Corporate Finance and Stewardship Report 2019 Responsible Investing 2 Corporate Finance and Stewardship Report I Corporate Finance and Stewardship Report 3
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INVESTMENTS Corporate Finance and Stewardship Report 2019 Responsible Investing 2 Corporate Finance and Stewardship Report I Corporate Finance and Stewardship Report 3 l. Contents Preface: M&G and the UK Stewardship Code 2020 . .4 Jonathan Daniels, Chief Investment Officer, M&G plc . .5 Introduction: Rupert Krefting, Head of Corporate Finance and Stewardship, M&G Investments . .6 Stewardship Stewardship overview: responsible investment at M&G . 8. Stewardship across Equities and Fixed Income . .10 ESG engagement . .12 Voting . .21 Remuneration . 26. M&G Real Estate . 28. Infracapital . 30. Other engagements and activities . .31 Corporate finance Corporate finance overview and activities . .39 Accreditations and initiatives . 42. The Corporate Finance and Stewardship team . .43 \ ' ·\ \ 4 Corporate Finance and Stewardship Report Preface: M&G and the UK Stewardship Code 2020 The UK Stewardship Code 2020 sets high stewardship standards for both asset owners and asset managers . The Code comprises a set of ‘apply and explain’ principles, but does not prescribe a single approach to effective stewardship . Instead, it allows organisations to meet the expectations in a manner that is aligned with their own business model and strategy . The 2020 code reflects the fact that the investment market has changed considerably since the publication of the first UK Stewardship Code in 2010, with significant growth in assets other than listed equity, including fixed income, real estate and infrastructure . These investments have different terms, investment periods, rights and responsibilities, and signatories to the 2020 Code will need to consider how to exercise stewardship effectively, and report accordingly, across asset classes . Of note, environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship . As both asset manager and asset owner, M&G is now reporting our stewardship activities in line with the 2020 Code . We are doing this in two ways: • Through our annual Stewardship Report, which highlights key activities from the previous year across Equities, Fixed Income, Property and Infrastructure; and • Through a static document, reviewed annually, that provides an overview of our stewardship approach as both asset owner and asset manager, and specifically outlines how we adhere to the Code . 2020 principles for asset owners and asset managers Purpose and Governance 1 Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society . 2 Signatories’ governance, resources and incentives support stewardship . 3 Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first . 4 Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system . 5 Signatories review their policies, assure their processes and assess the effectiveness of their activities . Investment approach 6 Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them . 7 Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities . 8 Signatories monitor and hold to account managers and/or service providers . Engagement 9 Signatories engage with issuers to maintain or enhance the value of assets . 10 Signatories, where necessary, participate in collaborative engagement to influence issuers . 11 Signatories, where necessary, escalate stewardship activities to influence issuers . Exercising rights and responsibilities 12 Signatories actively exercise their rights and responsibilities . Source: Financial Reporting Council, 2019 . Corporate Finance and Stewardship Report 5 Foreword At M&G our vision, put simply, is to become the best-loved and most successful savings and investments business, built upon our core values of care and integrity . By care I mean treating customers, clients and colleagues with the same level of respect we would expect for ourselves . And we invest with care, making choices for the long term . In terms of integrity, we empower our people at M&G to do the right thing, honouring our commitments to others and acting with conviction . Our business is built on trust . We are, first and foremost, stewards of our customers’ assets, and we take seriously the responsibilities that come with this role . Our responsible approach is long-term, and we encourage all our investment professionals to think creatively, act with conviction and work collaboratively to meet our customers’ changing needs . At M&G we have been serving individual savers since 1848 and continue to help millions of people to manage and grow their savings . We also work with financial partners around the world to help their clients build and manage their investments . We serve more than 800 institutional clients, such as pension funds and insurance companies . Meeting the expectations of this diverse client base means sticking to our principles; taking a responsible, active and long-term approach, which considers all the relevant financial and non -financial elements of our investments . Along the same lines, we encourage responsible practices in our investee companies through active engagement with company management, while using our votes to protect the interests of our customers as shareholders . Working closely with management of the companies in which we invest helps to ensure they are delivering the best possible long-term, risk-adjusted returns . This includes considering the environmental, social and governance (ESG) practices of those companies, where these issues can represent material long-term risks and opportunities . M&G is both an asset manager, through M&G Investments, and asset owner, through Prudential . At M&G Investments we look for the best opportunities to invest, across a wide range of assets, on behalf of people who care how their money is invested . Prudential is one of the UK’s leading life and pensions companies, and we help customers to manage their savings or to draw down against their long-term reserves . Many invest in our range of PruFund solutions designed to meet different customers’ needs for risk and return . This report provides an overview of the stewardship activities we have carried out over the past year, and demonstrates how we use our position as long-term, active investors to promote good practices at our investee companies . I hope you find it informative . Jonathan Daniels Chief Investment Officer 6 Corporate Finance and Stewardship Report Introduction Welcome to M&G’s Annual Corporate Finance and Stewardship Report for the year ended 31 December 2019 . Following the publication of the new Stewardship Code at the end of 2019, we have updated the format of how we report on our stewardship activities . While previously we only reported on those activities relating to listed equities, we have now expanded this to include our full range of asset classes . In addition, to reflect the make-up of our business following the demerger from Prudential plc in 2019, we will now report as both an asset manager and asset owner . Within M&G Investments, as asset manager, the Corporate Finance and Stewardship team has grown significantly this year, having recruited five new members to support our equity, multi-asset and fixed income investment teams and to focus on integrating ESG (environmental, social and governance) into our investment processes in an authentic way . As a result, during 2019 we made significant progress in integrating ESG across all of our investment processes . We have also developed new internal systems that allow us, for example, to easily quantify our ESG engagement activity . Some of our investee companies have, in fact, made it clear that of their investors, M&G is asking the most in-depth and searching questions on relevant ESG issues, such as climate change, deforestation, plastics or cyber security . We believe it is vital that we fully understand these issues and that companies effectively deal with these challenges, and consider it our duty as investors to hold them to account . Within those challenges, clearly climate change is the dominant systemic risk, and there is now real urgency for governments, companies and individuals to reduce carbon emissions . M&G currently raises the issue of climate change in meetings with investee companies, and in 2020 we will be reviewing company TCFD (Task Force on Climate-related Financial Disclosures) reporting, with a view to engaging with those companies that do not meet our expectations of progress . If we are not satisfied that investee companies are doing enough, then this will be reflected in our 2021 voting decisions . Corporate Finance and Stewardship Report 7 The Corporate Finance and Stewardship team supports and works closely with the Equity, Multi Asset and Fixed Income teams on a day-to-day basis, attending as many relevant meetings with the investment teams and their investee companies as possible . In this way, engagement with companies is fully integrated, which is also important in relation to voting . Ultimately, all investment and voting decisions lie with the fund manager, and the role of the