2020 Annual Review EOS Voting and Engagement Highlights - www.hermes-investment.com - Hermes Investment Management
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2020 Annual
Review
EOS Voting and Engagement Highlights
www.hermes-investment.com
For professional investors only
2 EOS Annual Review 2020 3
The EOS approach to engagement 4
Foreword5
Engagement activity 6
Voting overview 7
Engagement by theme 8
Our engagement plan 10
A guide to engagement terminology 13
A decade of action for the UN SDGs 14
Welcome to our 2020 Engaging through a pandemic 18
Annual Review, which
Environmental highlights
outlines the engagement, Taking the temperature 20
voting and public policy work Q&A: Biodiversity and sustainable land use 23
carried out by EOS on behalf of our Climate change and fossil fuel financing 25
clients. We have worked with Q&A: Circular economy 27
companies across the globe to address Social & ethical highlights
their key risks, challenges and Safety first – managing employees in a pandemic 29
Racial equity and ethnic diversity 32
opportunities, covering environmental, Engaging on human and labour rights 35
social, governance, strategy, risk and Q&A: Indigenous rights and Rio Tinto 37
communication matters. Alongside Q&A: AI ethics and data governance 39
this, we have continued to engage Governance highlights
with policymakers, regulators and Voting season 2020: virtually as good? 42
Q&A: Revisions to voting policy guidelines 45
standard-setters to help
Q&A: Board composition and effectiveness 46
improve market best practice. Regional public policy highlights 49
Strategy, risk and communication highlights
Preparing for future crises 51
Business purpose and long-term strategy 54
Afterword56
EOS team 57
This report has been written and edited
by Claire Milhench, Communications &
Content Manager, EOS
4 EOS Annual Review 2020 5
The EOS approach Foreword
About EOS
to engagement
Planetary boundaries and interconnected
sustainability issues
Dr Hans-Christoph Hirt
Head of EOS at Federated Hermes The pandemic can be seen as a warning from nature that we are
exceeding safe planetary boundaries, and it has starkly illustrated
the links between different sustainability issues.
The increased incidence of novel infectious diseases, like Covid-
EOS at Federated Hermes is a leading stewardship service provider. Our At the start of 2020, few of us could have 19, has been causally linked to land-use change resulting in
engagement activities enable long-term institutional investors to be more envisaged the dramatic changes to our daily habitat destruction, along with the wildlife trade and intensive
active owners of their assets, through dialogue with companies on lives wreaked by the Covid-19 pandemic. As farming. These human activities are also contributing to the loss
governments scrambled to impose national of biodiversity, which is now occurring at unprecedented rates.
environmental, social and governance issues.
lockdowns, it was clear that this deadly virus There is also clear evidence linking the occurrence and severity
would have a far-reaching impact on of vector-borne diseases with global warming, and the pandemic
We believe this is essential to build a global financial individuals and families, businesses and demonstrated how the burden of infectious disease is
Voting exacerbated by social factors, including inequality and lack of
system that delivers improved long-term returns for employees, the global economy, and society
investors, as well as better, more sustainable outcomes access to healthcare. Companies and investors will need to work
We make recommendations that are, where practicable, as a whole. The lessons for investor harder in the years ahead to understand these connections, and
for society.
engagement-led and involve communicating with company stewardship and tackling future sustainability start thinking about delivery to all key stakeholders in a more
management and boards around the vote. This ensures that challenges and crises are twofold. holistic manner.
our rationale is understood by the company and that the
recommendations are well-informed and lead to change
Our Engagement Plan is client-led – where necessary. Interdependence of different elements of society Urgent action on the climate crisis
we undertake a formal consultation Screening
By pressing pause on “business as usual” and forcing companies Addressing the climate crisis will be a key focus in 2021 with the
to adopt new ways of working, policymakers demonstrated they United Nations Climate Change Conference COP26 to be held
process with multiple client in Glasgow, Scotland in November. Given the systemic
We help our clients to fulfil their stewardship obligations by were willing to impose sweeping restrictions to address the
touchpoints each year to ensure it is public health crisis. Many businesses had to close for prolonged importance of climate change, engagement with companies on
monitoring their portfolios to regularly identify companies
based on their long-term objectives, that are in breach of, or near to breaching, international periods or change their operating models, impacting their physical and transition risks with the objective of Paris
covering their highest priority topics. norms and conventions. employees, customers, and supply chains. Agreement-alignment will remain a top priority in our
stewardship activities. Encouragingly, we saw in 2020 how the
In this way, the pandemic demonstrated the critical collapse in demand for fossil fuels reinvigorated investor
Advisory
interdependence of different elements of society, including demands to accelerate the transition to a low carbon economy.
We work with our clients to develop their responsible businesses, their key stakeholders, and governments.
ownership policies, drawing on our extensive experience and Some policymakers are now beginning to grasp the urgency of
expertise to advance their stewardship strategies. the climate crisis, with stronger commitments to scale up
Many financial regulators already investments in renewable energy and green infrastructure,
Our services
recognise climate change as a systemic alongside more ambitious net-zero goals in terms of the
Public The EOS advantage risk to the global economy and their calls timescales targeted.
Voting to action are only likely to grow louder.
policy A Relationships and access – Companies understand that Many financial regulators already recognise climate change as a
Engagement EOS is working on behalf of pension funds and other systemic risk to the global economy and their calls to action are
large institutional investors, so it has significant leverage – With some companies facing unenviable choices - between only likely to grow louder. The wind has changed direction and the
Screening Advisory representing assets under advice of US$1.28tn as of making large-scale redundancies or going out of business, for momentum is with us. In 2021 we will seek to capitalise on this.
31 December 2020. The team’s skills, experience, example - the pandemic showed the importance of businesses
languages, connections and cultural understanding maintaining a social licence to operate underpinned by a
equip them with the gravitas and credibility to access and corporate purpose. Those that failed to demonstrate their value
maintain constructive relationships with company boards. to society or that treated their employees, customers, and
Engagement A Client focus – EOS pools the priorities of like-minded suppliers badly, attracted negative publicity and public criticism.
investors, and through consultation and feedback,
We engage with companies that form part of the public We believe this interdependence will only grow over time given
determines the priorities of its Engagement Plan.
equity and corporate fixed income holdings of our clients to the bigger challenges ahead, such as responding to the
seek positive change for our clients, the companies and the A Tailored engagement – EOS develops engagement
inevitable impacts of climate change, addressing inequality,
societies in which they operate. strategies specific to each company, informed by
striving for racial equity, and dealing with job losses due to
its deep understanding across sectors, themes and
markets. It seeks to address the most material ESG risks automation. As a consequence, sustainability-focused risk
Public policy
and opportunities, through a long-term, constructive, management, and operational and financial resilience, will be
Engaging with legislators, regulators, industry bodies and objectives-driven and continuous dialogue at the critical to long-term value creation.
other standard-setters to shape capital markets and the board and senior executive level, which has proven to
environment in which companies and investors can operate be effective over time
more sustainably.
6 EOS Annual Review 2020 7
Engagement Voting
Activity Issues and
objectives
Companies
engaged by
Voting
recommendations
Votes against
management
Overview
engaged region
■ Environmental 23.7% ■ Australia and New Zealand 64 ■ Total meetings voted in favour 41.4% ■ Board structure 43.5%
■ Social and Ethical 17.0% ■ Developed Asia 141 ■ Meetings where voted against ■ Remuneration 25.3%
■ Governance 41.8% ■ Emerging Markets 204 (or voted against AND ■ Shareholder resolution 5.4%
abstained) 55.0%
■ Strategy, Risk and Communication 17.5% ■ Europe 273 ■ Capital structure and dividends 11.7%
■ Meetings where abstained 0.7%
■ North America 396 ■ Amend articles 5.3%
■ Meetings where voted with
■ United Kingdom 167
management by exception 3.0%
■ Audit and accounts 4.4%
■ Investment/M&A 0.6%
■ Poison pill/Anti-takeover device 0.4%
■ Other 3.4%
Number of engagements:
51 80%
companies in our programme We engaged with
featured engagements with companies in our core
2020 2019 Issues and objectives: the CEO programme in 2020 on
average more than of our relationships with
3,965
4
companies in our core
74
companies in our
Companies: Objectives engaged: engagement programme
programme featured
1,245 1,252
times have lasted 5 years or more
engagements with the chair
246
Regional corporate
governance principles 54%
of our relationships
1,043 2,854 963
companies in our
programme featured
with companies in
our core engagement
engagements with senior
management 22 programme have
lasted 8 years
or more
70% $1.28tn
We engaged with companies Number of voting Number of recommended
that together account for recommendations made in 2020: at votes against:
year-on-year increase
in assets under
advice engaged
63%
of the value of
the MSCI ACWI
All Cap
assets
under advice 123,988
resolutions
11,759
meetings
17,669
resolutions
Ratings Public policy Key stewardship initiatives
For the international business of Federated Number of Number of discussions We are an active participant in the following:
Hermes, recognising EOS activity: consultation held with relevant A Climate Action 100+: lead or co-lead 30 engagements, and A Investors for Opioid & Pharmaceutical Accountability
A+ A+
responses regulators and support another 14 A Investor Alliance for Human Rights
PRI InfluenceMap
or proactive stakeholders: A Principles for Responsible Investment: founding member and A Investor Initiative on Mining & Tailings Safety
Rating: Climate
173
chair of the drafting committee that created the PRI in 2006.
Engagement equivalents, such as A International Corporate Governance Network
Lead engagement with Vale on tailings dam failure, and actively
Score: a letter: involved in other groups, including cyber risk, water stress, cattle A The Institutional Investors Group on Climate Change
52
deforestation, palm oil, plastics, cobalt and tax. A UN Guiding Principles Reporting Framework
Real Impact
Tracker: A A Asian Corporate Governance Association
A Canadian Coalition for Good Governance
A CDP
A
A
US Council of Institutional Investors (CII)
30% Club
8 EOS Annual Review 2020 9
Engagement by theme
A summary of some the key issues on which we engaged in 2020 is shown below. Our holistic
approach to engagement means that we typically engage with companies on more than one
topic simultaneously.
Environmental Governance
Environmental topics comprised 24% of our Progress against environmental objectives Governance topics comprised 42% of our Progress against governance objectives
engagements in 2020. engagements in 2020.
Milestone 1 177 Milestone 1 74
Milestone 2 141 Milestone 2 57
Milestone 3 79 Milestone 3 44
Milestone 4 59 Milestone 4 41
■ Climate change 78.9% ■ Board diversity, skills and experience 24.7%
■ Forestry and land use 3.8% ■ Board independence 13.3%
0 50 100 150 200 0 20 40 60 80 100
■ Pollution and waste management 11.0% ■ Executive remuneration 42.8%
■ Supply chain management 3.4% ■ Shareholder protection and rights 15.4%
Source: EOS data Source: EOS data
■ Water 2.9% ■ Succession planning 3.8%
Social and ethical Strategy, risk and communication
Social and ethical topics comprised 17% of Progress against social and ethical objectives Strategy, risk and communication topics Progress against strategy, risk and
our engagements in 2020. comprised 17% of our engagements in 2020. communication objectives
Milestone 1 89
Milestone 1 77
Milestone 2 69
Milestone 2 50
Milestone 3 53
Milestone 3 34
■ Bribery and corruption 3.7%
Milestone 4 20 ■ Audit and accounting 5.8%
■ Conduct and culture 15.3% ■ Business strategy 35.9%
36
Milestone 4
■ Diversity 22.4% ■ Cyber security 5.2%
■ Human capital management 22.0% 0 20 40 60 80 100 ■ Integrated reporting and other disclosure 24.5%
■ Human rights 28.0% ■ Risk management 28.7% 0 20 40 60 80 100
■ Labour rights 7.1% Source: EOS data
■ Tax 1.5% Source: EOS data
10 EOS Annual Review 2020 11
Engagement themes for 2021-23
Our engagement
A Harmful substance management A Value chain rights
A Waste and circular economy A Protection of basic rights
initiatives A Indigenous rights and traditional
A Major pollution incidents communities
plan A Biodiversity and
sustainable land use
A Sustainable food systems
Pollution,
waste and
circular economy
Human and
labour rights A Diversity and inclusion
A Terms of employment
A Health, safety and wellbeing
Natural Human
A Water stress
resource capital
stewardship management
A Ethical culture and
A Strategy and action Environment Social anti-bribery and corruption
A Governance and lobbying A Artificial intelligence and
A Disclosure Climate Conduct, data governance
change culture and A Responsible tax practices
ethics
Stewardship
A Composition and structure A Audit and accounting
Our engagement plan identifies 12 key themes and 36 related sub-themes. We A Dynamics and culture A Sustainability reporting
A Evaluation and succession A Integrated reporting
find this breadth of coverage is necessary to reflect the diversity of the issues planning
Board Strategy, risk & Corporate
effectiveness Governance communication
reporting
affecting companies in our global engagement programme.
A Structure and metrics A Serious operational risks
A Transparency and A Cyber security
Although the pandemic changed our approach to disclosure Executive Risk A Product risks
engagement, we were able to continue focusing on Human and labour rights A Quantum of pay outcomes remuneration management
material issues such as the climate crisis and human
This theme covers all aspects of human rights including those
capital management through face-to-face video calls. Shareholder Business
related to forced labour and modern slavery, child labour, protection purpose and
payment of a living wage, and gender-specific issues; the and rights strategy
Climate change protection of basic human rights including the right to life and
A Basic protection and rights A Business purpose
In response to client feedback, this theme remains our liberty, privacy and freedom of expression; and the protection A Minority protection and rights A Capital allocation
number one priority, with the UN’s COP26 meeting in of indigenous rights. Investors have a duty to respect human A Investor engagement A Long-term sustainable strategy
Glasgow now set to take place in November 2021. Global rights, which underpin a company’s wider corporate culture,
greenhouse gas emissions must be reduced to net zero by business ethics and enterprise risk management, all of which
2050 to limit temperature increases to well below 2°C, and affect reputation and the ability to create and preserve value
ideally to no more than 1.5°C. Yet the global economy is over the long term.
In addition, in May 2020, the tragic death of George Floyd re- Broader themes for 2021
currently on track to deliver over 2.7°C of heating. To address We expect companies to apply the UN Guiding Principles on energised the anti-racism movement in the US and around the
this climate emergency, business models should align with the Business and Human Rights, reporting on their management of globe, and renewed concerns about poor representation of In addition, we will focus on companies putting in place a
goals of the Paris Agreement, including a net-zero goal, by those salient human rights issues and risks that could have the ethnic minorities in business. It also raised fresh questions business purpose and strategy to guide the future, as
2050 or sooner. most severe negative impact on company operations and about the role that companies play in perpetuating racial follows:
supply chains. inequity. We believe most companies and investors have
much more to do to address this urgent problem. In the near term – the corporate response to
To address this climate emergency, the pandemic
business models should align with Human capital management
Board effectiveness
the goals of the Paris Agreement, In a knowledge economy where intangible assets, such as Many businesses face difficult trade-offs, particularly between
achieving shorter-term financial returns and maintaining strong
including a net-zero goal, by 2050 employees, are estimated to comprise on average more than There is considerable evidence that the performance of the
relationships with key stakeholders, especially employees. We will
or sooner. half of a company’s market value, our engagement is focused board is vital to the long-term success of a company. Boards
encourage and support companies to set a clear and meaningful
on the most critical challenges to a company’s workforce. These should be composed of directors with technical skills aligned
include diversity and inclusion, fair wages, incentives and with the strategic needs and direction of the company and a business purpose and strategy, helping to identify the actions
As climate change is relevant and financially material to required in the short term to deliver long-term value.
almost every sector and across all geographies, we focus on benefits, plus health, safety and wellbeing. diversity of perspectives (including across gender, age,
all major areas of the economy, including oil and gas, coal ethnicity, nationality, background, skills and experience) to Meanwhile, following unprecedented government support for
This was reinforced by the coronavirus pandemic, which shone improve decision-making.
mining, transportation, energy-intensive industrials such as a light on how employers treat and engage their workforces, businesses through measures such as furlough schemes and loan
steel, cement, and metals smelting, consumer goods and and introduced new health and safety concerns, including guarantees, we will urge companies to act responsibly in critical
It is equally important that boards contain enough independent
retailing, and financial services. We are also an active member mental health issues. areas such as good employment practices, the payment of
directors to challenge management and that directors are able
of Climate Action 100+, the collaborative engagement appropriate levels of corporate taxation, and justifiable levels of
to dedicate sufficient time to fulfil their duties. An effective
initiative representing over US$50 trillion of assets, acting as executive remuneration.
board should also be involved in good dialogue with its
lead or co-lead engager for 30 companies. As far as we are
shareholders, the workforce and other key stakeholders.
aware, this is higher than any other participant.
12 EOS Annual Review 2020 13
In the longer term – avoiding the next crisis
A guide to
The pandemic has also highlighted the risks to companies as Textile production is estimated to
human activity pushes the limits of planetary boundaries. account for over one billion tonnes
Therefore, in addition to tackling the climate crisis, we now of CO2 equivalent every year,
expect companies to put in place strategies to achieve a net-
more than international flights and
engagement
positive impact on biodiversity, eliminate deforestation and avoid
contributing to the development of antibiotic-resistant maritime shipping put together.
“superbugs”. Companies must also put in place more advanced
risk management systems to identify a broader range of lower
terminology
probability, high impact events.
Expanding themes
We will also continue to build on our work in recent years in
these fast-growing areas:
Plastics
Consumption of plastic has increased 20-fold in the last 50 years Our engagement approach is systematic and transparent. Our proprietary
and is set to triple again by 2050, yet only around 14% is recycled.
Meanwhile, microplastics threaten to contaminate all living
milestone system allows us to track the progress of our engagements relative
organisms, with unknown health consequences. In April 2020 we to the objectives set for each company.
published our white paper Investor Expectations for Global
Plastic Challenges, to help address this ballooning problem. Over
the long term, plastics must either be removed altogether, reused
Objectives precise objective. Issues are frequently used for companies
or recycled in a closed loop. outside our continuous engagement programme, for example
We set clear and specific objectives within our company
engagements to ensure we achieve positive outcomes. An those where we typically engage only around the annual
Artificial intelligence (AI) and ethical data governance shareholder meeting and our voting recommendation.
objective is a specific, measurable change defined at the
The need for strong data governance is critical as company company – an outcome we are seeking to achieve. Each
business models become increasingly reliant on harvesting, objective is tracked using milestones. Objectives are regularly Milestones
storing and analysing data. This will mean ensuring the security, reviewed until they are completed – when the company has
Biodiversity and sustainable land use To measure our progress and the achievement of engagement
accuracy and integrity of personal data, and that individuals have demonstrably implemented the change requested – or
objectives, we use a four-stage milestone strategy. When we
consented to its use. Companies must take care to avoid The UN’s landmark 2019 global assessment report on biodiversity discontinued. Objectives may be discontinued if the objective
set an objective at the start of an engagement, we will also
discriminatory biases or unintended consequences arising from and ecosystem services identified a major decline in biodiversity is no longer relevant, or because the engagement is no
identify recognisable milestones that need to be achieved.
the application of artificial intelligence, which could lead to at a level unprecedented in human history, with extinction rates longer feasible or material.
Progress against these objectives is assessed regularly and
significant business risk and adverse social impacts. accelerating. In 2021, countries are expected to agree on a post- evaluated against the original engagement proposal.
We may engage with a company on multiple objectives at any
2020 framework for biodiversity at the Convention on Biological
Since 2019, we have been creating frameworks and tools that one time, covering a variety of material ESG issues. An
Diversity COP 15, which was postponed from 2020 due to the
investors can use to address issues around freedom of speech, example of an objective could be: “Development of a 4
Covid-19 pandemic. Like the Paris Agreement for climate change, The company
supply chains, data privacy, surveillance, user manipulation, bias strategy consistent with the goals of the Paris Agreement,
the targets will be delivered by countries and companies. implements a
including setting science-based emissions reduction targets 3
and discrimination. In 2020, EOS was shortlisted by the PRI for strategy or
for operating emissions (Scopes 1 and 2 emissions).” Each The company measures to
stewardship project of the year for its work in this area. We developed our engagement approach in 2020, culminating in develops a address the
2
the publication of a white paper: Our Commitment to Nature, objective relates to a single theme and sub-theme. credible concern
The company strategy to
which focuses on the business case for protecting biodiversity, our 1 acknowledges achieve the
engagement priorities and expectations, and key issues such as Our concern is the issue as a objective, or
deforestation and regenerative agriculture. We only consider companies to be raised with the serious investor
concern, worthy
stretching
company at the targets are set
engaged when we have an individual appropriate of a response to address the
The UN’s landmark 2019 global Fast fashion interaction with the company that level concern
Milestone Progress
assessment report on biodiversity Textile production is estimated to account for over one billion
relates to an objective or issue.
and ecosystem services identified a tonnes of CO2 equivalent every year, more than international
major decline in biodiversity at a level flights and maritime shipping put together. It is also water Issues Actions
unprecedented in human history, intensive, and a major source of microplastics. Yet once the How does an objective differ from an issue, another term we These are the interactions that take place between our
with extinction rates accelerating. consumer has finished with the item, some 73% is either use within our engagement? An issue is a topic we have engagement professionals and the companies or public policy
incinerated or goes to landfill, with less than 1% recycled. In 2020 raised with a company in engagement, but where we do not bodies with whom they are engaging. Every call, meeting or
we advanced our work in this area by identifying key performance precisely define the outcome that we are seeking to achieve. correspondence is recorded as an action. Actions can be
metrics and setting more ambitious, yet achievable objectives for This can be more appropriate if the issue is of lower linked to objectives or issues. We only consider companies to
the apparel sector. materiality and so we do not anticipate engaging with the be engaged when we have an individual interaction with the
frequency required to pursue an objective. Or perhaps we are company that relates to an objective or issue.
still in the process of identifying what type of change we may
want to see at a company and so are not yet able to set a
14 EOS Annual Review 2020 15
The Engagement Plan’s support of the UN SDGs
The chart below illustrates the number of engagement objectives and issues on which we have engaged in the last year, which
A decade of action
we believe are directly linked to an SDG (noting that one objective or issue may directly link to more than one SDG).
No Reduced
for the UN SDGs
poverty inequalities
Zero Sustainable cities
*OTHER Hunger and communities
Good health Responsible consumption
Proportion of issues and well-being and production
and objectives
engaged in 2020 Quality Climate
Education action
linking to the SDGs
Gender Life
equality below water
The pandemic has posed a significant threat to the achievement of specific
Clean water Life
SDGs, particularly good health and wellbeing. How did we engage on the SDGs and sanitation on land
in 2020 and how do we measure impact? By Katie Frame.
Affordable and Peace, justice and
1,849
of the issues and objectives clean energy strong institutions
The United Nations (UN) Sustainable Development Goals We also expect Covid to widen income inequalities. The World
engaged in 2020 were
(SDGs), also sometimes known as the Global Goals, were Bank has estimated that the pandemic pushed an additional 88 Decent work and Partnerships for
developed and adopted in 2015 as a global call to end million to 115 million people into extreme poverty in 2020, rising
linked to one or more of
economic growth the goals
poverty, protect the planet and ensure that everyone to as many as 150 million in 20213. This slows progress towards the SDGs
enjoys peace and prosperity by 2030. With less than 10 achieving SDG 1, no poverty, as well as SDG 10, reducing * This represents the proportion of issues and
Industry, innovation
years remaining on the clock, it is important to take stock inequalities. Additionally, school closures have kept 90% of the objectives assigned to the remaining SDGs.
and infrastructure
and reflect on our achievements and what action is world’s students (approximately 1.57 billion children) physically out
required to accelerate progress. of schools4.
The SDGs encompass 17 goals, underpinned by 169 targets and The International Labour Organization estimates that one in six
230 individual indicators of progress. The goals are highly young people lost their jobs during the pandemic, with many
interconnected, so action and progress in one area will affect the more experiencing a cut in hours, impacting SDG 8, decent work Why engage on the SDGs?
Milestone progress of SDG-linked engagement objectives
outcomes in others. Whilst the goals were initially developed for and economic growth5. We remain concerned that due to the Investors and their representatives play a key role in supporting
450
governments and civil society, the private sector has an important economic impact of the pandemic, work to address SDG 13 or the delivery of the UN SDGs. This could be by creating positive
role to play in helping to achieve the ambitious targets. SDG 7 on climate change and clean energy respectively, will also outcomes for society through investments and engagement as the
face significant setbacks. goals recognise the role of the private sector in financing 400
Since their establishment, some progress has been made – for sustainable development. Moreover, the SDGs provide a common
example the proportion of waters under national jurisdiction framework and language for investors and companies to work 350
covered by marine protected areas has more than doubled since The International Labour Organization towards the achievement of the shared goals, with measurable
No of milestones completed
2010, and access to electricity in the poorest countries is estimates that one in six young people indicators of progress. They also provide a clear time frame in
increasing. However, the development of pathways to meet the which change needs to take place, helping to set targets and 300
lost their jobs during the pandemic,
goals is not advancing at the speed or scale required1. create a greater sense of urgency, while considering what action
with many more experiencing a cut in is needed from business to achieve sustainable development, 250
hours, impacting SDG 8, decent work beyond the typical incremental improvements and business-as-
How has the pandemic reframed the SDG
and economic growth. usual targets.
discussion? 200
Whilst the Covid-19 pandemic has created a sense of global unity, Our engagement with companies encourages them to act
it has posed a significant threat to the achievement of specific responsibly and reduce their negative impacts on society, across 150
SDGs. The pandemic threatens to reverse the progress that has their value chains. We are also suggesting changes that could
been made on SDG 3, which aims to promote good health and provide a positive impact. Our view is that the long-term success
Katie Frame of business is inextricably linked to achievement of the goals 100
wellbeing. We have seen disruption to healthcare services and
infrastructure, with 70 countries halting childhood vaccination
Theme co-lead: Human because the SDGs help to create an economic context and
programmes, and many have experienced disruptions to cancer Capital Management society in which businesses can best thrive. 50
screening, family planning and infectious diseases beyond Covid2.
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
SDG
1
https://sustainabledevelopment.un.org/content/documents/24978Report_of_the_SG_on_SDG_Progress_2019.pdf Milestone 1 Milestone 2 Milestone 3 Milestone 4
2
https://www.thelancet.com/journals/lanpub/article/PIIS2468-2667(20)30189-4/fulltext
3
https://www.worldbank.org/en/news/press-release/2020/10/07/covid-19-to-add-as-many-as-150-million-extreme-poor-by-2021 Source: EOS data for 2020
4
https://www.nature.com/articles/d41586-020-02002-3
5
https://feature.undp.org/covid-19-and-the-sdgs/
16 EOS Annual Review 2020 17
We are pleased that as an outcome of our engagement, AMN committed to
participating in the Nursing Now “Nightingale Challenge” to provide leadership CASE STUDY CASE STUDY
and development training for nurses and midwives during 2020.
Biodiversity Decent work
SDGs 14 and 15 – Life below SDG 8 – Decent work and economic
water, Life on land growth
Our stewardship work has always focused on improving the
sustainability of companies in order to boost long-term wealth CASE STUDY
creation and achieve positive outcomes for society. In particular,
SDG target 12.6, which is to “encourage companies, especially
large and transnational companies, to adopt sustainable practices AMN Healthcare Since the initial peak of the pandemic and the global
and to integrate sustainability information into their reporting SDG 3 – Good health and shutdowns experienced from March 2020, we have
cycle”, underpins much of our engagement work with companies. wellbeing systematically engaged with companies across our
When we engage on an SDG, we are often seeking positive programme on the management of their human
outcomes through which companies can contribute to solving capital, with a focus on health, safety and wellbeing.
problems such as inequality (SDG 10), poor health (SDG 3) and
climate change (SDG 13).
For example, we have engaged with Panasonic to
understand its ‘e-Work’ initiative and how it will continue to
How do we measure impact? promote a culture of flexible working to support employees.
There is no universally-accepted standard or benchmark for We have also engaged with Amazon to improve its health
reporting on the SDGs, therefore we have developed our own and safety performance, especially in light of the pandemic
approach in alignment with our engagement strategy. and the stresses placed on employees. Additionally, we
In November we responded to the business
We attribute a direct link between one of our engagement engaged with WalMart to encourage it to improve
consultation on the Convention on Biological Diversity
themes and an SDG if our engagement objectives directly AMN Healthcare is a healthcare staffing company that communications between in-store sales associates and the
Post-2020 Global Biodiversity Framework.
support at least one of the UN’s targets underpinning the relevant principally provides travel nurse staffing services. Its board on health and safety practices.
goal. We recognise that good corporate governance is essential core business is the placement of nurses and allied
We suggested strengthening the wording to say that
to the achievement of the SDGs, as a well-governed company will health professionals on temporary assignments at
2030 should be the latest year by which nature loss is
be better placed to address the key environmental and social hospitals and healthcare facilities throughout the US.
reversed, with some sectors and countries aiming for Through our engagement we are
issues identified by the goals. However, we do not often attribute
2025. We also outlined how to improve the involvement
a direct link between corporate governance and any single SDG, Our engagement objective was for the company to of the financial sector in the development and delivery of
encouraging companies to view the
given the indirect benefit this has. Instead, we focus on mapping expand on its existing employee volunteering activities the framework and emphasised the importance of using SDGs as a framework to identify areas
those environmental and social themes that have a direct to establish an NGO partnership to support the science-based approaches. where they can make a positive impact
relationship to the achievement of one or more of the goals. development of skills and experience for nurses, towards the goals through their supply
physicians and other professionals, and to empower and We explained our engagement approach to biodiversity
Due to the interconnectedness of the goals, an engagement on
improve healthcare provision in lower and middle- and how having SMART targets informed by science chain, operations, products or services.
climate change will often link to more than one SDG. For
income countries. would be key to ensuring an effective contribution to the
example, engaging with an oil and gas company to encourage it
goals from the private sector. Finally, we provided
to set and pursue a strategy that is consistent with the goals of During our engagements we facilitated an introductory How can investors accelerate progress over the
suggestions about how the biodiversity framework could
the Paris Agreement directly impacts SDGs 7, 12 and 13. meeting between the CEO of AMN and the executive be aligned with the UN SDGs and existing climate change
next 10 years to help achieve the goals?
However, engaging with an electronics manufacturer to set an director of Nursing Now, a global NGO campaign Through our engagement we are encouraging companies to
frameworks, including the TCFD and the Paris Agreement.
absolute CO2 reduction target is likely to only directly impact established to raise the profile of nurses worldwide. We view the SDGs as a framework to identify areas where they
SDG 13, although we may see indirect impacts on SDGs 7 and 12. continued to highlight the importance of investing in and can make a positive impact towards the goals through their
Many more SDGs will also be indirectly impacted through climate developing those in the nursing profession. supply chain, operations, products or services. While some
action given the strong links to poverty and inequality. progress has been made, there is much to be done
We are pleased that as an outcome of our engagement, collectively, particularly on those goals most impacted by the
AMN committed to participating in the Nursing Now pandemic. Additionally, investors and companies need to shift
We recognise that good corporate “Nightingale Challenge” to provide leadership and We have also engaged with their focus from simply measuring their inputs and begin to
governance is essential to the development training for nurses and midwives during Amazon to improve its health and consider the actual impact of this work. This will help us to
achievement of the SDGs, as a well- 2020. In addition to this, AMN donated to the Nursing
Now initiative and will be partnering with continuing
safety performance, especially collectively direct resources towards achieving sustainable
governed company will be better placed education companies to help provide training to nurses in light of the pandemic and the development in a more efficient manner.
to address the key environmental and and midwives. We will continue to ask AMN to engage stresses placed on employees. Over the next 10 years, investors should play an important
social issues identified by the goals. its clients in this effort to raise the profile of nurses. role by encouraging business leaders to embrace more
sustainable and inclusive models, and we will continue to use
the SDG goals as a basis for these conversations.
18 EOS Annual Review 2020 19
To document our engagement outcomes we published 22
long-form company case studies in 2020, and 27 short-form
Engaging through
case studies. We provided investors with engagement toolkits
in two white papers: Investor Expectations for Global Plastics
Challenges and Guiding Principles for an Effective Board. We
also identified the links between different ESG issues such as
a pandemic
climate change, biodiversity loss and infectious diseases in
our in-depth pandemic series of EOS Insights articles.
For the 2020 voting season, we developed new voting
guidelines to be supportive of virtual shareholder meetings –
as long as these were temporary and had appropriate We will also prioritise
safeguards for shareholder rights. The move to virtual engagement on the protection
meetings allowed us to intervene at a record number, of human and labour rights
“attending” 22 versus nine in 2019. We issued 16 client alerts
on controversial votes, versus 11 the previous year. Our more
abuses, given the increased risks
nuanced approach to voting included taking a more of further deterioration in already
supportive stance on director re-election in more marginal precarious working conditions,
cases of low board diversity, so as not to remove key directors arising from the pandemic.
at a time of crisis.
How did we adapt our engagement approach when governments responded to
the pandemic with lockdowns, curbing international travel and face-to-face
meetings? By Bruce Duguid. For the 2020 voting season, we
We will prioritise engagement on the protection of human
developed new voting guidelines to and labour rights abuses, given the increased risks of further
be supportive of virtual shareholder deterioration in already precarious working conditions, arising
The Covid-19 pandemic became the significant backdrop to Most companies had a good narrative for how they were
much of our engagement in 2020. Our Asia and emerging protecting their operations and key stakeholders, including
meetings – as long as these were from the pandemic. We will also focus on modern slavery and
markets team experienced this early with travel bans from employees, although we challenged one large US retailer over temporary and had appropriate limited access to fundamental needs such as food and
medicine, including effective coronavirus vaccines.
January, but this soon spread to other regions. Despite allegations of poor Covid practices in its stores. In contrast, UK safeguards for shareholder rights.
lockdowns and the inability to meet face-to-face, we were supermarket Tesco did well to adapt its operating environment Finally, to avoid future crises, we will step up our engagement
able to adapt quickly to virtual engagement using web- and customer proposition, and we completed a long-standing in critical areas including action to limit global heating to
based interfaces. This meant we could continue to deliver engagement on audit and risk management. In 2021 we will focus on delivery of the appropriate post-pandemic
1.5°C, corporate strategies to eliminate deforestation and
our engagement plan and related voting, plus our public response. We will encourage companies to put business purpose
achieve a net-positive impact on biodiversity, and taking
policy and market best practice work. We also on-boarded Despite the lockdown restrictions, our engagement activity at the heart of delivering positive societal outcomes and guiding
essential steps to avoid contributing to the development of
eight new members of staff – six in our Pittsburgh office was higher than in 2019, with similar levels of access to board decision-making around the trade-offs between stakeholders.
antibiotic-resistant “superbugs”.
and two in London – all joining after lockdown commenced. directors and senior executives. Some directors appeared to Following the tragic death of George Floyd, which re-energised
have more time available for engagement due to the lack of the anti-racism movement in the US and around the world, we are
In April we sent an open letter to the chairs and CEOs of the travel, and they were keen to continue discussing long-term asking companies for a strategy and action plan to close the
companies in our engagement programme, explaining that issues such as climate change, with some intense dialogues in ethnic pay gap and achieve proportionate ethnic representation at
our dialogue during and after the pandemic would focus on the run-up to annual shareholder meetings. Collaborative all levels, including the board.
business resilience and stakeholders. We outlined how we engagement initiatives such as Climate Action 100+
expected companies to ensure the safety and wellbeing of also continued.
their workforces. We also wanted them to treat their suppliers The move to virtual meetings allowed us to
fairly, serve their customers and support the efforts of These efforts resulted in some positive outcomes, with oil and
governments and society in dealing with Covid-19. gas major BP announcing a new net-zero strategy with capex intervene at a record number, “attending”
22 9
and accounting assumptions aligned with the Paris Agreement
goals, and similar indications from Repsol, Total and Royal
Dutch Shell. There was also significant progress at Amazon on versus in 2019.
net-zero targets, Lafarge Holcim on science-based targets,
Rolls-Royce on net-zero emissions, even as it faced a collapse in
air travel, and Anglo American on carbon neutral mining.
Some directors appeared to
have more time available for
engagement due to the lack of
Bruce Duguid
travel, and they were keen to Executive Director,
continue discussing long-term We will ask companies for a
Head of Stewardship, EOS
issues such as climate change. strategy and action plan to close
the ethnic pay gap and achieve
proportionate ethnic representation
at all levels, including the board.20 EOS Annual Review 2020 21
Environmental In addition, prior to Total’s annual shareholder meeting, we Although these developments are to be applauded,
worked closely with the French company to produce a joint companies have applied different methodologies, so
Taking the
statement in collaboration with CA100+. In this it set the comparison is difficult. To help address this, we have worked
ambition to achieve net-zero emissions and committed to with the Institutional Investors Group on Climate Change
aligning its investments with the Paris goals. Repsol, the first (IIGCC) to develop a net-zero benchmarking methodology,
oil and gas company to commit to net-zero emissions, which allows for flexibility in business models and a
temperature
increased the ambition of its intermediary Scope 3 targets and comparison between company commitments. This draws on
its targets around renewable energy deployment. a range of market-leading sources including the Transition
Pathway Initiative, Carbon Tracker and InfluenceMap. We
We have also participated in the CDP have also participated in the CDP consultation to develop
consultation to develop a science-based a science-based target methodology for the sector.
target methodology for the sector.
Progress of objectives for CA100+ companies engaged by EOS, 2020
Company Name EOS Sector 0 1 2 3 4 5 6 7 8
BP Oil & Gas
Total Oil & Gas
Siemens Industrials
The collaborative engagement initiative Climate Action 100+ hit the halfway Bayerische Motoren Werke Automotive
mark in 2020, making progress with some of the world’s largest greenhouse Posco Mining & Materials
gas emitters, despite the challenges posed by the pandemic. By Nick Spooner. Anglo American Mining & Materials
Hon Hai Precision Industry Technology
Rolls-Royce Holdings Industrials
The Covid-19 pandemic may have captured the headlines The oil and gas sector, which potentially has the most to lose Daimler Automotive
in 2020 with its immediate risks to public health, but the from a rapid transition to a low-carbon economy, remained in Centrica Utilities
long-term issues posed by the climate crisis have not focus in 2020. The sector was disproportionally impacted by Respol Oil & Gas
gone away. The collaborative initiative Climate Action the pandemic, as demand for fossil fuels – particularly oil used
LyondellBasell Industries Chemicals
100+ (CA100+), where we continue to lead or co-lead in transportation – collapsed. This coincided with a temporary
Eni Oil & Gas
engagement with 30 companies, reached its halfway mark increase in supply, compounding the industry’s problems.
Gazprom Oil & Gas
in 2020, with more company commitments to mitigate Against such a backdrop, it was encouraging to see some
systemic climate risks. progress due to the efforts of CA100+. LafargeHolcim Mining & Materials
Danone Consumer Goods & Retail
According to the CA100+ 2020 Progress Report, published in PetroChina Oil & Gas
December, 43% of focus companies engaged by the initiative The oil and gas sector, which potentially Air Liquide Chemicals
have now set a net-zero target. But there are gaps in target has the most to lose from a rapid AP Moller – Maersk Industrials
coverage, with only 10% of focus companies setting a net zero transition to a low-carbon economy, Chevron Oil & Gas
by 2050 target that covers the company’s most material Scope remained in focus in 2020. Walmart Consumer Goods & Retail
3 emissions.6
Lockheed Martin Industrials
The company has set a target or ambition to reduce its In February, following the appointment of BP’s new CEO Lukoil Oil & Gas
Objectives engaged
greenhouse gas emissions to net zero by 2050 Bernard Looney, the company announced that it would set a Severstal Mining & Materials Number of objectives with progress
net-zero target for 2050 for all the oil and gas it produces, as ConocoPhillips Oil & Gas
100 well as for its entire operations. This made it the first oil and
Berkshire Hathaway Financial Services
80 gas major to make such a commitment, setting the bar for
69% Volkswagen Automotive
other European oil and gas companies. Later in the year, the
60 54%
43% company published its methodology for determining whether
38% 38%
40 31% 31% new capital expenditure was consistent with the goals of the Demand-side decarbonisation The aim is to make an impact beyond the companies
19% Paris Agreement, including the underlying assumptions engaged under CA100+, which until recently only focused on
20 12% 12% 8% 10% Decarbonisation of the whole economy will require action
8% 4%
around commodity prices. This came in direct response to the 161 of the world’s biggest greenhouse gas emitters. Large
0 from energy demand-side participants, as well as the supply
2019 shareholder resolution where we led the filing. It also companies are often well-placed to help reduce Scope 3
Consumer
products
(14 companies)
Utilities
(31 companies)
side. This was highlighted by the net-zero benchmarking
Total
Industrials
(26 companies)
Mining & Metals
(23 companies)
Oil & Gas
(39 companies)
Transportation
(26 companies)
built on engagement over the previous 12 months to seek emissions (those in their supply chains or arising from the use
letter that lead engagers sent to all CA100+ companies in
alignment of BP’s accounting assumptions with the goals of of their products) because of their deep pockets, their
September. The letter had three main requests:
the Paris Agreement. importance to suppliers, or their influence over consumption
1. Disclose in line with the CA100+ Net-Zero Benchmark; patterns. Walmart, the largest company in the world by
Company has set a net-zero by 2050 target or ambition that covers revenues, had already set a symbolic target of reducing
its Scope 1 and 2 emissions
2. Set a long-term ambition for net-zero by 2050, for all emissions by one gigaton – approximately double the
Company has set a net-zero by 2050 target or ambition that covers
its most material Scope 3 emissions
Nick Spooner material emissions, as well as science-based, intermediary emissions of the UK – throughout its operations and supply
Theme co-lead: Climate Change targets; and chain, although we questioned whether even this was
Source: Climate Action 100+ 2020 Progress Report. sufficiently aligned to the achievement of the Paris goals. In
3. Collaborate with CA100+ in developing pathways for
2020 it committed to reaching net-zero emissions for Scopes
decarbonising the sector and value chain overall.
1, 2 and 3 emissions by 2040 as part of its ambition to become
6
https://www.climateaction100.org/wp-content/uploads/2020/12/CA100-Progress-Report.pdf
a regenerative business.22 EOS Annual Review 2020 23
The impact of large corporations with complex supply chains
setting net-zero targets is evident in the case of Hon Hai. The
Rolls-Royce must go through the Q&A: Biodiversity and sustainable land use Forests, peatlands and grasslands,
company is a major supplier to Apple, which set a target to
process of understanding how the among other ecosystems, are
decarbonise its supply chain by 2030. This has helped us
engage with the company on setting long-term greenhouse energy transition will impact each natural carbon sinks that absorb
gas targets. We were pleased when Hon Hai set a net-zero of its products, including aircraft Sonya Likhtman and store carbon dioxide from
target for 2050, and we will continue to engage with the
engines, and how these can be made Theme co-lead: Climate Change the atmosphere.
company on the execution of this target, including the level
of ambition in its intermediary targets. compatible with a net-zero economy.
Some of the most challenging transitions are those involving Biodiversity rose up the investor agenda in 2020, as
companies that must fundamentally change the nature of landmark studies and nature programmes warned of
their products. This is the case for those in the extractives collapsing ecosystems. Approximately one million
industry, but also for companies such as Centrica, BMW, Rolls- species are now at risk of extinction and the rate of
Royce and Kinder Morgan, where we co-lead engagements extinction is accelerating. This is of serious concern as
under CA100+. For example, Rolls-Royce must go through the the ecosystem services provided by the natural world
process of understanding how the energy transition will underpin our economies and societies.
For the most part, companies have taken the immense
impact each of its products, including aircraft engines, and
value of nature for granted. However, the threat to global
how these can be made compatible with a net-zero economy. We developed our engagement approach throughout
ecosystems is now at unprecedented levels and the risk of
In 2020 the company set a 2050 target to make all products 2020 and in early 2021 published a white paper Our
hitting irreversible tipping points is high7.
compatible with net-zero emissions, even in challenging Commitment to Nature. This focuses on the business
sectors such as the airline industry. case for protecting biodiversity, our engagement In 2021, countries are expected to agree on global goals
priorities and expectations, and key issues such as for biodiversity at the COP15 to the Convention on
deforestation and regenerative agriculture. We have Biological Diversity, to be held in China. As with the
Tighter policy also signed up to the Finance for Biodiversity Pledge as Paris Agreement for climate change, the targets will be
Such targets have been partly driven by the continued the international business of Federated Hermes. delivered by countries and companies. Litigation risks
tightening of policy, with steps taken by China, Japan and the
EU this year towards net-zero emissions. In the run up to
Key data for CA100+ that arise when companies negatively impact biodiversity
Q. What is driving biodiversity loss? through major oil spills or other polluting events are
COP26, to be held in the UK in November 2021, we can
Over already high, but financial and reputational costs for
545
expect further shifts as the pressure builds to bring national A. There are five main drivers – changes in land use and companies are likely to increase as the protection of
policies into line with Paris Agreement pledges. The US is also sea use, direct exploitation of organisms, climate change, biodiversity becomes a public policy priority.
rejoining the Paris Agreement. signatories pollution and invasive alien species. As climate change is
one of the five, reducing greenhouse gas emissions across
When combined with the increased willingness of investors to
use stronger engagement tactics to spur action, particularly at
operations and throughout supply chains will be a key Companies need to urgently
mechanism through which carbon-intensive companies
companies that are falling behind, this should stimulate further With over acknowledge their impact and
US$52tn
can mitigate their impact on biodiversity. Simultaneously,
successful outcomes from CA100+. The net-zero benchmarking,
the health of the biosphere is important in tackling climate dependence on nature.
currently being carried out by independent organisations, will under
change. Forests, peatlands and grasslands, among other
give investors even better data to use when comparing management
ecosystems, are natural carbon sinks that absorb and store
companies, and help to increase the level of ambition.
carbon dioxide from the atmosphere. For this reason,
In 2021 we will look closely at how the energy transition is protecting and restoring forests and other ecosystems is
Over
160
accounted for in company financial reports and accounts, as considered to be the second most effective solution to
well as focusing on nature-based solutions, the Just Transition, companies targeted, climate change, after switching away from fossil fuel use. Q. What are we asking companies to do?
and mitigating physical climate risks through adaptation. accounting for an estimated Q. Why should investors be concerned? A. Companies need to urgently acknowledge their impact
80%+
and dependence on nature. This means understanding the
of global industrial A. All businesses, to varying degrees, are dependent on ways in which biodiversity and ecosystem services are
emissions the common goods provided by nature. Recent relevant to the business model. This might be through
estimates suggest that over half of global GDP is sourcing practices and supply chains, the construction of
moderately or highly dependent on nature. This may be new sites, or the ways the company’s operations interact
In 2021 we will look closely due to dependence on raw materials, such as food with surrounding ecosystems. The sectors that we have
at how the energy transition We lead or co-lead the engagement on ingredients, wood and medical components, or on a identified as key to halting and reversing biodiversity loss
30
is accounted for in company companies across the three range of processes enabled by nature. These ecosystem are consumer goods and retail, agrochemicals, mining and
financial reports and accounts, as major regions (North America, “services” include the provision of clean air, the materials, oil and gas, utilities, real estate and construction,
maintenance of the water cycle, climate regulation, and finance. As best practice, we expect companies to
well as focusing on nature-based Europe and Asia)
pollination and the availability of nutrient-rich soils. commit to having a net-positive impact on biodiversity
solutions, the Just Transition, and Healthy levels of biodiversity, including among plants, throughout their operations and supply chain. This goal
mitigating physical climate risks
14
animals and microorganisms, enable ecosystem services should be accompanied by strong governance, effective
through adaptation. We collaborate with to function effectively. measurement, an impactful strategy and regular disclosure.
others on another companies
7
Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), Global Assessment Report on Biodiversity and Ecosystem Services (2019).You can also read
