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Environmental, Social and Governance (ESG) Wrap

Key ESG issues making headlines this month are:

* Rio Tinto’s climate change resolution marks a significant shift in investor culture
* Obesity and Nutrition: How are Australia’s largest food and beverage manufacturers performing?
* Finance: UK Government calls on top pension funds to disclose climate risks
* EU Commission approves Bayer’s acquisition of Monsanto
* Florida shooting – will things change for the better in the US?

Rio Tinto’s climate change resolution marks a significant shift in investor culture

Three large institutional investors Local Government Super Fund, the Church of England Pensions Board and Seventh Swedish National Pension Fund co-filed a shareholder resolution with the Australian Centre for Corporate Responsibility (ACCR) at Rio Tinto’s Annual General Meeting in April.

The resolution requested that Rio review and report on its membership of industry associations such as the Minerals Council of Australia (MCA). The MCA’s pro-coal political lobbying has been noticeably in conflict with the viewpoint of Rio, which publicly advocates for measures to reduce carbon emissions in line with the Paris Climate Agreement.

Rio’s board recommended that shareholders vote against the resolution, however, 18.3% of shareholders voted in support, and more than 20% including abstentions (this is a large percentage when talking about shareholder resolutions).

So what?

Over the last few years we have seen the number of shareholder resolutions put forward to ASX companies rise steeply.

We have historically taken the view that the most constructive and effective form of shareholder activism is the direct communication we have with companies either through our meetings with company directors or the letters we write to them. Lodging of proxy voting is extremely important but should occur concurrently with this engagement.

However, if we are not satisfied with progress being made or wish to send the company a message then we may decide to vote against or abstain on a resolution.

In the case of Rio, we decided to abstain on the above resolution to signal the importance of this issue for shareholders. It is important that companies are transparent and consistent in their approach to climate change and are not ineffectively using shareholder funds for industry associations that lobby against climate action.

Read more about shareholder resolutions in our latest Corporate Governance report

Obesity and nutrition: How are Australia’s largest food and beverage manufacturers performing?

Following on from their report earlier this year on the nutrition policies of Australia’s supermarkets, Deakin University’s Global Obesity Centre (GLOBE) has ranked the obesity and nutrition-related policies of Australia’s largest food and beverage companies.

The report, ‘Inside our Food and Beverage Manufacturers’, assessed 19 food and beverage manufacturers, representing 53% of the market share of packaged food manufacturers and 72% of the market share of non-alcoholic beverage manufacturers. Companies were assessed in terms of corporate strategy, product formulation, nutrition labelling, promotion practices, product accessibility and relationships with external groups.

There was a high level of variability in the performance of these companies, with scores ranging from just three out of 100 (Parmalat) to 71 out of 100 (Lion Dairy & Drinks). The research found that most companies had some form of commitment to addressing obesity and nutrition concerns but there was still considerable room for improvement by all.

So what?

As well as significant social costs, obesity and poor nutrition have a negative impact on the economy in terms of placing time and cost pressures on the health care system and also through lost productivity (e.g. sick days).

Food and beverage manufacturers are one of the key players in determining how good, or bad, the general population’s diet is and, as a result, will continue to face scrutiny as the cost of obesity rises.

A key finding was that voluntary actions around marketing to children are “ineffectual”. If the food and beverage industry fail at self-policing in line with society’s expectations, there is a risk of government regulations being imposed and a higher transition cost than had the industry self-regulated.

AMP Capital is a signatory to the Access to Nutrition Index (ATNI), a global initiative which rates the world’s largest food and beverage companies on their policies and practices in relation to nutrition and obesity. In February, AMP Capital joined the ATNI Investor Engagement Group, which will see AMP Capital take part in collective engagement with 17 listed companies within the 2018 Global ATNI, the third Index of the series, due to be launched later this year. Engagement will focus on each company’s approach to integrating ATNI’s recommendations and more generally improving nutrition-related policies and practices.

Finance: UK government calls on top pension funds to disclose climate risks

The Environmental Audit Committee (EAC) is calling on large pension funds in the UK to disclose information on the risks that climate change poses to pension savings. The Department for Work and Pensions recently admitted that many trustees do not completely understand the scope of their fiduciary duty when it comes to environmental risks.

The EAC has issued a letter to twenty-five pension funds, including Universities Superannuation Scheme, BT Pension Scheme and the RBS Group Pension Fund, with assets under management worth £555 billion, requesting information about their climate change risk. These responses will assist the EAC in deciding how the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) should be put into practice.

So what?

According to the EAC, asset owners, such as pension fund trustees, have a fiduciary duty to act in the best interests of their beneficiaries. However, despite many good examples of this practice, this duty is sometimes misinterpreted as a duty to maximise short-term returns. This leads to the neglect of longer-term considerations — including sustainability and climate-related risks and opportunities — and is the very thing that got Australia’s Commonwealth Bank into trouble last year. After failing to properly disclose the risks posed to its business by climate change in its 2016 annual report, the bank found itself being sued by shareholders for depriving them of a “true and fair view” of the company’s financial position and performance.

In Australia, it is understood that ASIC is also looking at how Australian super funds are factoring climate change into their investment risks and it is likely there will be a greater call for transparency on this in the not too distant future.

EU Commission approves Bayer’s acquisition of Monsanto

The European Commission has permitted the acquisition of Monsanto by Bayer, under the EU Merger Regulation.

The merger also received regulatory approvals from China and Russia, while India's anti-monopoly watchdog, the Competition Commission of India (CCI), is still reviewing the merger.

The deal is provisional on an extensive remedy package, regarding the parties' overlaps in seeds, pesticides and digital agriculture.

Monsanto is the largest supplier of seeds and the pesticide glyphosate in the globe, with most of its sales derived from the US and Latin America. Bayer is the second largest supplier of pesticides in the world and an important seed provider, with a larger share of its sales coming from Europe. The deal creates the largest global consolidated seed and pesticide company.

So what?

The merger will strengthen Monsanto's dominant position in certain markets, where Bayer is an important challenger. However, it may also lead to a slowing in innovation as a result of decreased competition as well as much greater political power for the merged company.

For many years, Monsanto has been involved in lawsuits alleging the violation of competition laws, excessive royalty payments in Brazil, and has attracted significant opposition for its aggressive patent enforcement methods.

While a lot of change would be required, maybe Bayer will have a positive impact on Monsanto and all will be restored in the global food chain.

Florida shooting – will things change for the better in the US?

The mass shooting at a school in Florida on February 14 this year has received an enormous amount of media attention and caused significant public debate around the issue of firearms.

A notable number of companies have announced they will cut direct and indirect ties with the firearms industry as a result. Investors, especially those with responsible investment policies, are questioning their stance and exposure to firearms manufacturers, as well as retailers and distributors.

American Outdoor made the AR-15 which was used at this mass shooting. The Florida Teachers’ Pension Fund owned more than $500,000 of its stock.

Survivors of the mass shooting have been lobbying big corporations to cut their ties with the National Rifle Association. And several have, including United Airlines, six rental-car firms including Hertz and Avis Budget Group, and MetLife.

Blackrock, a company which manages trillions of dollars, said last week that the shooting has caused it to re-examine its holdings in both gun makers and gun retailers. It will start offering clients the option to invest in funds that exclude firearm manufacturers and retailers. It also said it will more actively engage with gun manufacturers, and in some instances, vote against the wishes of company management.

So what?

Pension funds, as primarily passive investors, often own the entire market. The fiduciary duty of public pension funds is to maximize returns while reducing risk, and many of these gun companies provide reliable returns. At the same time, some members want the stocks in their portfolio to reflect their values and sense of social responsibility.

This is one of the main issues with passive investing. It’s even more important that these managers engage on behalf of passive funds because if something is not right you can’t just divest, you have to stay at index weight. So, to improve things they have little choice but to engage. 

Hopefully we see some kind of regulation change in the US which will mean that it isn’t sensible to own these companies from a fiduciary standpoint.

Ian Woods
Head of ESG Investment Research
AMP Capital

Camille Wynter
ESG Investment Research Analyst
AMP Capital