1 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | JANUARY - MARCH 2019 northernlgps.org WEXXXXXXXXXX ARE HERE NLGPS LAUNCHES RI POLICY

GREATER MANCHESTER / MERSEYSIDE / WEST YORKSHIRE STEWARDSHIP REPORT Q1 2019 2 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | JANUARY - MARCH 2019 northernlgps.org INTRODUCTION

ies we will ensure that the businesses in which we invest are both financially and environmentally sustainable, have high standards of governance and are RESPONSIBLE responsible employers. As far as possible the Northern LGPS will seek to invest in a way that is financially and socially benefi- cial for the North of England. INVESTMENT AT To put these aspirations into effect in January we launched our Responsible Investment Policy, and from Q1 2019 we have been undertaking a range of NORTHERN LGPS activities to begin exercising our collec- tive influence as investors. Every quarter we will issue a report detailing the work we are doing to implement the policy to ensure that NLGPS is transparent about and accountable for its RI activities.

NLGPS Stewardship Day NLGPS is one of the largest pools of pension fund GETTING In January over 70 people attended the capital in the UK. It has assets of STARTED inaugural NLGPS Stewardship Day at Aintree Racecourse in Liverpool where we launched the NLGPS Responsible We are focusing Investment Policy and set out our our stewardship approach to stewardship. The event was chaired by Councillor Paul Doughty and activity on major was attended by councillors, council holdings and staff involved with NLGPS, trade union overlaid with £46bn representatives and others. an ESG risk One of the event highlights of the NLGPS has made day was a speech by the journalist major investments analysis. James Bloodworth (pictured) who spoke in infrastructure. We started our Through the GLIL about his experiences of poor work- engagement joint venture NLGPS ing conditions in low-wage jobs in the programing this and Local Pensions UK including in an Amazon ‘fulfilment Partnership have centre’ (warehouse) and as an Uber in Q1. commited more than £1.8bn driver. These accounts form the basis of his book, Hired: Six Months Under- cover in Low-Wage Collectively Northern LGPS (NLGPS) factors can be financially material and, Britain. NLGPS represents one of the largest pools as such, should be part of the assess- has committed to of pension fund capital in the UK. It ment and monitoring of investments in make employment represents the interests of the Greater all asset classes. Achieving sustainable, standards one of Manchester, Merseyside and West York- long-term financial returns underpins the the major themes shire Pension Funds with assets under ability to pay pensions. A focus on ESG it will address in management of £46bn. These assets issues helps reduce risks to the Pool and its RI activities, are invested to fund the retirements of its beneficiaries. These risks might be so this talk was of hundreds of thousands of beneficiar- financial, such as the underperformance great interest and ies who live both within the North and or failure of an investee company, or generated lots of beyond. The Northern LGPS will always reputational, resulting from poor corpo- discussion. act in accordance the interests of those rate behaviour. Bob Holloway, Pensions Secretary for beneficiaries and we want our Respon- In addition, our beneficiaries live in the Local Government Association spoke sible Investment activities to make a a society that is affected by the behav- to delegates about regulatory changes positive contribution to our region. iour of investee companies. Therefore affecting the NLGPS. Other speakers Environmental, social and governance we expect high standards from those included Alan MacDougall from PIRC (ESG) issues are important to the North- businesses. Consistent with the Northern who discussed corporate governance and ern LGPS for a number of reasons. ESG LGPS’s fiduciary duty to our beneficiar- shareholder voting. 3 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | JANUARY - MARCH 2019 northernlgps.org INTRODUCTION COMPANY ENGAGEMENT

Our engagement approach

As set out in our Responsible Investment Policy, NLGPS seeks to engage both in its own right and in collaboration with others. In respect of our own engage- ment, NLGPS works with our responsible investment partner PIRC. This in turn involves a mixture of the ongoing engage- ment that PIRC undertakes with compa- nies throughout the year, focused NLGPS engagement and activity taken through our participation in the Local Authority Pension Fund Forum (LAPFF). We believe that engagement needs to be backed up by robust voting and NLGPS member funds have sought to retain maximum authority to direct their own voting. Each quarter we will provide information on engagement activity. NLGPS discloses its voting on all companies online two days Action on tailings dams ahead of meetings (see later story). Institutional investors, led by the Church of England and Swedish NLGPS attends its first AGM Social media companies Council of Ethics of the AP funds, have begun a large-scale initiative In mid-March our outgoing chair Paul Following the tragic event in Christch- to prevent the further collapse of Doughty attended the AGM of Chemring urch in New Zealand in March, where tailings dams. The initiative stems PLC, marking the first time we have 50 people were shot dead by a far-right from the collapse of the Vale tailings attended an annual meeting in our terrorist in attacks on the Al-Noor Mosque dam in Brumadinho in late January. own right. As part of our stewardship and Linwood Islamic Centre, there has The Church of England convened a approach, we have focused our initial been renewed focus on the responsibility meeting of companies, investors, public equity engagements on companies of social media companies. In particular industry groups and industry experts where NLGPS has major holdings, over- Facebook was subject to severe criticism on 4 March to discuss the causes laid with an ESG risk analysis. for failing to prevent the terrorist live- of tailings dam failures, and a letter Collectively NLGPS holds more than streaming the attack. has been sent to mining companies. 5% of Chemring’s outstanding shares. In response, the New Zealand Crown- LAPFF has been closely involved Tragically, last year one worker was killed Owned Investors, led by the NZ Superan- and has played an important role and another injured in an explosion at nuation Fund announced a collaborative in engaging with community repre- the Chemring Countermeasures facility engagement with social media companies sentatives. near Salisbury. In addition we were aware to strengthen controls to prevent the live that the company experienced a signifi- streaming and distribution of objection- cant level of shareholder dissent against able content. The New Zealand investors a number of resolutions at its 2018 AGM. leading on this include the Accident they ask the companies to report on how We were pleased to hold a very Compensation Corporation, Government effective their policies are to manage productive meeting with both the chair- Superannuation Fund, National Provident risks posed by controversies over the man and chief executive after the AGM at Fund and Kiwi Wealth. All three members governance of online material. This which we discussed issues such as safety, of NLGPS have agreed to back the initia- includes election interference, fake news, diversity and workforce engagement. tive, which is also being supported by hate speech, threats to democracy and Whilst much of our engagement will LAPFF. The engagement will initially freedom of expression and human rights not be tied to AGMs, given the size of our focus on Facebook, Alphabet, which abuses. So these resolutions provide an holding we felt that it was important to is the parent company of Google, and avenue for investors to indicate concerns attend in person in order to demonstrate Twitter. to these companies through the ballot our commitment to working construc- There is also a related engagement this proxy season. tively with companies where NLGPS is a running in the US with shareholder major shareholder. We intend to attend resolutions being put for the third year other AGMs where we feel this will be running, to the annual meetings of Twit- beneficial. ter, Facebook and Alphabet on objection- NLGPS also initiated engagement with able content. These have been filed by two more of its major holdings during Q1. New York State and Arjuna Capital and 4 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | JANUARY - MARCH 2019 northernlgps.org THEMATIC PROJECTS

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In the frame: Housing is now a high profile political issue

in which they operate. previous structural changes to the econ- House-builders Set against this backdrop, NLGPS omy. Therefore we believe it is vital that and ESG decided to undertake an engagement the future changes to the nature of the programme with the UK’s listed house- economy that are likely to be necessary to standards builders. A review of UK listed house- tackle climate change take account of the builders has been undertaken examining regional employment effects. We believe their approach to issues such as climate that this fits well with the well-defined One of the thematic projects NLGPS has change reporting, delivering affordable regional focus of NLGPS. initiated in Q1 is research and engage- housing and employment contracts in an In February members of the NLGPS ment in relation to house-building industry known for subcontracting. This team held initial discussions with Nick companies. There is now broad consensus has already generated some interesting Robins (pictured) of the Grantham Insti- that the UK faces a severe housing crisis. results and ideas about where some of tute to discuss how Many believe that we are not building the gaps in current practice might be. In we can start build- enough new homes while both main the coming months the NLGPS will be ing a Just Transition political parties have set ambitious engaging UK house-builders on our find- element to our work targets. In addition a lack of afford- ings, praising good practice and where on climate change. able housing, particularly in some new necessary pushing for improvements. Potential employ- construction projects, has also been a ment changes in the subject of controversy. As a result housing North, and Yorkshire is now viewed by the public as one of the Investing in a Just Transition in particular, already feature in some of most important issues facing the country. the early work the Just Transition team is This focus brings with it huge oppor- One of the elements of the NLGPS RI planning, so there is an overlap with the tunities for the house-building industry. policy that may become increasingly region in which many NLGPS beneficiar- However, it also has led to growing scruti- significant in future is our interest in ies live. ny of the way that house builders operate encouraging a ‘Just Transition’ to a We will be working with Nick and which could have a material impact for low-carbon economy. The Just Transition colleagues more over the year. We are investors. Many of these concerns overlap initiative is built around the importance already starting to factor Just Transition with Northern LGPS’s responsible invest- of engaging with the social aspects of into our engagement work, and it may ment priorities, including its focus on the climate change also have implications for our growing environment, executive pay, employment There is a significant regional aspect to infrastructure portfolio. We also look standards and practices and companies this work. Unfortunately some communi- forward to working with other LGPS being a force for good in the communities ties in the North have suffered during funds on this agenda through LAPFF. 5 NORTHERN LGPS QUARTERLY STEWARDSHIP REPORT | JANUARY - MARCH 2019 northernlgps.org THEMATIC PROJECTS POLICY AGM ACTION IN Q2

Stakeholder engagement Voting The Big Tent at Amazon At NLGPS, we are acutely aware of the transparency One of the most interesting importance of taking other stakeholders AGMs of the US season is on into account when we look at investee 22nd May. Online retail giant companies. The Shareholder Rights Direc- Since the financial crisis there have been Amazon.com is facing a slew of tive sets out that shareholders should increasing demands for institutional communicate with other stakeholders in investors to be accountable in relation to shareholder proposals tackling investee businesses, and we believe that their engagement with companies, and a range of ESG issues. In total over time there will be growing expecta- this has been formalized in the Steward- 12 resolutions are on the ballot tions of investors in this area. As such, ship Code in the UK and equivalents including 9 from the ‘Big Tent’ NLGPS is building stakeholder engage- elsewhere. initiative. These cover issues ment into its Responsible Investment A core element of this accountability including management of food activity, in company-specific, thematic has been the expectation that investors waste, use of facial recognition and policy work. We were very pleased disclose their voting record. Although a technology, the need for an to undertake some initial stakeholder number of asset managers still decline independent chair and gender engagement meetings during Q1, and we to do so, most of the largest do make pay equity. One of the most plan to report on our stakeholder engage- this information publicly available as do interesting proposals has been ment activities on a regular basis. a growing number of asset owners. All filed by Amazon Employees for NLGPS member funds have disclosed Climate Justice which seeks a their record for a number of years now. company-wide plan on climate Employee voice in When NLGPS considered how to change. NLGPS intends to corporate governance approach this issue we looked at best practice worldwide. A growing number support the ‘Big Tent’ proposals. The importance of giving employees a of investors disclose how they will vote voice in the governance of business is on certain resolutions during the year. In an important aspect of the revised UK addition some of the largest public sector Corporate Governance Code, which came pension funds, CalPERS and CalSTRS, Exxon feels the heat into effect from 1 January 2019. Giving make all their votes available in advance employees a greater say is also an objec- of meetings via their online disclosures. Oil giant Exxon Mobile Corp. tive that NLGPS supports. Given our similarity, both in member- faces a battle with sharehold- In February we were very pleased to be ship and orientation on ESG issues, to able to meet with Amanda Hillerby, the US public sector funds NLGPS felt that ers at it’s AGM on 29th May. employee director at Mears Group, to talk it should align with its global peers. As The New York State Common about her experiences since joining the such voting decisions on all stocks are Retirement Fund and the Church board last summer. NLGPS has a holding now publicly available via our online of England are voting against in Mears Group and we believe we are the voting disclosure site two days ahead of all Exxon directors and have first shareholders to talk to Amanda since the relevant meeting. urged other shareholders to do her appointment to the board. While we believe that NLGPS is the same. The funds, which are With respect to the public policy currently the only institutional investor part of the Climate Action 100+ aspects of workforce engagement, NLGPS in the UK to pre-disclose all of its votes in group if investors say Exxons was also pleased to have a discussion this manner, we expect that over time this inadequate response to climate with the TUC about its views on employ- will become standard practice. change is a serious governance ees in governance. Unions have argued failure. NLGPS members are that employees should be able to elect part of Climate Action 100+ and directors from the workforce rather than intend to support the call for companies choosing alternatives such as action. nominating an existing non-executive to engage with the workforce. NLGPS has already raised employee representation at board level as a topic in its company engagements and will continue to do so during 2019. Our experi- ence to date has been that a number of companies prefer the option of nomi- nating an existing NED to appointing employees to the board. Abstain

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6 NORTHERN LGPS QUARTERLY STEWARDSHIPFor REPORTFor | JANUARY - MARCH 2019 northernlgps.org Q1 VOTING OVERVIEW

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Abstain Abstain Votes on remuneration policy, Votes on remunerationOppose reports, Opposition to auditors by firm Q1 2019 Q1 2019 Oppose Oppose For RSM 1 Deloitte For For Abstain PwC Abstain For Abstain 10 RSM Abstain17 For 28 13 11RSM RSM 63 PwC Oppose Oppose EY PwC PwC 32 KPMG For For KPMG KPMG Grant Thornton

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Auditor appointments, Q1 2019 DirectorAbstain elections, Q1 2019 RSM Withhold Withhold Abstain Withhold 47 Oppose PwC Abstain WithholdFor Withhold127 Withhold Withhold 37 70 Abstain Abstain OpposeFor KPMG Abstain Abstain Abstain Abstain 372 Oppose Oppose Grant Thornton Oppose Oppose Oppose Oppose For For EY For For For For The entire NLGPS voting Deloitte Abstain record, disclosing all votes on all resolutions at all Oppose companies, is available

For Oppose For online in a searchable 94 1046 database. RSM Withhold Withhold PwC bers also voted on 57 remunera- are expected to play in ensuring Q1 review: NLGPS policy focuses on tion policies, in which case theAbstain vote the veracity of companies’ financial Abstain excessive pay, director independenceKPMG is binding. More than half (33) of reporting, votes on their appoint- Oppose Oppose and tackling potential auditor conflicts these policies were opposed, with ment are an impact accountability Grant Thornton NLGPS abstaining on a further 13 mechanism. Investors are increas- For and voting for 11. ingly wary of auditors undertaking For EY NLGPS members voted at 318 held votes. It is a deliberate strategy to significant amounts of non-audit meetings during Q1 2019. In its The most common reason take a particularly robust position work, because this may prejudice Deloitte role as responsible investment for opposing or not supporting a on remuneration policy votes their independence, and expect adviser to NLGPS, PIRC was in board director’s re-election was since these are both binding and firms to be rotated for the same contact with 121 companies where because of concerns about inde- forward-looking. If shareholders reason. Where companies breach votes were cast during the quarter, pendence. This might result from do not challenge inappropriate these expectations, NLGPS will and in 23 cases this led to further a non-executive’s financial links features in remuneration policy oppose their appointment. dialogue. In six cases this lead to to the company, excessive board these can be locked in for several During Q1, NLGPS members changes in voting decisions ahead tenure or other factors.Withhold Some years. opposed justW underithhold half (47%) of of the meeting. directors were opposed due to Opposition to both remunera- all auditor appointments, voting for By nature of the fact that in failure to attend boardAbstain meetings. tion policies and remuneration re- around a thirdAbstain (35%) and abstain- most markets multiple directors A lack of board diversity has been ports results from an assessment ing on the remainder. Auditors Oppose Oppose face election at every AGM, direc- another factor. of both the structure and scale undertaking significant amounts of tor election resolutions are by far Turning to executive pay, during of reward. NLGPS members will non-audit work was an important For For the most common. During the first Q1 NLGPS members voted on 117 oppose company policies where factor. In terms votes on specific quarter, NLGPS voted on the elec- remuneration reports or similar total awards available are deemed audit firms, of the Big Four, it was tion of 1592 directors. In total, 66% advisory votes on pay. In total to be excessive. Voting policy takes EY that attracted the most oppose of directors were supported, with NLGPS voted for 54% of the time, a much broader view of pay than votes, followed by PwC and KPMG 23% opposed. In the remainder of opposed on 32% and abstained on basic performance linkage. with Deloitte far less likely to be cases NLGPS abstained, or with- the remaining 14%. NLGPS mem- Given the vital role that auditors opposed.