliable and resulted in position is desirable. As these projects come to an end, GFI is entering a cash generative blackouts, which has caused disruption for Anglo. Overall, Anglo has managed this risk well. phase, amplified by the gold price. Management has made it clear that the majority of this Recently, the South African Government gave Anglo permission to generate its own power; the cash is to be used to reduce leverage, in line with our own desires. group will install solar power near its mines which will allow it to be less dependent on Eskom. In terms of South Deep, we have engaged the CEO about how the group planned to reduce injuries, deaths, strikes, improve relations with the South African Government and Conviction – Unchanged ensure the mine was profitable. Over time this engagement has had a positive impact, as GFI put new management in place at the mine and addressed the broad spectrum of problems at South Deep. Today, South Deep is more profitable, and takes up less of the CEO’s direct time, due in large part to rectifying the mine’s health, safety and labour issues.
Conviction – Decreased (due in part to share price performance)
40 41 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Hong-Yi Chen Electronic Arts (EA) Tom Morris Orange Equity Analyst Fund Manager
Background: Background: • American video game company headquartered in California. • A leading European telco with major operations in France, Spain, • Franchises include FIFA, Madden and NFL (National Football League), Poland and parts of Africa along with non-sports games, such as Star Wars and Battlefield. • Owns mobile and fixed networks across its footprint
Investment rationale Investment rationale Structurally, the video gaming industry is a growing area of media consumption. Orange’s revenue and earnings before interest, taxes, depreciation and amortisation Consumers are spending increasingly more time on video games than on other leisure (EBITDA) growth should improve as more customers adopt converged fibre packages (which activities. The first generation of people who played video games as children are continuing come at a higher price), while costs are tightly controlled, thanks to digitisation, and a large to play in adulthood; adult participation is steadily growing. Quarantine and social number of employees retire. Capex as a percentage of revenue should peak and then fall restrictions from Covid boosted participation in gaming, as well. Video gaming companies over the next few years as the French fibre to the home roll-out is completed. This should are monetising their services by selling games and offering subscriptions and other game- then allow for substantial free cash flow (FCF) growth. Orange already has top net promoter related products to ensure recurrent spending. EA has a unique offering in gaming with scores (NPS), a customer loyalty and satisfaction metric. The Covid crisis will likely make its extensive and valuable sports franchises; these act as a high barrier to entry for EA’s people realise the importance of high-speed home internet connections, boosting demand ENTERTAINMENT & competitors and provide a long runway of revenue for the group. ENTERTAINMENT & for fibre. COMMUNICATIONS Key issues: COMMUNICATIONS Key issues: 1 Loot boxes and potential classification as gambling 1 Transparency on accounting approach 2 Cloud gaming 2 Solid execution to regain shareholder trust. ESG-related issues – green 3 Sports licences. ESG-related issues – green ESG-related outcomes – blue ESG-related outcomes – blue Engagement & requests Engagement & requests In March, we met via video conference with the CFO, the group’s Head of France, and We engaged with EA during the year on several of its key areas. First, the group sells sports Investor Relations. During the meeting, we strongly encouraged the group to increase team packages, or loot boxes, which function in the same way as trading cards, but in the its transparency with investors and specifically asked Orange to avoid accounting fudges virtual world. These loot boxes may be deemed to be gambling if consumers monetise their and/or unwarranted adjustments to the figures it reports, echoing similar requests we had teams by selling virtual players for real cash. A gambling label would mean that the group’s made in previous meetings. This will help the group return to being the predictable, cash loot box-associated games would not be marketable to children. EA is trying to ensure that generative business that it should be. We stressed that the group needs a period of steady loot boxes are not considered as gambling products, doubling down on its defence of its execution to win back the trust of the market. products. We have encouraged the group to take a more active approach and have a plan in place should loot boxes be classified as gambling under new legislation. Outcome Subsequent to our meeting, Orange again relied on unusual categorisations of revenues We also engaged the group on the potential for cloud gaming. Currently, consumers play and profits to flatter its Q2 results. We feel the group relies too heavily on adjustments and video games using their own pc or phone. However, access to games via a streaming service often fails to be completely up front about issues. The group appeared not to take on board may soon become the norm. Streaming gaming services would mean gaming companies our feedback. It compounded the feeling that Orange’s management are quite disconnected would face a lower hurdle for players to use their products, since players would only need from shareholders, and unlikely to prioritise improving financial performance for the benefit a screen, not a pc or console, to play video games. The only potential problem from EA’s of shareholders. As a result, we reduced our overall holding in Orange. perspective would be users’ internet speed but EA would maintain both streamed services and more traditional gaming to offset this risk. Conviction – Decreased (largely due to an unsuccessful outcome from engagement)
EA is in a strong position with regard to its sports licences. The group’s FIFA, Madden and NFL licences allow it to produce annual updates for its games and promote exclusivity of its games that are popular with players. This helps ensure loyalty to the brand and retain its games’ dominant status.
Conviction – Increased
42 43 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Adrian Brass Six Flags Dan Ekstein Tesco Fund Manager Equity Analyst
Background: Background: • Theme park operator in the United States. • The United Kingdom’s leading food retailer, with operations also in Central Europe and Asia. Investment rationale We initiated a position in Six Flags following the pandemic, when the group’s shares were Investment rationale down significantly due to its parks being closed. Theme parks are massive sites and supply Tesco has successfully implemented a turnaround over the past five years. A comprehensive is limited, due to the large space requirements, despite continued high demand. Six Flags cost-reduction plan, involving simplification of its supply chain, logistics and store operating is priced well compared to other theme parks; it is also family oriented with rides for model has allowed it to reinvest in the quality and price of its core grocery offer. Shoppers thrill seekers. Six Flags unsuccessfully tried to expand its franchises internationally in have responded, so that now Tesco has stemmed market share losses to discounters Aldi and 2019. However, with a new CEO, the group is reinvesting in its home market to improve Lidl. The group consistently leads its Big-4 peers in terms of like-for-like sales. Shareholders and introduce new attractions. Customer satisfaction remains high and the group has have also been rewarded as operating margins have improved to 4.7% in FY19/20a from reset its goals and expectations with regard to earnings. a nadir of 1.7% several years ago, driven by savvy category management and operating leverage. As cash flows and profits have been rebuilt, so the balance sheet has improved Key issues: dramatically, with leverage on Tesco’s preferred metric of Net Debt/EBITDAR currently at CONSUMER 1 Leverage CONSUMER 3.1 times, down from a peak of 6.0 times. This will further improve to c.2.5 times once the 2 Customer satisfaction and attendance levels, tech investment well-priced (£8.2bn) disposal of its Thai and Malaysian businesses completes, paving the DISCRETIONARY 3 Alignment of management’s incentives with performance. DISCRETIONARY way for both a step-up in dividends and commencement of a share buyback.
& CONSUMER Engagement & requests & CONSUMER Key issues: STAPLES We engaged with Six Flags in June and August to understand better the group’s liquidity, STAPLES 1 Capital allocation framework post-disposal of the Thai business, potential for divi + its debt levels and its plans for increasing the park’s attendance levels. Six Flags has buyback to re-rate the equity invested to improve, update and introduce new rides and attractions each year. It is now 2 Competitiveness of price points and offering vs. discounters ESG-related issues – green looking at investing in technology to assist with virtual queueing systems for ticketing, ESG-related issues – green 3 Ability to enhance loyalty through its Clubcard+ Scheme ESG-related outcomes – blue rides and food and merchandise ordering. The group is also investing more in its ESG-related outcomes – blue 4 Ability to improve economics of online grocery, such that channel shift is less dilutive. staff to ensure that it maintains high customer satisfaction levels. As a seasonal attraction, Six Flags flexes its workforce up and down, depending on seasonality, a Engagement & requests quality that helped it respond appropriately to lockdown and a gradual reopening after We engaged with Tesco on three occasions during 2020. In April we discussed the pandemic the first wave of Covid. with Tesco’s CFO. Tesco managed the huge logistical challenges of ensuring food availability during the initial lockdown, while complying with Covid operating norms. It incurred extra We also engaged the group on its profit expectations and discussed its alignment of costs with Covid-related signage, queueing systems, additional recruitment for food delivery incentives, since this had been one of the downfalls with its international expansion. and stocking shelves and sick leave for its staff. Tesco provided unconditional sick pay to any We encouraged Six Flags to provide better disclosure on its earnings, along with its employee absent for Covid and gave 12 weeks’ fully paid leave for employees over 70 years customer satisfaction levels and investment in the overall business, so that investors can of age or who were vulnerable or pregnant. It also recruited tens of thousands of temporary have an accurate picture of the group’s stability. The right investment in technology staff, a significant percentage of whom have been given permanent roles. Tesco did not (e.g. artificial intelligence to predict park capacity or provide data on strong/weak furlough any of its employees. In April the group paid a 10% bonus to its colleagues in attendance days) could help Six Flags return to 3–4% annual growth. stores, logistics and distribution. In September we met Tesco’s new CEO and expressed our satisfaction with the current strategy and our desire for him to stay focused on the ‘nuts and In terms of group strategy, Six Flags’ new CFO (formerly at Guess and Mattel) plans bolts’ of remaining competitive. We also emphasised our desire to see cash flows directed to implement cost efficiencies. The group will focus on its core business, improve the to enhanced shareholder returns post-completion of the Thai disposal (expected later end-to-end experience of its guests, simplify the cost structure and redesign its website this year). In October we met with the CFO again to discuss the 1H 20/21 results, focusing to make it more user-friendly. on online economics, supplier relationships and the impressive improvements in Clubcard loyalty observed in recent months. Conviction – Unchanged Conviction – Increased
44 45 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Imran Sattar Associated British Foods (ABF) Jane Holl Burberry Fund Manager Equity Analyst
Background: Background: • Multinational retail and food processing company; owner of Primark • British luxury fashion retailer, selling core outerwear, leather goods, fashion accessories. • World’s second-largest producer of sugar and yeast as well as other baking ingredients. Investment rationale Investment rationale Burberry has a 40% revenue skew to Chinese consumers globally. It has a strong digital There is hidden value in ABF’s grocery business and Primark is a growth asset which has presence with around 15% of sales generated online. The group is currently in the middle continued to perform well, despite the group’s lack of an e-commerce platform. of a turnaround, orchestrated by CEO Marco Gobetti and Italian designer Riccardo Tisci (ex-Givenchy), to modernise the brand and rejuvenate its revenue performance. Burberry has Key issues: strong, high-end brand perception with Chinese consumers and is the luxury brand most 1 Growth prospects for Primark without online services exposed to Chinese recovery. If the turnaround succeeds, the group should see double-digit 2 Fast fashion and consumers’ perception of Primark’s products. earnings per share (EPS) growth and strong shareholder returns bolstered by a dividend and share buyback facilitated by a strong net cash balance sheet. Engagement We spoke with ABF in May and September to discuss Primark’s performance during Key issues: CONSUMER lockdown and the pandemic. While the group does not have an online offering, it CONSUMER 1 Successful turnaround of the Burberry brand to rejuvenate revenue performance kept its followers engaged on social media and its stores reopened to healthy footfall, 2 Sensitivity to recession or a prolonged move away from conspicuous consumption GOODS demonstrating brand loyalty. Primark is competing against other brands that provide GOODS 3 Supply chain oversight and transparency. both click and collect and home delivery services and this competition may be structurally more pronounced following Covid. Engagement ESG-related issues – green ESG-related issues – green We spoke with Burberry in May about the progress of the group’s turnaround. We ESG-related outcomes – blue In terms of fast fashion and the group’s supply chains, we engaged ABF in September ESG-related outcomes – blue also engaged Burberry in September to find out more about its oversight of its supply on its oversight and audit of these, given the problems with (unrelated retail chain) chain. The group has longstanding relationships with its suppliers who are located Boohoo earlier in the year. ABF believes it has one of the best supply chains in the globally. Burberry undertakes evaluation of its suppliers, all of whom must adhere to the retail business. Sixty per cent of the group’s cotton comes from sustainable sources – group’s supplier standards. The group conducts on-site visits and regular audits and also a high percentage in the retail sector – and it aims to attain 100% over time. The group has structures in place to manage supplier issues, should they arise. Burberry’s external undertakes regular audits of its suppliers and tracks performance over time. ABF advisory committee meets quarterly and works with Burberry on its supply chain and has put recycling centres at many of its UK and European stores and donates environmental considerations. Importantly, a percentage of all bonuses are based on any proceeds from recycling to Unicef. All in all, Primark is thoughtful about its role, business performance, a part of which focuses on sustainability. We asked the group ensuring that the ‘throw away’ culture is minimised, especially as consumers are more specifically about sourcing cotton from Xinjiang, China, where there are reports of forced environmentally focused now. ABF is working to make sure it has the right product labour being used in cotton production. Burberry states that it does not source cotton from offering and that its supply chain is robust. Xinjiang; most of the group’s cotton comes from the United States, Australia and India, as the group has particular quality requirements for cotton. Burberry’s goal, set in 2017, is that ABF’s grocery business (enzymes, lactose, yeast and emulsifiers) has seen strong demand all of its products would have at least one positive attribute by 2022. The group is setting in 2020. Ovaltine and Twinings, which have benefited from customers’ pivot to herbal specific targets for recycled products and for sustainable cotton and will disclose these next teas, have performed well over the last few years, but may see slower growth year. Burberry has a ‘no destroy’ policy for unused products – after several seasons, unsold if consumers start to downtrade. products are donated the charity SmartWorks.
Requests Requests During our conversations with ABF this year, we have asked the group to: We asked Burberry to increase its transparency on its supply chain and to actively • Increase its transparency on supply chains disclose issues that arise as well as how the group manages these. We also requested that • Increase the percentage of sustainable cotton it uses Burberry publish a materiality assessment which includes sustainability areas. • Report on how supply chain and fast-fashion issues impact group strategy and pay. Conviction – Decreased (due to the relative rerating of shares and underwhelming Conviction – Reduced (much of the hidden value in grocery has been demonstrated performance in China as compared to other luxury brands) and risks to the intrinsic value of Primark have increased given consumer habit changes around e-commerce)
46 47 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Emily Barnard Team17 Mark Wharrier Unilever Equity Analyst Fund Manager
Background: Background: • A small indie games company, developing and publishing its own-IP (intellectual property) • Multinational consumer goods company, headquartered in London • Shares in third-party IP through a ‘games label’ strategy. • Group brands include Dove, Hellman’s, Lipton, Persil, Toni&Guy, Ben & Jerry’s and Magnum. Investment rationale This business has the potential to achieve high growth with high margins and decent Investment rationale cash generation; a net cash balance sheet gives the group M&A flexibility. Unilever offers long-term sales growth which can return to 3–5% sales growth range driven by its emerging market (EM) footprint and improvement in its product mix which Key issues: is shifting towards Personal Care and Home Care and away from the lower growth Foods 1 Staff retention and Spreads brands. The business has a high FCF conversion and a more explicit approach 2 Lumpiness of revenue to returning surplus capital to shareholders. Unilever is trading at an unusually wide gap to 3 CFO change. global peers, which has the potential to close with improved execution from management.
Engagement & requests Key issues: CONSUMER During 2020, we spoke with Team17 to understand how the group is managing its key CONSUMER 1 Return to sales growth in the 3–5% range issues and get a better sense of the business. In terms of staff retention, the gaming sector 2 Food businesses in categories which are ex-growth (e.g. ice cream, mayonnaise, stock cubes) GOODS is a popular area and the group works to nurture talent while keeping young developers’ GOODS 3 Impact of internal reorganisation, management change and M&A; feet on the ground. Headcount is growing by double digits, with the group’s reputation share class unification and listed profile helping them to attract talent in a competitive industry. Team17’s 4 ESG reporting standardisation and climate change management. ESG-related issues – green Engagement Committee which meets quarterly to discuss the working environment and ESG-related issues – green ESG-related outcomes – blue communication, giving feedback to human resources. In an industry with a reputation ESG-related outcomes – blue Engagement for overworking employees, the group encourages developers not to work long hours. It We engaged with both the CEO and the COO during our meetings with the group in uses contractors to help manage workloads, as games deadlines approach. Team17 is January, June and August 2020. Our engagements during these meetings focused on: undertaking a formal employee engagement survey to understand the needs and thoughts • The changes Unilever made in 2019 in the top echelon of management when it was of its staff. To date, the group has had low employee turnover. trying to return to higher sales growth. • Unilever’s refinement in strategy to ensure country the manager’s discretion was being used Team17 has some lumpy revenue, as new games generate lots of new business but in the effectively to improve the group’s responsiveness and adapt to local consumer demands. second year after launch, revenue may drop. This links to the lack of visibility around • Its sales growth target of 3–5%. Accuracy and attainability of this target will depend on games releases. The group counterbalances this with new releases or versions of existing Emerging Markets (EM) growth and, importantly, on group execution. Unilever can make games each year, adding new content each time which should help smooth the revenue its products more available, drive usage, and employ smarter marketing rather than reset profile. As the business scales and each individual franchise becomes a smaller part of the prices. Big brands tend to be resilient in downturns and take share in the initial stages of whole, lumpiness of revenue and visibility around games releases should also become less recovery. All in all, Unilever’s emphasis is on profit and cash flow rather than mechanical of an issue. margin targets. • Unilever’s vote on share class unification. One listing would mean it could participate Team17 has some developments to undertake in terms of investing in internal processes in deals which make industry sense rather than bolting on transactions. and IT systems as it manages the rapid growth of its business, something we have • The group plans to divest from most of its Lipton tea business. The group will keep the confidence the new CFO will be on top of. best-performing parts of Lipton in the Indian and Indonesian markets, as well as its joint tea business with PepsiCo. Conviction – Increased Requests During our meetings, we requested that Unilever report on its ESG data in a way that can be comparable with other companies. We also asked that the group build on its existing management structures for environmental impacts to ensure it has the right approach to managing climate-related risks and opportunities across its business.
Conviction – Increased
48 49 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Mike Totton Domino’s Pizza Group James de Uphaugh Dunelm Fund Manager CIO
Background: Background: • UK master franchise holder for the American pizza group; has 1,100 stores in the United Kingdom. • Sells home furnishings in the United Kingdom.
Investment rationale Investment rationale Domino’s is a capital-light business with the franchisees owning and operating the stores. Dunelm is a high-return, cash generative UK retailer. It has around 9% of the home The group owns the supply chain, technology infrastructure and coordinates national furnishings market, which is highly fragmented, and about a 1% market share in furniture. advertising. Franchisees purchase the ingredients and supplies from Domino’s central Dunelm has transitioned from having a mainly out-of-town store portfolio to being a commissary. The business generates substantial FCF and trades relatively inexpensively more omni-channel retailer, highlighted by the relaunch of its website in November 2019. compared with international peers. The timing of the group’s shift has been well timed: it comes as customers are using their homes in multifunctional ways, due in large part to Covid. Dunelm has the management Key issues: bandwith and logistical expertise to take advantage of an opportunity when other retailers 1 Franchisee relationship; reacceleration of UK growth are retrenching, rather than expanding. The group’s close relationship with its supply 2 Substantial management changes chain also gives it flexibility to expand its exclusive product offering. 3 Unwinding international growth efforts CONSUMER 4 Pizza and health. CONSUMER Key issues: 1 Opportunity to gain market share with online marketing initiatives SERVICES Engagement & requests SERVICES 2 Shape of the economic downturn; average selling price at risk We engaged Domino’s several times during the year, including in March, May and August, 3 Supply chain oversight; carbon emissions. to discuss the group’s relationship with its franchisees which had broken down following ESG-related issues – green Domino’s attempted expansion into Europe. Domino’s lost their trust, partly by allocating ESG-related issues – green Engagement ESG-related outcomes – blue capital to growing its European business, instead of reinvesting the money domestically. ESG-related outcomes – blue During 2020, we engaged with Dunelm in June, July and September. In June and September, The group’s success depends on growing system sales; it is actively engaging with franchisees we focused on the group’s status post the pandemic outbreak and spoke with the Chairman to improve the relationship and seeking to agree a long-term growth strategy with them on remuneration structure. Dunelm had closed its stores and warehouse at the onset of the before taking the plans to the market. pandemic to ensure it could put in place safe working protocols. In September, we discussed the group’s results and its efforts to capitalise on what was a strong market, at the time. We also engaged the group on its changes at the helm. Domino’s has a new CEO, CFO and Chairperson, and has appointed experienced members (who are also female) to its board. In July, we spoke with Dunelm about its supply chain. Dunelm has a sophisticated audit The group’s board members bring extensive experience in quick service restaurant brands process for its Tier 1 suppliers and is extending this to Tier 2 in countries where there is a higher and food retail, including from Burger King, Taco Bell, Pizza Hut and Costa. A refreshed risk. The audit covers slavery, health and safety and working hours. Dunelm has a team on the board should also help relationships with the group’s franchisees. ground who help with the audit process by visiting its factories. Its UK warehouses are also audited. Dunelm is setting long-term carbon targets and measuring its carbon footprint. Going We engaged with Domino’s on capital allocation decisions encouraging the cessation of forward, the group will also review its cotton and timber with the view of purchasing these international expansion plans and to return to a UK-focused, cash generative, capital-light from sustainable sources. model in order to improve group returns on capital. Subsequently, Domino’s has announced its intent to exit international operations and has disposed of its Norwegian operations. Requests During our engagement in July about Dunelm’s supply chain, we encouraged the group to Another area of engagement has been around its corporate stores. Domino’s owns about 30 be more transparent on its sourcing for both raw materials and human capital. We asked stores which allow the group to experiment with things that franchisees might use to enhance Dunelm to publish more information on its carbon emissions, what steps the group takes operational performance but don’t have the time and money to trial. Generally, these stores are if a supplier contravenes its supplier code and any instances highlighted by whistleblowing not very profitable but they make it possible for the group to innovate. during the year. We also need to understand more about the group’s sourcing of cotton and timber, as information becomes available. In response to Dunelm’s question, we encouraged And finally, we engaged Domino’s on the healthiness of its menu. Domino’s says its pizzas are the group to return the £10m government wage support funding that it received during not masquerading as healthy. The group offers ‘healthier’ options in terms of thinner pizza lockdown earlier in the year. bases, low-fat cheese and vegan pizza options. Generally, consumers don’t opt for healthier options, as they understand that pizza is an indulgent treat. The average customer orders pizza Conviction – Increased five times per year.
Conviction – Unchanged
50 51 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Chris Field FirstGroup Ed Jeans Homeserve Fund Manager Equity Analyst
Background: Background: • British multinational transport group • UK-based multinational home emergency repairs and improvements business • Bus operations in North America, the United Kingdom and Ireland and Rail • Sells subscription-based home-assistance products in the United Kingdom. • Now in ‘Home Experts’ business with Checkatrade (United Kingdom), Habitissimo (Spain) and e-Local (United States). Investment rationale FirstGroup is a break-up story where the sum of the parts exceeds a £1.20 share price. Investment rationale Prompted by a strong new chairman who is keen to crystalise value, the company is Homeserve is well positioned to grow as it establishes further utility partnerships in the undertaking to sell its US businesses First Student and First Transit, a domestic public relatively underpenetrated US market. It is looking to grow customer numbers to more transit service. We think UK First Bus will shrink post-Covid to around 75% of its pre- than double the approximate $100m divisional EBIT achieved in FY20. Homeserve has Covid level but it should be more profitable. Investors have not attributed value to the expanded its offering in recent years to appeal to the additional 50% of the population group’s rail business, since it lost money on two problem contracts. The government is unlikely to purchase home-assistance products. If Homeserve can successfully monetise now set to pay a management fee to the rail operators given Covid uncertainties, which paying trades, it has a long runway of growth which should be reflected in the value of may reduce use of public transport systems, going forward. the group.
CONSUMER Key issues: CONSUMER Key issues: SERVICES 1 Covid and its impact on cash flow/indebtedness of the group SERVICES 1 Growth in the group’s core membership business in the United States 2 The sale process of the US businesses and the likely proceeds; board refresh 2 Success of the Home Experts business 3 What the rail and bus businesses will look like post-Covid in terms of contractual 3 Capital allocation ESG-related issues – green arrangements and network size ESG-related issues – green 4 Regulatory frameworks (particularly in the United Kingdom for insurance ESG-related outcomes – blue 4 Carbon emissions. ESG-related outcomes – blue pricing practices). Engagement Engagement We engaged with FirstGroup’s management on several occasions throughout 2020 to We engaged with Homeserve in April, May, June and July. During our meetings, we discussed understand the impact of Covid on the group’s business on its cash and debt levels. In the group’s plans to expand from 5 to 15 markets and how Homeserve plans to reap a similar September, we spoke with the Chairman regarding the sale of the US businesses and level of success in the US market that it has achieved in the United Kingdom. The group also about the group’s desire to refresh its board once the US businesses are sold. Our has set clear targets and milestones for its business strategy in the United States, so there is concerns that insufficient competitive tension in the sale process would result in low a well-established road map by which to gauge US growth. Homeserve boasts an 80+% client offers were assuaged. Furthermore, the simplified group will result in a significant fall retention rate across the group, pointing to its strong marketing platform. We also spoke with in central costs helped by the group taking a more decentralised business management the CEO of Checkatrade, Mike Fairman, to understand more clearly the group’s strategy for approach by empowering local managers. accelerating customer acquisition and what changes Homeserve had made since acquiring the business in 2017. We discussed capital allocation priorities across the group, as Homeserve When speaking with the group’s Chairman in September, we asked about FirstGroup’s is allocating capital to multiple ventures (Checkatrade, utility policy books, bolt-on M&A in transition to electrification to help reduce overall carbon emissions and the time HVAC (heating, ventilation, and air conditioning) and new market entry). it would take the group to put more electric buses on the road. FirstGroup is working towards this and would expect the move to take time. We have also spoken with Homeserve about how well positioned the group is regarding the pricing of its insurance products. The Financial Conduct Authority (FCA) has been looking at insurance products, specifically reviewing multi-year pricing increases and general Conviction – Increased transparency of contract terms; there may be regulatory change in this space along these lines. We have encouraged Homeserve to continue to be as transparent as possible in its pricing structures.
Conviction – Increased
52 53 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Mike Totton Essentra Tom Record Ionis Pharmaceuticals Fund Manager Fund Manager
Background: Background: • UK-based manufacturer and distributor of components, packaging solutions and filters • A biotechnology company; global leader in Antisense RNA therapeutics
Investment rationale Investment rationale Essentra’s three divisions (Components, Packaging and Filters) all operate in fragmented Ionis has spent more than 25 years developing Antisense RNA oligonucleotide therapies markets. Components, including caps, plugs and fittings, offers high margins and application which modify the expression of a gene and can halt disease. The company’s drug discovery across many sectors and is an area in which Essentra has substantial pricing power. In platform has created a wide variety of drugs including treatments for diseases originating Packaging, which consists of specialised cardboard packaging for pharmaceutical and beauty in the liver and the central nervous system; treatments in other tissues are being developed. customers, Essentra prints the package and leaflets and provides solutions for serialisation, The company targets diseases, such as Huntington’s, that do not currently have therapies. tamper evidence and labelling. Essentra also specialises in Filters (for tobacco) that are slim The knowledge and knowhow Ionis has in its platform makes new drug discovery cheaper, or flavoured and include filters for capsules. This division is driven by Asian demand. Essentra more predictable and less expensive. Since the development of blockbuster drug Spinraza, recently established a joint venture in China and is developing a biodegradable filter that Ionis’ culture is moving from validation of the technology to a more commercial mindset. won’t degrade the texture or flavour profile. Pre-Covid, the group was on the front foot in all three divisions, having materially improved operating performance and inflected towards Key issues: SUPPORT growth in all three divisions. SUPPORT 1 Continue spend on R&D platform to maintain productivity of new drug development 2 Using Akcea and other potential listed subsidiaries for commercialisation SERVICES & Key issues: SERVICES & 3 Cultural evolution and better partnership terms PHARMACEUTICALS 1 Margin expansion opportunity as Essentra leverages latent manufacturing capacity PHARMACEUTICALS 2 Cash flow preservation 3 Supply chain disruption with Covid; protecting facility workers Engagement ESG-related issues – green ESG-related issues – green We met with Ionis’ management team in February at the group’s headquarters in Carlsbad, ESG-related outcomes – blue Engagement ESG-related outcomes – blue CA. During the meeting, we asked Ionis to consider not using Akcea for further drug We met with Essentra in March, May, June, July and September to discuss the potential commercialisation. We believe that this separation of the R&D from the commercialisation for supply chain disruption at the group’s manufacturing facilities on the back of Covid. side was unnecessary. The historic rationale of keeping the company’s R&D ‘unpolluted’ We also wanted to understand how the group is safely managing its employees to avoid is less valid now that the technology is proven. Akcea, of which Ionis had a 76% stake, is shutting down these facilities. We spoke with Essentra about preserving its cash flow.The located in Boston. We suggested that the group’s R&D and commercialisation should be group didn’t rely on government subsidies to pay workers during lockdown, choosing to closely linked and that Ionis should not create more listed subsidiaries or put more drugs absorb the costs themselves. We engaged on cash flow; it raised £100 million to support its into Akcea, as the market perceives this as value leaking from its drug development pipeline. balance sheet and fund a £50 million acquisition. We had a positive outcome from these discussions when, in August, Ionis announced that it was buying back the minority stake in Akcea. Requests We made the following requests of Essentra: During our February meeting, we also discussed how the group’s culture is evolving. In • Acquire weak competitors to help consolidate the market. The group did go to the January, Brett Monia, Ionis’ new CEO, replaced the founder who became the group’s market in late September to raise money for future M&A. Chairman. Monia’s focus is on helping the business to maximise the value of its platform • Not to take furlough money from the government, as we felt this would hamstring now that the technology behind its platform is proven. We spoke about the group’s the group’s opportunities, going forward advancements in the scope of its platform and its treatment pipeline, both of which are • Focus on managing the group’s improvement levers. The group did make acquisitions hugely promising. and remained cash generative every month during lockdown. Conviction – Increased Conviction – Increased
54 55 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
James Dudgeon CDK John King Ideagen Equity Analyst Fund Manager
Background: Background: • Provides technology solutions to the automotive industry. • Mid-cap tech and software company • Provides governance, risk and compliance software solutions. Investment rationale CDK has low multiple, good growth targets, margin improvement and a change Investment rationale in management. CDK’s CEO, formerly at Intel, is investing more in the group’s tech Ideagen’s products are based on requirements that people need to fulfil each year, and improving the revenue growth outlook. providing predictability to the group’s revenues. Its organic growth rate should return post-Covid as the group adds new customers and services. The business is noncyclical Key issues: with structural drivers in that regulatory requirements will continue to need to be met 1 Complicated financial reporting and upheld. This requires ongoing, consistent training which helps drive predictability 2 Clarity on IT expenditure in revenues. 3 Improving relationships with smaller dealers; better customer retention. Key issues: Engagement 1 Key man risk in the CEO and Chairman; remuneration INFORMATION During 2019 and 2020, we spoke with the group four times and with the group’s CFO INFORMATION 2 Group’s transition towards software as a service (SaaS) twice. We discussed on each occasion the need for the group to make its financial 3.Financial rigour and transparency; change of auditor. TECHNOLOGY reporting more transparent. Lack of clarity on numbers makes it difficult for potential TECHNOLOGY investors to forecast the group’s future earnings. We also engaged on how the group Engagement and requests is improving its relationship with smaller dealers. CDK has been improving its When we spoke with Ideagen in September, we discussed the CEO’s instrumental role in ESG-related issues – green customer service and products to be more attractive to a wider range of auto dealers. ESG-related issues – green setting group strategy and the extent to which the group’s Chairman is involved in group ESG-related outcomes – blue ESG-related outcomes – blue decision-making. We also met (virtually) the group’s new Financial Director and learnt a Requests bit more about her background. We discussed the fact that the group had placed a share We asked the group to improve the clarity of its accounting to help investors see that price level requirement on LTIP awards, saying we didn’t feel it was best practice for the the business is growing with solid margins. During 2020, CDK offered some discounts executives to be incentivised on share price. to its auto dealers and increased its tech investment, which we approve of, but would like the company to be more transparent on the financial impact. These should be In terms of Ideagen’s movement to SaaS, we wanted to understand better how the group clearly highlighted on the P&L. is managing its transition away from licencing and support and maintenance services. Essentially, Ideagen is encouraging its customers to move from existing contracts to SaaS Outcome subscriptions, offering improved servicing to make the switch more desirable, as customers CDK is slowly making progress in communicating about its expenditures in a more roll off existing contracts. We also discussed the sustainability of the group’s M&A activity, transparent way. Management is also getting better about answering analysts’ questions going forward. From a financial rigour perspective, we encouraged the group to change its about the investments it is making to modernise its IT and new product development auditor at least every 10 years and to provide more clarity in its financial reporting. Ideagen has this on its agenda to review once Covid is past. Conviction – Increased Feedback/Requests During engagement, we made several requests, including: • Publish more information on risks and the management of these. (Ideagen provided greater detail on its risk management framework soon after our engagement in September.) • Publish a more financially literate annual report.
Conviction – Increased
56 57 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS 2020
Stewardship reflected in our Escalation of issues
What we mean by ‘escalating issues’ in engagement – Publishing details of how the group plans to meet a target Instances where we have escalated engagement We undertake hundreds of engagements each year. In 2019 and or goal (i.e. information on milestones and their link to 2020, these engagements have been driven by our prioritised pay and strategy) Company Date Topic Escalated engagement Outcome Impact on issues for each of our holdings, as determined by our materiality – The expected time frame around implementing our request conviction assessments and client-focused outcomes. Below, we lay out how – Publishing a materiality matrix/heat map showing we escalate our engagements (in terms of stages and objectives), where the group thinks that particular issue lies in Tullow Q 3/Q 4 2019; Board Asked for better experience on Company appointed board Decreased; when we escalate (situations that trigger escalation) and what the context of its other key issues Oil start of expertise the board with regard to fossil fuel members with no additional exited position we take forward with companies as a matter of priority. • Specify (again) why we want the group to take our recommended Jan 2020 extraction (Stage 2) Oil and Gas exposure steps; the importance of the issue to our clients and/or within the BP Nov 2019; Direct links Asked for better link between BP stated carbon reduction goal Decreased There is no difference geographically in our escalation processes, context of double materiality (the impact to the company itself Feb 2020 between long-term strategy, pay, reducing in Feb 2020; details of plan at (rising cost of capital as stages and reporting; these are the same for our UK, global, and the impact of its actions/products on others). strategy, pay carbon and transition to renewables. Capital Markets Day (CMD) in negative externalities in international and US equity strategies. and targets. Requested information on goalposts Sep 2020 oil and gas business are Situations that trigger escalation: Goal posts for for achieving net zero target by 2050 priced, manifested in How we escalate engagement • A company isn’t listening to our requests or hasn’t taken net zero target (Stage 2) increased investment in renewables at uncertain Stage 1 escalation enough action to change returns and reduced Naturally, there will be some engagements that are unfruitful, • We haven’t received enough information or assurance that the shareholder cash flow) particularly in the initial stages. Often, it is the case that we need group is managing to a satisfactory level a specific issue we’ve to repeat or gently push, with various company representatives, been engaging them on Associated May Fast fashion; Pushed group to increase percentage Group has improved overall Decreased specific changes or improvements that we’d like to see the group • Given certain situations with market scrutiny, we feel that British 2020 supply chain; of sustainable cotton; consider ways reporting on supply chain and (much of the hidden value Foods waste to mitigate waste from fast fashion; thought through issues on fast in grocery has been realised; put in place. Sometimes, escalation simply means undertaking we needed to do more work on particular issues with increase supply chain oversight; fashion (no-burn policy; more Primark’s intrinsic value is a deep dive into a topical area of potential risk, as we did in companies to ensure: consider online offering (Stage 1) to donations/recycling) more at risk as consumer 2019 with our mining companies and their tailings dams. – We have enough information to make a coherent judgement preferences favour on how the company is managing a specific issue e-commerce) Stage 2 escalation – We have the audit trail for information and engagement, Knights May Shareholding Risk that non-lawyer shareholder Group will include greater Increased Occasionally, we have to make a bigger fuss in engagement to if asked by our clients Group 2020 rule holds more than 10% of group’s clarity on this rule in their see if these changes are possible, let alone achievable. We do this • Despite repeated assurances by the group to make a change in (small cap) capital, which would violate quarterly updates by strenuously requesting and restating the rationale why the a certain way or direction, the company then takes steps which listing rules (Stage 1) changes should take place and stating that we expect to see progress. are in direct disregard to or in the opposite direction to the assurances they have provided to us Unilever June Reporting; Asked group to provide enhanced In progress Increased 2020 materiality materiality matrix and to report in Stage 3 escalation • New information suddenly comes to light in the press or with assessment standardised format on ESG data so In cases where escalating our engagement hasn’t worked, and our a market event (such as Covid) that directly challenges our their data are comparable with other requests remain not only valid but also pivotal to our investment investment rationale in a holding and which demands our companies. Also asked for improved thesis, we may threaten to divest if our requests are not heeded. immediate attention management of climate change risks In practice, instances of escalating engagement to this level and • A group takes an action that is out of character and/or in (Stage 1) threatening to exit are rare. direct confrontation to our positions on climate transition Central June Reporting on The group has made great progress H1 20 – sustainability-related targets Unchanged and/or inclusive growth. Asia Metals 2020 key issues; but can do more to outline its key for 2020, remuneration will be Tracking if issues are escalated (CAML) linking issue issues and link these to internal linked to achievements – these If issues are escalated, we note this in our proprietary system, The issues we escalate (small cap) management management structures. Asked for targets cover health, safety and MajHive, where we continue to track or work with the company Our engagement is driven by our key issues on companies. to pay clarity on how key issues link to pay employee welfare and development and define the part of the bonus that in general, as well as looking after and record any outcomes from escalation. (Please see our ESG integration steps on page 26 to understand how our links to health and safety, diversity the environment and communities key issues are determined.) Where these issues, especially as they and other ESG-related targets (Stage 1) close to CAML operations Our objectives of escalation develop over time, have an increasing impact on our holdings, When escalating engagement on specific topics, we: then we escalate the issues. This increasing impact – regardless of Rio Tinto Sep Heritage sites Asked for greater accountability Bonus payments partially withheld; Unchanged • State what exactly we’d like the group to do in terms of: whether it is due to exposure of a company to a particular issue or 2020 on heritage issues; improved risk Rio announced in Sept 2020 that management; asked for relationships the CEO and two others would step – Improved management of the issue/area (i.e. better because the topic itself has moved up the agenda with our clients with indigenous peoples to be raised down; group to include heritage management structures, auditing or reporting) – has a bearing on our investment thesis, dictating our escalation to level of health and safety for group sites on Health, Safety and – Linking issue management to pay, group strategy in engagement. (Stage 2) Environment (HSE) risk register
58 59 ENGAGEMENT HIGHLIGHTS 2020 ENGAGEMENT HIGHLIGHTS PROXY VOTING 2020 IN
Our collaborative engagement Climate Action 100+: In 2020, we undertook some collective engagement under the • We have engaged BHP, Anglo American, BP, Royal auspices of the IF and Climate Action 100+. These included: Dutch Shell and Unilever to discuss each group’s management of its respective management structures IF: around climate changes. • In May, the IF asked us about our preference for how SSP should treat its dividend. We engaged on how this Outcomes from collaborative engagement: treatment would be treated in a way that is in the best • Our discussions with companies that we approach interest of all shareholders. through collaborative means have fed into our materiality • Discussions with Ryanair in October 2019 in a group assessments for these holdings. investor session arranged and hosted by the IF. We • We are more aware of the spectrum of initiatives that discussed the independence of the group’s NEDs, changes are being undertaken in the ESG space. on the board, the group’s work with trade unions in its countries of operation and Ryanair’s carbon footprint. We followed up on this discussion with Ryanair in early 2020.
60 61 PROXY VOTING IN 2020 PROXY VOTING IN 2020
Stewardship in our
Example of a vote Tesco, 2020 AGM Proxy voting in 2020 against management Item Approve remuneration report How we voted Against Outcome Report was voted down by a majority of votes
We voted against Tesco’s remuneration report. Here, the RemCo had used Tesco’s peer We exercise our voting rights and responsibilities across all Monitoring our shares and voting rights group to determine part of the LTIP pay-out. They later removed Ocado from the peer of our funds, where we are permitted to do so by our clients, As stated above, we exercise our voting rights and group so that a significant amount of the award could vest (keeping Ocado would have regardless of geography. We believe that the voting of proxies responsibilities, where we are permitted to do so by our indicated Tesco’s performance was too low for the award to vest). We engaged with Tesco, should be undertaken by the same team that manages the clients. In 2020, we were not asked to vote differently from our saying that it was unusual for a TSR comparator group to be amended at such a late stage. assets and that voting is an important way of communicating proxy voting instructions to ISS. There have been instances in We also requested during engagement that the company require executives to retain with the investee company. Some of the engagements that previous years, however, in which we have been asked to vote a their shareholding for two years instead of one, after leaving the group. We felt this was we have with our holdings relate to our voting. Our voting segregated client’s shares in a partially or completely different necessary, particularly as the CEO and CFO were departing and any issues regarding approach is the same across all of our funds. way to our own voting position. Going forward, we anticipate unsecured loans in Tesco’s banking book might only become known after their departure. that there will be more requests of this nature from segregated Unfortunately, we did not have a successful outcome from this part of the engagement, Our voting policy clients, which we will follow and report on in terms of impact as Tesco did not agree to extend its post-employment shareholding by a year. Majedie’s voting principles are published on our website. and the proportion of shares affected in subsequent proxy This document governs our proxy voting for all of our funds; voting updates. our funds do not have their own voting policies. We retain the flexibility to make exceptions to our policy as we deem Stock lending and ‘empty voting’ Example of a vote against Barclays, 2020 AGM necessary. Rather than outlining stringent parameters, this We see stock lending as a practice that can dilute voting power a shareholder resolution Item Approve climate-related shareholder-requisitioned resolution (we voted against) policy allows us to take a flexible approach to voting, taking and lead to a reduction in our influence at company meetings. Item Approve company’s climate-related proposal (we voted in favour) into consideration the engagement that we have had with As such, our policy is not to lend stock. However, segregated Outcome Shareholder resolution was voted down by a majority of votes our holdings. We continue to work with our companies and clients may undertake stock lending, facilitated by their challenge them where we feel they could do better. custodian. When this takes place, we alert our clients who We voted against this climate-related shareholder proposal because the company tabled have stock out on loan ahead of a company meeting and it is its own proposal which ISS described as being similar in substance to the shareholder Our proxy voting instructions to ISS up to our clients whether to recall their stock. This approach, resolution. Approval of both could have created legal uncertainty. We therefore voted in Our voting guidelines with ISS are broadly that we vote in we hope, helps mitigate ‘empty voting’. favour of the company proposal, which received a majority of votes in support. line with ISS’ recommendation where ISS and management’s recommendations are in agreement. An exception to this Our voting activity/record is in the case of the approval of political donations and In 2020, we voted 100% of our shares where we were expenditure: in these instances, our policy is to vote against. authorised to do so by our clients. Our voting record is Example of a vote Alphabet, 2020 AGM In cases where ISS and management’s recommendations publicly available, 30 days in arrears, on our proxy voting that was withheld Item Elect Director Alan R. Mulally How we voted Withheld our vote are not in agreement, we make our own voting decisions on microsite at https://vds.issgovernance.com/vds/#/MjUwOA==/ Outcome Mr Mulally was successfully elected the investment team. We also scrutinise, in particular, the (This report includes the Withhold instruction which is recommendations of management and ISS for UK small cap combined with the Against instruction.) We withheld our vote on Alan Mulally as it was noted he had failed to attend at least 75% of holdings. Certainly, in every case, we can exercise our own his total board and committee meetings held during the year without an acceptable reason voting decisions and override ISS’ recommendations where Our voting rationales for the absences. We withheld our vote because we did not have the option to vote ‘against’, it is appropriate to do so. When voting, we provide a rationale when there is a as is the case for director elections in the United States. divergence between the recommendations from In terms of the practical steps of proxy voting, we provide management and those from ISS. ISS with a daily file containing firm-wide holdings and they facilitate our voting through their platform. Example of a vote that Tribal Group, 2020 AGM wasn’t in line with our Item Authorise issue of equity without pre-emptive rights How we voted In favour Clients’ voting preferences proxy voting principles Outcome Item received a majority of votes in favour Generally, our pooled and segregated funds vote in line with our voting policy. Occasionally, some clients for whom we run We voted in favour of Tribal Group’s issuing equity without pre-emptive rights, despite segregated funds request that we vote their shares according the fact that the amount of equity exceeded ISS’ recommended limit of 10% of issued share to their voting policies. While we feel it is important for fund capital. Tribal is a smaller UK company that offers education support services. We voted management and voting to go hand in hand, we review these in favour in light of the exceptional circumstances the company faced and our flexible requests on an individual basis and do accommodate clients’ voting approach enabled us to do this. requirements, as needed.
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2020 Proxy voting review
While the 2020 pandemic disrupted many of our face-to- executive shareholding requirement. Ultimately, we had a Executive shareholding requirements At the Chinese internet company Sohu.com, we withheld votes face meetings with companies, we continued to vote our positive outcome from this engagement as Morrison set We engaged several companies on their proposed remuneration on three directors because the company maintained a long-term proxies without interruption during the year, placing votes 2022 as its date for pension alignment and also decided to packages and had several positive outcomes from these poison pill which had not been ratified by shareholders. ISS noted electronically using our ISS voting platform. As with prior years, increase the shareholding requirement for its CEO from 250% engagements, supporting our decision to vote in favour. that the company neither acknowledged nor responded to the our voting covered a range of topics, including remuneration of salary to 300%. (A 250% requirement is still in place for fact that two directors had received a lack of majority support proposals, director elections, political expenditure items and other executives.) We voted in favour at the previous year’s AGM. Nor had the group addressed the shareholder resolutions. All in all, we cast 3,899 votes in 2020. At a consumer services company, the group lacked a post-cessation reasons why it had so many dissenting votes in 2019. We voted against shareholding requirement in its draft remuneration proposal. We continued to be active investors across the full life cycle In contrast, we voted in line with ISS’ recommendation to vote The group had also specified a shareholding level for executives We voted in favour of voting. During the pre-meeting period, for example, we against the remuneration policy at food retailer Greencore that we felt was too low. We engaged the group on both issues, At the UK smaller company Games Workshop, we voted in frequently provided feedback to companies on ways to improve where we felt pension contributions for the CEO and CFO were asking it to include a post-cessation shareholding requirement and favour of the re-election of a director who held other positions their proposals. During the voting period, we cast votes, excessive. The group also had no plan to bring executive pension also increasing the shareholding level for executives. We had a at small organisations that would not be overly demanding of as we deemed appropriate, in support of and also against percentages in line with what it pays its wider workforce. successful outcome from our engagement on these issues, his time. We also voted in favour as the director will be standing management. We also often engaged with companies after the as the group fulfilled both of our requests in its updated down from the board at the group’s AGM in 2021. voting period to let them know how we voted and why. Remuneration proposal, so we were happy to vote in favour. We voted in favour of the Chairman of UK smaller company The examples below provide a flavour of our voting activity Given the economic disruptions and volatility caused by the Gresham Technologies, against the recommendation of ISS. pandemic, many companies decided to reduce their executive One of our financial companies proposed reducing the shareholding during the year. guideline for its CFO. We engaged the group and requested Here, we felt that the Chairman was independent even though remuneration. However, some companies decided to carry on he had been awarded options in 2010. The Chairman could as if Covid had not happened, and this caused us some concern. that in the interest of executive and shareholder alignment, the Pension contributions group maintain the level of shareholding the CFO was required to have exercised the options after three years but had not. We continued to view the Chairman as independent. During 2020, investors and the UK corporate governance We voted against maintain. We had a positive outcome from this engagement, agenda focused on the percentage for pension contributions that At Ryanair, we voted against the remuneration report and as the company updated its proposal and the CFO’s required companies pay to their executives and to their workforce. Many the Remuneration Committee Chair, as the CEO had been shareholding level was left intact. Therefore, we voted in favour. Environment want to see parity between these amounts. At many companies, awarded a bonus equal to 92% of maximum opportunity for In 2020, climate change increasingly featured as a topic on parity already exists; in others, a wide gap still remains. FY2020. Governance – over-boarding company meeting agendas in the form of shareholder resolutions. and independence In instances where there is a gap, some companies have tried Another airline group issued a draft proposal to provide We voted in favour to tackle the imbalance with updated remuneration proposals, an ‘exceptional award’ level in a new LTIP, despite the We generally trust companies to select individuals to serve on As in previous years, we supported an environment-related while others have been slower to instigate change. At Majedie, current economic climate. We concluded this proposal their boards who have the time, the experience and the interest shareholder resolution at the American retailer Kroger, which while we have always made equal pension contributions in was inappropriate, not least because of the challenging to help the company perform at its optimum. When this does called on the company to assess the environmental impacts of our own business, we are less concerned with setting a hard circumstances in which both the company and the industry not seem to be the case, we may vote against a director. We are non-recyclable packaging used by the group. deadline for our investee companies and more interested in find themselves. Ultimately, this airline group removed the also interested in there being a sufficient amount of independence remuneration committees addressing this issue to try to find exceptional level of award from its proposed LTIP, following on boards, as we see this as an effective way of governing. At the same Kroger AGM, we also supported a shareholder ways forward. feedback from shareholders, including ourselves. resolution requesting the company to report on its ‘human We voted against rights due diligence process’ in its operations and supply chain. We voted in favour We voted in favour At Vodafone, we voted against a director who we felt was over- The company had recommended votes against on both items. We voted in favour of the remuneration policy of grocery chain We voted in favour of SSP’s remuneration report. This report boarded in terms of his time. The individual already held three Wm Morrison, despite ISS’ recommendation to vote against. was contentious because the group’s former CEO had received other external board positions, two of which were the roles of chair. We voted against The group had committed to – but not set a date for – reducing a bonus that lacked pro-rating for the time that he served on Barclays introduced its own climate-related commitments – the contributions received by incumbent executives during the board. The individual, whom we felt had made a valuable At the Finnish engineering and service company KONE, in response to a shareholder resolution – in which it set a target of their employment. ISS prefers companies to set a date by which contribution to the company, had received an extra three we voted against the full slate of directors which were up for net zero carbon emissions by 2050 and committed to align all of its any new policy takes effect; the IA also set a date of end 2022 months’ relative bonus payment which we did not think was re-election as a single item on the ballot. We voted against financing activities with the 2015 Paris Agreement. We supported for any new policy. While supporting Morrison’s policy, we a material amount of remuneration. The company explained because there was insufficient independence on the Board the company’s actions – and voted against the shareholder also engaged with Morrison’s RemCo chair, from whom that it had accelerated the former CEO’s departure to enable and Audit Committee. There was also considerable overlap resolution – as ISS recommended that the group’s commitment we sought clarity on policy development plans. During the new CEO to assume his role. Within this context, we in terms of membership between the Audit, Nomination and was similar in substance to the shareholder resolution and that engagement, we also requested that Morrison increase its voted in favour of the report. Compensation committees. approval of both could create legal uncertainty.
64 65 PROXY VOTING IN 2020 SUSTAINABLE DEVELOPMENT GOALS
Proxy voting statistics for our pooled funds Our investments’ support for the SDGs
Our proxy voting dashboard displays voting statistics, 30days All voting decisions, tailored to our client and fund portfolios, We are conscious of the interest that our clients and there is still wide range of reporting approaches in the ways in arrears, for Majedie’s pooled funds and can be accessed via continue to be available each month on My MajIQ to those the market have in the Sustainable Development Goals that companies talk about their support for the goals. In https://vds.issgovernance.com/vds/#/MjUwOA==/ with a log-in. (SDGs). We support the idea that companies are part of light of this, we have put together a chart to indicate which the global solution in helping to solve some of the world’s SDGs our top 20 holdings (by market cap) report on – and biggest problems. We certainly consider it beneficial when demonstrate support for – in their annual or other public companies are aware of and support the various SDGs reports. Going forward, we will consider other ways to report In 2020, we voted across their business practices and report on their support on the extent to which our holdings participate in achieving and efforts in achieving the goals. We also recognise that the SDGs.
across
Sustainable Development Goals 1 to 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Zero Hunger Zero Well-Being & Good Health Education Quality Equality Gender WaterClean & Sanitation Communities & & Production Consumption Responsible Institutions Strong & Justice Peace, Goals the for Partnerships (3,899) (274) No Poverty Energy Clean & Affordable Growth Economic Work Decent & Infrastructure & Innovation Industry, Reduced Inequalities Cities Sustainable Action Climate Water Below Life Land on Life unique proposals meetings
Company by market value as at 30/10/2020 Votes by instruction: 5% .02% UNILEVER PLC ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü • Votes For: 3,692 proposals (94.6%) TESCO PLC ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü • Votes Against/Withhold: 191 proposals (5%) 3I GROUP PLC 3i believes its approach aligns with the achievement of the goals through: systematic screening, investment in growth and strong governance. 94.6% .4% • Votes in which we Abstained: 15 proposals (0.4%) ASTRAZENECA PLC ü ü ü ü ü ü LEGAL & GENERAL • Other: 1 proposal: (0.02%) GROUP PLC ü ü ü ü ü ü ü ELECTROCOMPONENTS PLC ü ü ü ü ü ü ROCHE HOLDING AG-GENUSSCHEIN ü ü ü ü ü ü ü ü ü ü ü BAE SYSTEMS PLC ü ü ü ü ü ü ü ü RELX PLC ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü FEVERTREE DRINKS PLC Alignment with management SERCO GROUP PLC ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü 5% 95% ASHTEAD GROUP PLC • We voted in line with management ROYAL DUTCH SHELL 95% of the time PLC-B SHS ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü • We voted contrary to/against management AUTO TRADER GROUP PLC 5% of the time BOSTON SCIENTIFIC CORP ü ü ü ü ü ü ü ü ü ü WEIR GROUP PLC/THE ü ü ü ü ü ü ü ü ASSOCIATED BRITISH FOODS PLC ü ü ü ü ü ü ü ü ü ü ü HAYS PLC ü ü BARRICK GOLD CORP ü ü ü ü ü ü ü ü ü DAILY MAIL & GENERAL TST-A NV Statistics Source: ISS
66 67 SERVICE PROVIDERS SERVICE PROVIDERS
Stewardship and our Our service providers
Majedie subscribes to third-party research provision Oversight of service providers for ESG-related information. We monitor our service providers to ensure that they meet and MSCI and were able to query information and get our needs and our standards for providing services. In each immediate responses, as needed. ISS FactSet case, we meet with our dedicated account managers at least annually, but in practice our communications with On a minimum of an annual basis, we speak with our ESG We use ISS as a platform for voting our proxies. We receive We use FactSet’s application to perform consistent and each are ongoing. In every instance, our communication data providers to keep abreast of how they are developing background research and voting recommendations from scalable performance and risk analysis across all our is focused on ensuring that our service providers meet our and how the services they provide are changing. This is ISS for upcoming votes but we exercise complete discretion strategies. We input our portfolio holdings, market data and needs of clarity, transparency and the currency of the particularly true as new legislation comes into force on in terms of our voting decisions. This arrangement has risk models (using FactSet’s Barra risk models) to enable us information, analysis and detail they provide. fund- and strategy-level reporting. been in place since 2004. to measure active and total risk (including the decomposition of active risk by risk factor and stock contribution) across ISS and proxy voting FactSet and Bloomberg In January 2020, we asked ISS to support our proxy voting our funds and to undertake stress test reporting, where a We have annual reviews with ISS, as part of our microsite which provides a public record of our proxy range of shocks and historical scenarios, both positive and We monitor the services provided by FactSet and subscription, which provide an opportunity for us to Bloomberg. With FactSet, our monitoring is a continual voting decisions, over time. Voting records are uploaded negative, are run and analysed. flag issues with the service provider. In addition to these to this site one month in arrears. process. We have a specific account manager and dedicated reviews, we have engaged regularly with ISS regarding: consultant with whom we are in regular contact regarding In March 2020, Majedie also subscribed to ISS’ carbon Bloomberg • Our tailored voting policy for which we conduct FactSet’s product offering or specific system issues. This is data for our holdings so that we might be able to report spot checks a two-way communication system. Our monitoring covers more fully, internally and externally, on the carbon We use Bloomberg terminals in our day-to-day fund – Our tailored policy on not supporting political not only FactSet’s proprietary functionality; it also covers emissions of our holdings and at fund level. management operations. During the year, we have worked donations caused our default vote position to be set the system’s integration of third-party products such as risk with Bloomberg on its ESG offering, feeding back on what our against items that were designed to require more models which provide us with flexibility within a platform. needs are from an ESG data perspective and engaging with transparency on political donations. We were able Sustainalytics relevant teams on best practice in the ESG space. to identify this and alert our ISS contacts to make We also monitor the services that Bloomberg provides. In a correction within the custom policy 2020, this focused mainly on the ESG data that Bloomberg In June 2019, Majedie subscribed to Sustainalytics’ Our instructions to service providers provides and developments to this system. We fed back on • Our voting data controversial weapons list to uphold our exclusion We do not use ESG-related information from third-party several occasions on the types of information and data we of investment in companies involved in cluster research providers to inform our understanding of the – We have the facility to ask ISS about any proxy voting would like to receive as well as on the functionality of the munitions, anti-personnel landmines, depleted uranium key, material issues for our investee companies. While data figures that appear out of line with our own, information that would be most helpful to our stewardship- and biological and/or chemical weapons. Majedie’s we respect that some of the information may be used internal tally related analysis and reporting. This communication and controversial weapons policy is available on our website. as backward-looking data on compliance issues, we do • Carbon data monitoring are ongoing. not believe that it provides an accurate assessment of – We question ISS about information that doesn’t seem Actions we take if issues arise with our providers materiality of specific ESG issues to a company in terms correct with regard to the weighting, emissions level MSCI of level of exposure or impact, and certainly not within or benchmark’s carbon footprint. In such instances, From time to time, we have questions or issues around how In December 2020, we subscribed to MSCI’s ESG data the context of a company as a whole. This research is we have engaged ISS to ensure that we understand or what type of information we receive from our service service for the purpose of understanding more clearly ESG focused only and requires much greater context, we the carbon data and the methodological basis upon providers. When this happens, we engage with our assigned what our clients and other investors are being presented feel, to determine an accurate materiality matrix for each which it has been reported. contacts to improve the quality of the information or in terms of ESG information. As stated earlier, we do not company. Therefore, we undertake our own materiality reporting we receive. To date, we have not had an issue with use any third-party ESG scores to form any part of our assessment on our holdings, prioritising those issues that Sustainalytics and MSCI any of our providers that we needed to escalate. However, ESG integration process; our proprietary resiliency scores we see as being key to the wellbeing of the company, and As required, we follow up with our third-party ESG should that ever be the case, we would raise it with the line are based on our analysis of a company’s underlying issues linking directly our engagement with each company on its data providers to question a data point and/or a piece of managers of our assigned contacts, in the first instance. and their materiality on the longer-term performance of specific issues. information, if we feel that the information is not up to the group itself. date or there is a more accurate reflection of the data. This As such, we use ISS’ information to help inform our happens as and when questions over data arise. In 2020, proxy voting and keep us abreast of the carbon emissions we had good working relationships with Sustainalytics of our holdings and our funds. We use Sustainalytics’ information to adhere to our controversial weapons policy.
68 69 GOVERNANCE GOVERNANCE
Our Governance of Stewardship
Majedie Asset Management Ltd Organisation chart – Effective December 2020 Strategy and Oversight
Executive Chairman Chief Investment Officer Audit & Risk Conduct Dealing Diversity Fair Value Investment Product Remuneration Committee Committee Oversight & Inclusion Pricing Oversight Governance Committee Committee Committee Committee Committee Committee
CEO of MI CEO CEO Head of Clients CEO of MI Head of Clients Executive CEO CFO, COO CEO CEO CEO Chairman Chair Chair Chair Chair Director Chair Chair Chair Chair
Execution *Member of Management Group
CEO*
CIO* CFO, COO*
Dealing Investment Responsible Clients Legal Compliance Performance Operations Information Finance Capitalism & Risk
Senior Dealer CIO* Head of Responsible Head of Clients* General Counsel* Compliance Head of Operations IT Director* CFO, COO* Capitalism* Director, MLRO* Performance & Risk Director*
MI: Majedie Investments PLC
70 71 GOVERNANCE GOVERNANCE
Governance structure
Majedie has a long-established structure of oversight Investment Oversight Committee (IOC) Management Group and the Board Compliance and Legal teams and governance within our business operations which Our IOC is chaired by our CEO and comprises our COO, The IOC reports directly to the Board on a quarterly The compliance and legal teams sit within the second line attributes accountability for effective stewardship across Head of Compliance and Head of Performance and Risk. basis. This report comprises the minutes of the three of defence and test adherence to first-line controls. The our organisation. As with all aspects of our business, This committee meets monthly and reviews and oversees previous monthly IOC meetings and any additional heads of our legal and compliance teams report directly to we exercise first, second and third lines of defence our fund performance, attribution, transactions, position issues that require escalation to the Board. Where our CEO and form a line of defence for adherence to and with stewardship. sizing, risk parameters, market scenario stress tests and processes have not been followed or decisions cannot oversight of our stewardship activities. These teams: overall portfolio positioning. The IOC is an integral part be traced or audited, then this becomes an issue which • Approve all of our investment and marketing materials, Responsible Capitalism team of our second line of defence with regard to ensuring may impact individual annual appraisals. The IOC and including those for Responsible Capitalism, which Our Responsible Capitalism team comprises our Head correct and appropriate investment processes are followed the Board have the ultimate decision with regard to the set out our processes, report on our holdings and of Responsible Capitalism and our Stewardship Manager. by the investment and Responsible Capitalism teams. degree to which individual investment team members engagements, reflect our performance and represent This team functions as part of our investment team and Investment team representatives periodically report to – as well as the investment team as a whole – uphold Majedie to a range of stakeholders both domestically leads the group in terms of ESG integration, materiality the IOC, providing relevant information on our ESG Majedie’s stated processes, stewardship activities, risk and abroad. integration analysis to ensure that our investments, parameters and fund guidelines. assessment, engagement with regard to ESG topics, • Stay abreast of changes in regulatory requirements ESG-related reporting, ESG messaging and speaking conviction levels and ESG analysis are robust and evidence based. At all times, the IOC requires that our investment The Management Group is chaired by our CEO and regarding reporting on our stewardship activities decisions adhere to our ESG integration process and that comprises eight heads of department. It meets formally and specific characteristics of our funds, all of which The Responsible Capitalism team is responsible for are mainstream. implementing Majedie’s stewardship policies and for all decisions can be traced and/or audited through our on a weekly basis to assist the CEO in carrying out his ensuring the investment team has the proper tools, in-house IT systems. These systems house our company responsibility for the day-to-day management of the • Support the Senior Managers and Certification information and knowledge base for analysing our notes (tear sheets), proprietary scores for resiliency and firm. Majedie’s Head of Responsible Capitalism joined Regime requirements. These impact our CIO and holdings and drawing appropriate conclusions on conviction, engagements with companies, engagement the Management Group in January 2021 to provide fund managers in terms of knowing and understanding material issues. It is also responsible for ensuring the outcomes and trade rationales. stewardship-related oversight and to report on firm-wide all the material risks and opportunities that our investment team can engage effectively on these issues. sustainability and ESG issues. investee companies face from both macro and Historically, the IOC has focused primarily on micro perspectives. All new ESG initiatives and ESG-related policies and quantitative portfolio risks but in 2021 we will include • Work closely with our Responsible Capitalism/ statements are produced by the Responsible Capitalism ESG integration as a component of our IOC quarterly investment team to stay up to date with our investment team and must be approved by the CIO, the CEO or agenda. The IOC will be armed with relevant ESG-related approach of integrating ESG into our investment directly by our Management Group prior to publication information (such as resiliency- and conviction-level scores process and thinking (and verify that we do what and/or implementation. of fund holdings, fund-level carbon emissions statistics we say we do through specific ESG monitoring). and third-party ESG scores on our funds) to enable it to challenge and oversee effectively our investment processes on ESG integration and related topics.
72 73 GOVERNANCE GOVERNANCE
Governance structure
Specific issues we have encountered Resources and managed this year Our Responsible Capitalism function reports directly Currently, approximately 28% of our firm is female; women In 2020, there were issues that were challenging for us to the group CEO and is staffed by experienced ESG represent 15% of our investment team (which also comprises to manage. Here are some examples of such issues along professionals: our Head of Responsible Capitalism has over our Responsible Capitalism team). Females comprise 17% with details of our management approach: 20 years’ experience in establishing ESG platforms and of our Board and 22% of our Management Group. Our policies across multiple asset classes, while our Stewardship firm’s employees come from a range of cultural and Manager has more than 8 years’ experience with proxy ethnic backgrounds. voting, stewardship reporting and client communications. Issue Why it is important Specific problem How we managed it This team is currently working with our investment and We are working to increase the gender and ethnic diversity compliance teams to communicate better with clients on across the firm, but this is a gradual process because our In-house IT systems Facility for storing our materiality Develop the system to accommodate Used in-house and external our stewardship messaging. level of staff turnover is typically low (as is characteristic of assessments, key issues, engagements our structured approach to resource to design, develop and boutique firms). In 2020, we took the following steps to create and outcomes. integrating ESG into our test IT developments to make our The Responsible Capitalism resource sits with and is part a more diverse and inclusive organisation: mainstream investment process. ESG enhancements possible. of our investment team. It helps evaluate issue management programmes and activities of our holdings. To do this, the • Requested that headhunters provide a balanced list Responsible Capitalism team provides deep dives of our of diverse applicants Conviction score An important part of our Ensuring that a consistent We undertook ongoing training holdings from an ESG perspective, helps the investment • Anonymised CVs of applicants for roles investment process. This links methodology is used by the whole with the investment team on analysts identify and prioritise key issues and ensures these directly to our materiality investment team when considering individual, small group and issues are then linked to our engagement with holdings. • Regarding the industry-wide challenge of attracting assessments, engagements, outcomes conviction and assigning scores. entire team discussions. We also The Responsible Capitalism team also prepares stewardship more females to investment roles, our Next Generation and fundamental analysis of our Also ensuring that the changes in monitor and discuss outliers reports on engagement, engagement outcomes, ESG-related Investor competition (please see page 15) aims to build holdings. Also linked to our trading conviction link directly to trading. in conviction scores at weekly topical issues for client and public consumption and a future pipeline of applicants. This initiative was and weightings in the portfolio. investment meetings. The scores undertakes the administration of proxy voting. covered in the IA’s Addressing the Gender Pay Gap: have proven invaluable in helping Industry Initiatives (a report that showcased policies, to manage our portfolios from a Training programmes and procedures implemented and developed risk perspective and also ensuring Our Responsible Capitalism resource provides ongoing across the industry to tackle firms’ gender pay gaps). our portfolio weightings reflect training on ESG integration to our investment team as our convictions. well as to other departments within our business, such as However, we realise that these steps alone are not enough the client team and the compliance and legal teams. It has and we want to do more to foster a more diverse and inclusive developed in-house tools for the investment team to use organisation. Therefore, in 2021, we aim to: Approach to oil, gas and Our clients’ attitudes towards fossil Mixed views on our investment When investing in fossil fuel and/ to focus on the ESG issues for each company and to help mining companies fuels are changing and we need to team about the most effective or mining companies, we expect the team know the type of questions to ask companies • Create better structures to support diversity internally, ensure we are serving their needs way to manage our clients’ these holdings to demonstrate in relation to various material issues. This helps enhance including the adoption of diversity targets around in our investments. changing attitudes towards outstanding management and both the team’s understanding of the relevant issues as well gender balance and pay. Our vision is that by building fossil fuels, our companies’ reporting around their specific as promote our engagement with companies to promote female participation within investment roles, our increasing exposures to carbon climate-related issues. Where this best practice. industry’s gender pay gap will subsequently narrow risks and higher carbon is not the case, our conviction and close footprints in our portfolios. level is likely to decrease. Stewardship and diversity • Introduce KPIs at management level that promote Majedie is a boutique asset manager with 62 employees. diversity and inclusion We strive to ensure that Majedie is a vibrant and open • Link a member of our Board with our diversity and workplace. We embrace our differences and value diversity inclusion efforts. as this encourages us to question more deeply and explore all angles. We see this as being a crucial factor in the longer- term success of our own firm.
74 75 GOVERNANCE STEWARDSHIP
Stewardship in managing
Our stewardship resource going forward We will continue to assess the appropriateness of our an outsider would have. We don’t take a box-ticking approach Conflicts of interest stewardship-related resource. We are keenly aware that the with our companies and we feel that, generally, an approval needs and requirements of our clients are changing quickly system that depends on a predetermined list of requirements in terms of their expectations of engagement work with from an outside source would not enhance the credibility of Disclosure of conflicts of interest policy investee companies and in terms of our ESG-related reporting. our stewardship activities. Upcoming legislation (Sustainable Financial Disclosure It is central to Majedie’s culture that we always seek to do by conducting in-depth conflicts projects periodically which Regulation, EU Taxonomy, Paris Alignment, etc.) is also We also did not adopt an ESG integration approach that the right thing by our clients. As an FCA-authorised and involve engaging with the whole of our business, speaking increasing the need for ESG-related information and reporting is based on or uses third-party service provider ESG-type regulated firm, we also have a specific regulatory obligation with representatives of each of the teams at Majedie, to at both the holding and fund level. We have the flexibility scores (this is also referenced on page 68). We felt that this to take all appropriate steps to identify, prevent or manage increase awareness that conflicts of interest identification, to add resource, as needed, and will continue to monitor our was not appropriate in helping us understand each of our conflicts of interest. prevention and management is the responsibility of all staff resource needs as client thinking, reporting legislation and investments as a whole or in formulating, accurately, members. We also arrange a series of one-to-one meetings ESG evolve. our key issues for our holdings. Majedie has a firm-wide conflicts of interest policy which between compliance and a sample of employees from every sets out our approach to identifying, preventing and department to discuss, in detail, their business area and the Stewardship-linked remuneration managing potential and existing conflicts of interest across conflicts that may arise there in order to ensure that we are Rationale for and assessment of our chosen the business. This policy is designed to help employees confident the conflicts register is accurate and up to date. governance approach Historically, we have not linked specific KPIs for appraisal understand what a conflict is, explain their responsibility and remuneration purposes with our stewardship efforts. The oversight structures we have put in place to monitor, in relation to identifying and dealing with conflicts of Examples of managing conflicts review and evidence our stewardship work are functioning In 2020, we introduced KPIs for our investment team that interest and how the firm deals with conflicts as and when appropriately and effectively. We have chosen this approach focused on ESG integration into our investment process. they arise. Alongside this policy, Majedie’s compliance team In 2020, there were instances where Majedie managed because it leans heavily on the expertise of our internal teams, We also began to build into our annual appraisal system maintains a detailed conflicts register which identifies each funds or portfolios which held the securities of a client or allows us to move quickly and effectively for our clients, KPIs for ESG and stewardship for our CEO, CIO and existing and potential conflict that the firm has across the an entity related to a client, such as its pension scheme. reflects our independent thinking and supports our deep Head of Clients. For these management roles, the KPIs business and records the controls in place to prevent or Potential conflicts occurred when a proxy voting intention dives in terms of our stewardship-related research and relate to the degree to which each member of the team is manage them. Conflicts in the register are classified under was materially affected by the client relationship and it could engagement activities. keeping up to date with ESG developments, our clients’ one of three headings: have taken precedence over the investee relationship. In these needs and ensuring the ESG integration process is robust, instances, a fund manager could have supported, through as it pertains to each job function. voting, an unhealthy remuneration policy at the investee Our governance structures have been largely effective in 1 Conflicts between Majedie and its clients ensuring that our stewardship practices have impacted our company in order to maintain good relations with the client. investment thinking, our engagement with companies, reporting In 2021, we plan to continue the roll-out of stewardship- 2 Conflicts between Majedie employees and clients This could obviously lead to an outcome that is detrimental on these activities and in our proxy voting. They have been related KPIs across our business functions. These will be 3 Conflicts between clients. to the performance of the investee company that impacts the robust yet flexible enough to encourage our Responsible agreed at Management Group level and will be included portfolios of other clients. in appraisals at the financial year end. Capitalism platform to evolve and develop over the years. How our conflicts of interest policy applies to stewardship However, this conflict was avoided as our voting policy Importantly, our chosen governance structures have Targets for stewardship governance in 2021 requires that in these circumstances Majedie always votes allowed and supported development, not only in our We welcome and remain vigilant for any changes in our Our conflicts of interest policy seeks to identify, prevent or in line with the recommendation of its proxy voting stewardship activities, but also in our overall business governance structures that may help improve our stewardship manage conflicts, including those related to stewardship adviser, ISS. operations. We now look more specifically at how we, as activities as well as help us manage our own business better. and engagement. Our conflicts of interest register contains a business, manage our key, material issues in parallel with Going forward, we will consider: potential conflicts of interest relating to stewardship and our investments. engagement and details how they are either prevented • Including more individual targets in annual appraisals for or managed. our investment team and including ESG-related KPIs for the Why we did not choose an alternative method of rest of the business as it relates to various job functions accountability/verification Managing instances of actual or potential conflicts • Providing a more regular update to the Majedie Asset related to stewardship Management board on Responsible Capitalism We have actively chosen not to outsource any of our Majedie has always maintained a conflicts of interest stewardship-related practices, mainly because we feel that • Ensuring the IOC includes ESG reviews at each meeting. policy and register, which have included stewardship and the ownership, management and engagement of our holdings engagement-related conflicts. The conflicts register is a should all sit with the same team. As we have built our live document which is updated each time a new conflict or business around being client aligned and employee owned, we potential conflict is identified. A formal review of the conflicts have chosen not to use external verifications of our systems register is undertaken by the compliance team on an annual as we feel we have better oversight and interest in the efficient basis. Notwithstanding this, it is possible for the conflicts functioning of our stewardship platform and systems than registers to become stale. Majedie has sought to address this
76 77 STEWARDSHIP STEWARDSHIP
Our stewardship and ESG-related policies
Our policy review process Rationale for internal assurance Policy/Statement What it covers Our compliance and Responsible Capitalism teams work We have chosen to assure our policies internally as this together to monitor and enact regulatory output makes the most sense for our business. As a smaller firm, we Stewardship statement Our Responsible Capital/stewardship platform, covering: to ensure our policies are up to date with multiple are flexible, and our individual departments are in greater, • Our approach to ESG in terms of key risks and opportunities (financial and ESG-related) regulatory requirements. more immediate contact than perhaps is the case at larger • Privileges of share ownership and engagement firms. Our internal communications work extremely well • Exclusion of controversial weapons. In the autumn of 2019, our Responsible Capitalism team, and are not hampered by red tape and bureaucracy. We also in conjunction with our investment team and the CIO, have talented legal and compliance teams who are quick ESG integration statement How we see ESG integration: undertook a review of our stewardship-related policies to pick up on areas where changes need to be made and • Focus on key issues for each company by looking to see what was already in place. We updated who are keenly interested in keeping Majedie on the right • Engage on those issues the policies so they would be aligned with our evolving side of all laws and regulations, regarding all aspects of our • Analysis and engagement linked directly to conviction level which impacts approach to ESG integration and with our clients’ business operations. investment decisions. expectations for engagement, proxy voting and stewardship. During that time, we also published our statement on Our policies Shareholder engagement policy The critical role that engagement plays in our investment decisions: climate change which takes into account the exposure Our stewardship and ESG-related policies, updated in • Speaking plainly and specifically with companies that our investments have with regard to carbon and Q 4 2019, appear on our website at www.majedie.com • How and when we escalate our engagement with companies energy transition risks and opportunities. This statement and consist of our: • Collaborative engagement reflects the work undertaken by the Responsible Capitalism • Engagement reporting. and investment teams and was reviewed and approved by Majedie’s Management Group. Stewardship conflicts of interest statement Defines and provides details on how we manage conflicts of interest that relate specifically to our investments. Our investment team undertakes regular engagement with our holdings on the key, material issues we have Climate change statement How we integrate climate change issues into our investment decisions, determining the identified for each of our investee companies. materiality of climate-related issues for each company; our engagement on climate-related issues.
Our internal assurance of stewardship Proxy voting principles We believe that management, engagement and voting go hand in hand; outlines our proxy Internally, as stated above, our compliance, Responsible voting principles. Capitalism and investment teams work together to ensure that we are doing what we say we do in terms of Majedie’s response to the Majedie’s response to the United Kingdom’s Modern Slavery Act. stewardship-related policies and practices. Our stewardship- Modern Slavery Act related policies are internally reviewed and approved by our compliance team for accuracy and for transparency. All Controversial weapons policy Our policy on companies we exclude from our investable universe due to their involvement group policies are also approved by our Management Group with controversial weapons. and ultimately ratified by the Board. Diversity and inclusion policy Employees can access these on our internal IT systems.
Employee policies including those for Employees can access these on our internal IT systems. maternity and paternity leave, flexible working and other situations
78 79 STEWARDSHIP
Balanced reporting therefore, our investment decisions. To ensure that we report in a fair, balanced and understandable way, we: Therefore, we made several changes over the course of 2020, all of which have been covered in this report. • Require our in-house compliance team to approve all Briefly, they include: client presentations • Require sign-off from CEO, CIO, Head of Clients • Updating Majedie’s ESG and proxy voting-related policies (or similar) in addition to compliance sign-off for any group-related policies, including Responsible • Formalising the process by which our investment team Capitalism/stewardship integrates ESG and undertakes materiality assessments • Peer reviewed internally before releasing information • Linking our engagement with our prioritised issues for each company and tracking these outcomes • Strive to provide both the positive and negative sides in our performance reporting, stock specific examples • Linking all of our analysis on a company to our and engagement summaries. conviction level and trading • Including ESG-related KPIs in individual appraisals Our continuous improvement in stewardship • Engaging our clients on their ESG concerns Since autumn 2019, we have reviewed and updated our and outcomes stewardship policies and processes. Before making any • Training our investment team, CEO and CIO on changes, we found that the group’s policies didn’t fully ESG integration and messaging explain how the investment team structurally included • Enhancing our IT systems to facilitate our new the consideration of ESG-related material issues, nor how formalised approach. our engagements could impact our conviction levels and,
80 81 WELL-FUNCTIONING FINANCIAL MARKETS WELL-FUNCTIONING FINANCIAL MARKETS
Promoting well-functioning financial markets
How we look at systemic risks Systemic risks arising from climate change Climate change scenario testing As part of our portfolio monitoring and risk assessments upsetting sales, transportation and human movement. Our As a result of the disruption caused by Covid-19, we have In 2020, we began thinking about how to undertake for our funds, our performance team undertakes scenario investments were suddenly exposed to what were hitherto engaged our companies on their climate-related issues climate-related scenario testing more methodically for and stress tests which look at the impacts that past unimaginable scenarios. For many companies, revenue (details on these engagements are on page 33), as we see global our holdings. This includes analysing developments in: events have had on equities. The trends we examine over fell to near zero, causing concern over covenants, rental warming as an upcoming disruptor to business operations • Climate-related legislation specific time periods relate to portfolio characteristics and payments, salaries and loans. Over the course of the year, and supply chains (details on these engagements are on page 35). exposures. These tests, which are run on a monthly basis the pressures lessened and then increased as lockdowns We see systemic risks arising from climate change that • Market sentiment to heavy carbon emitters and reviewed by our IOC, consist of a range of shocks and eased and were reinstalled due to the virus. Many could impact, to varying degrees: • Cost of capital changes for companies with high historical scenarios, both positive and negative, using a companies, industries and sectors have not recovered from carbon emissions Barra factor-based risk model (via FactSet). These tests the impact of this. • The cost of capital • Life cycle assessment of a company’s operations, so that examine a spread of outcomes and changes over time, • Licencing agreements (e.g. for offshore drilling) carbon emissions from supply chain, product, logistics along with any counterintuitive results with their drivers, Examining our key issues at fund level during a year of global and R&D is also included in our considerations and help our investment team understand the risk profile pandemic, we see that some of the greatest exposures include: • Reduced demand for fossil fuels (Scope 1, 2 and 3 emissions). of the underlying portfolios. The investment team may cash reserves; exposure to covenants and/or payments; • Increased demand for renewables also run modelling of external trends as part of individual reduction in revenue; and employee treatment with furlough stock research. assistance, pay cuts and/or redundancies; and supply chain • New legislation favouring renewables over more We will report more on the outcomes of our climate change disruption. (Our engagements on supply chain management are traditional sources of energy (e.g. EU’s Green Deal): scenario testing as information on this becomes available. Rationale for our chosen scenario testing model found on page 35.) In 2019, we undertook a similar deep dive – Government subsidies for renewables We originally chose Barra as our stress testing platform on the safety of tailings storage facilities at our mining – Consumer preferences for renewables Our effectiveness in promoting well-functioning markets because members of our investment team (and founders) companies (a full discussion on which is included in our (e.g. electric cars) At Majedie we aim to continuously improve our ability to Responsible Capitalism 2019 report, available on our website). were familiar with the system from their time at Mercury/ – Enhancements on products that use renewables. identify and respond to market-wide and systematic risks MLIM (now Blackrock). As we developed as a business and As indicated in our engagements section, we have spoken at and also to promote well-functioning markets. length with our companies about how they have managed decided to use ‘best of breed’ systems and platforms, Barra Company-specific risks arising from climate change continued to meet that criteria. We still use the Barra model these issues over the course of the year. Our investment team does recognise and assess certain today as it provides us with a consistent metric over time, Many of our holdings have substantial carbon or climate- systemic risks, such as those stemming from climate change, is integrated with FactSet and is fully supported, by both We are preparing to report at fund level on our systematic related material risks which we believe contribute to commodity pricing and general market and consumer FactSet and MSCI, allowing us more easily to conduct the risks, as determined by the key issue we prioritise for our systemic risk within the financial sector/asset management. trends as part of our top-down and bottom-up investment required analysis. holdings at the stock level. Our in-house IT systems will We have started thinking about the best way to undertake process. We also aim to examine more systematically any allow us to undertake this type of analysis in 2021. scenario testing on climate change. As a first step, we potential impacts on our investee companies from climate Assessing the most material issues for our companies purchased carbon data on our holdings in March 2020 change, specifically, and to include this in our investment and have used this information to understand more about thinking, going forward. As part of our bottom-up process of identifying and the direction of travel for our holdings in terms of their prioritising key issues of the companies in which we invest individual approaches to managing their carbon risks and (a proprietary part of our investment approach), we can take opportunities. These risks frequently fall into the broader a top-down view of the broad issues to which our holdings categories of: demonstrate exposure. • Transition risk In 2020, some of the largest exposures that our portfolios • Physical risk demonstrated were related to the shocks inflicted by the • Legislative risk. global pandemic. Before the outbreak, the materiality matrices for our companies reflected a more diverse range of issues, including exposures to commodity pricing, management/governance issues, regulatory risk, climate change, supply chain and sourcing, M&A activity and cybercrime. Fear of the virus resulted in global lockdowns that sent a shock wave through businesses around the world,
82 83 ASSOCIATIONS AND COLLABORATIONS ASSOCIATIONS AND COLLABORATIONS
Our work with other stakeholders in Associations and collaborations
Majedie has worked over the course of the year to promote markets with other stakeholders, including those which Our role and effectiveness in industry-related bodies continued improvement in the functioning of financial focus specifically on sustainability and stewardship. Majedie has also worked with industry bodies to promote feel we have expertise to offer the market and can make continued improvement in the functioning of financial worthwhile contributions to the market as a whole. Topic Body Member Purpose/Goal Activity Effectiveness markets. We have undertaken this participation as we Examples of our participation include: since
Collective IF 2018 Enhance our collective Participated in collective Moderate – We undertake Sustainability- Member Purpose/Goal Activity Effectiveness engagement engagement with our engagements with: our own extensive related bodies since holdings. We see collective • SSP (June 2020) engagement with our engagement as potentially • Ryanair (August and holdings and the majority TCFD March Support the effort by companies Engagement with our holdings Moderate – Our engagements having benefit in situations October 2019) of the time this is fruitful. 2020 to publish information on how on how they address their with our holdings are ongoing. where solo engagements are • Aviva (July 2019) Our collective efforts, while they manage their climate-related climate-related issues as well as We have assessed and are less impactful. • Barclays (March 2019). helpful in moving the needle risks and opportunities in a the exposure that each has to addressing the climate-related slightly with our holdings, format which is transparent these areas. risks of our holdings. As part of also helped us to understand and can be used for comparative Encourage our investee our engagements, we are heavily the developments other purposes. We also plan to companies to report along TCFD encouraging our companies to investors were hoping to report along TCFD for our own guidelines to promote investor report in line with TCFD. achieve, as well. Through firm’s management of climate- understanding of the risks and our collective engagements related issues. opportunities within this space. with SSP and Ryanair, we were able to reiterate the Climate Action March Join a group of stakeholders/ Engaging specific holdings on Ongoing – We are active importance of a sound capital 100+ 2020 shareholders working towards the their carbon exposures and members of Climate Action 100+ raise (SSP) and the need for efficient management of climate- encouraging companies to have and have engaged with a number truly independent board related risks and opportunities better resiliency structures in of our holdings in connection members as well as carbon by investee companies. place and provide more with our membership. reduction plans (Ryanair.) transparent reporting on their These dialogues are ongoing. carbon reduction efforts. We will continue to engage on ESG/ PRI 2017 Demonstrate that our Hosted a webinar in Successful – We have helped In 2020, we undertook specific climate-related issues as part of Sustainability- commitment to ESG September 2020 in which expand understanding of engagement on this with BP, this group. related bodies integration is genuine and a PRI director participated ESG integration in terms of Anglo American, BHP, Royal to work with other like- as a panellist. materiality and how investors Dutch Shell and Unilever. minded investors. can think in terms of risks Presentations with PRI at and opportunities. We University of St Andrews support the PRI in particular Please see overleaf for examples of our participation (October 2019). by working with them in with financial industry bodies. educational presentations.
Collaborative IEN 2019 Connect with family offices, Moderate – We helped associations endowments and universities sponsor IEN’s annual in the United States. We conference in 2020 and support their learning more contributed to the discussion about how to integrate ESG of integrating ESG into into their principles and statements of investment directly in their investments. principles by universities and endowments. We continue to be a member of their working group.
IA July Be an active member of the Moderate – We support 2003 investment community the IA’s work and engage and share knowledge and with them on an ad hoc experience with others in basis to address industry our sector. issues (e.g. ESG reporting, categorisations for ESG involvement, etc.).
84 85 ASSOCIATIONS & COLLABORATIONS ASSOCIATIONS & COLLABORATIONS
Financial Member Purpose/Goal Activity Effectiveness Our work across these industry bodies has promoted the Impact of our collective participation on our business industry bodies since development of standards and legislation intended to By being an active player in the ESG arena, we have a better help market participants trade efficiently, understand the understanding of where the market is moving and how IA July Support and be active Our Head of Legal is a current Successful – We have nature and outcomes of their investments and promote quickly things are evolving. As such, in 2020 we: 2003 participants in our industry member of the IA’s Legal participated in a number the advancement of women and under-represented groups body/association. Committee, its Model Investment of efforts with the IA. Our • Ensured that we were on track and up to date with our within the financial sector. While we are pleased to report Management Association (IMA) participation in the IA’s own ESG integration, across our business (investment on our participation and efforts with these bodies, we Join a group of stakeholders/ working group and its Fund Legal Committee, in its IMA team, client team, compliance, legal, risk and shareholders working towards Governance Working Group, working group and in its Fund realise there is quite a bit more to do in terms of education performance team, etc.) the efficient management which has produced guidance Governance Working Group to the wider market on sustainability and ESG integration of climate-related risks on value assessments and will have all been successful in terms and we hope to be increasingly involved in these types of • Are moving forward on undertaking climate change and opportunities by reconvene in 2020 to review the of helping the group establish scenario and similar earth systems analysis investee companies. guidance produced in 2019. guidance and feedback. projects, going forward. • Are considering our fund offering to ensure it meets In June 2020, Majedie provided Our involvement with industry bodies is more advanced the changing needs of our clients comment to the IA on The for a group of our size, with AUM of approximately • Are making sure we have the ESG data we need to Markets in Financial Instruments £8bn. We have routinely participated and contributed Directive (MiFID) and The service our fund range directive on undertakings to work hosted by the IA or the FRC and have also for collective investment in participated in work undertaken by the IF and the PRI. • Understand that we have expertise to offer the market transferable securities (UCITS) Our aim is to continue our current level of support for in terms of ESG approach and product. requirements around sustainability these groups and choose specific areas where we can focus labelling of funds. In 2019, one our expertise for the benefit of the market as a whole. of our Client Communications directors was a member of the IA’s Stewardship Committee. Taking collective engagement further
Our COO/CFO worked with Instances in 2020 where we have participated in wider Direct2Fund initiative hosted discussions about ESG/sustainability/stewardship: by the IA to change the way • We have presented at conferences and spoken with subscriptions and redemptions take place for UK UCITS funds, pension fund trustees (along with other investors) to try to eliminate the need for the about integrating ESG considerations into Systematic manager (or a middleman) buying Investment Plans (SIPs) and ISPs and also about how the from or selling to the fund. market is moving in terms of ESG developments.
FCA Since we Support the industry’s (One of our Client Directors was a Successful – We have • We met with Guy Opperman, Parliamentary Under- began in regulating body member in 2018 of the Institutional supported the FCA through Secretary of State at the Department for Work and 2003 Disclosure Working Group, a working groups, responses Pensions, on 7 July 2020 to talk about the role of ESG and group set up by the FCA to support to their queries and in sustainability in pension legislation here in the United consistent and standardised their consultations. disclosure of costs and charges Kingdom.. In September 2020, we hosted a webinar in to institutional investors. which Minister Opperman was a guest speaker.
Majedie contributed to the Financial Reporting Council’s (FRC) consultation on the UK Corporate Governance Code and Stewardship Code in 2018.)
CFA UK Membership Support the financial sector’s In 2020, we continued to work Successful – We are working via qualifications body and assist with CFA UK and CFA US with the CFA on specific individuals with upholding and improving to determine how we could projects regarding ESG and industry standards. assist with specific projects and aim to assist with ESG-related research topics. education, going forward. We also aim to work with the In 2019, one of our Client CFA on diversity and inclusion. Communications Directors served as vice chair of CFA UK’s Inclusion and Diversity Network Committee.
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Stewardship Code 2020 Page(s) Companies referred to in this report Associated groups and legislation
Principle 1 12–17 3i Group 67 Gold Fields (GFI) 36, 41 Investment Association (IA) 13, 15, 64, 75, 84, 86, 87 Purpose, Strategy, Culture ABF 35, 46, 67 Greencore 64 Climate Action 100+ 13, 16, 32, 60, 85 Principle 2 70–76 Alphabet 63 Gresham Technologies 65 Governance, Resources, Incentives Anglo American 33, 40, 60, 85 Hays 67 EU Taxonomy 76 Principle 3 77 Ashtead Group 67 Homeserve 53 Conflicts of Interest Financial Conduct Authority Astrazeneca 67 Hotel Chocolat 35, 36 (FCA) 53, 77, 86 Principle 4 Auto Trader Group 67 Ideagen 36, 57 Promoting well-functioning markets: Aviva 84 Ionis Pharmaceuticals 55 Intentional Endowments • Systemic risks 82–83 Network (IEN) 16, 84 • Structure 82 Avon Rubber 35 Knights Group 59 • Associations 84–87 BAE Systems 36, 67 KONE 65 Investor Forum (IF) 13, 22, 60, 84, 87 Barclays 63, 65, 84 Kroger 65 Principle 5 78–80 Principles for Responsible Review and assurance Barrick Gold 67 Legal & General Group PLC 67 Investment (PRI) 3, 13, 22, 84, 87 Principle 6 18–22 BHP 60, 85 Marks & Spencer 35 Clients’ needs Blackrock (Mercury Asset Management) 82 Orange 43 Sustainable Accounting Standards Board (SASB) 28 Principle 7 Boston Scientific 67 Relx 67 Stewardship, investment, ESG integration: BP 33, 36, 59, 60, 85 Rio Tinto 59 Sustainable Financial • Client time horizons 20–21 Boohoo 46 Roche Holding Ag-Genusschein 67 Disclosure Regulation (SFDR) 76 • Issue prioritisation 28–36 • Service providers 68–70 Breedon 33 Royal Dutch Shell 33, 60, 67, 85 Taskforce on Climate-related Burberry 35, 47 Ryanair 60, 64, 84 Financial Disclosure (TCFD) 13, 16, 32, 85 Principle 8 68–69 Monitoring service providers CDK 56 Serco Group 67 Central Asia Metals (CAML) 36, 59 Six Flags 44 Principle 9 Service providers Engagement: Centrica 36 Sohu.com 65 • Approach 36 DFS 35 SSP 60, 64, 84 Bloomberg 28, 68, 69 • Case studies 39–57 Daily Mail and General Trust 67 Stock Spirits 36 FactSet 68, 69, 82 Principle 10 84–87 Domino’s Pizza 50 Team17 35, 48 Collaboration Dunelm 35, 36, 51 Tesco 45, 63, 67 ISS 13, 28, 62–65, 68, 69, 77 Principle 11 58–60 Electrocomponents 36, 67 Tribal Group 63 MSCI 68, 69, 82 Escalation Electronic Arts 42 Tullow Oil 59 Principle 12 61–66 Essentra 36, 54 Unilever 27, 30, 33, 49, 59, 60, 67, 85 Sustainalytics 68, 69 Exercising rights and responsibilities Fevertree 36, 67 The Weir Group 67 FirstGroup 52 Wm Morrison 64 Games Workshop 65
88 89 Majedie Asset Management, established in 2002, is an independent, employee-owned investment boutique that actively manages equities for institutional investors, wealth managers and endowments across a range of UK, US, global and international strategies.
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