Stewardship at Hermes

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(No Transcript)
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Stewardship at Hermes

• NAPF Stewardship Forum, 19 March 2015

• Saker Nusseibeh
• Chief Executive Officer, Hermes Investment
  Management

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Hermes Investment Management

• Offering an experienced and stable investment
  foundation
• Active institutional fund management since 1983
• Owned by one of the UKs largest pension schemes
  BT Pension Scheme
• 11 specialist teams with 28.6bn/36.8bn/US44.5bn
  1,2 assets under management
• A leader in corporate governance with
  134.0bn/172.4bn/US208.8bn3 assets under
  stewardship

• 1 AU54.4bn.2 Please note the total AuM figure
  includes 3.7bn/4.7bn/US5.7bn/AU7.0bn of
  assets managed or under an advisory agreement by
  Hermes GPE LLP (HGPE), a joint venture between
  Hermes Fund Managers (HFM) and GPE Partner
  Limited. HGPE is an independent entity and not
  part of the Hermes group. 0.4bn/0.5bn/US0.6bn/A
  U0.7bn of total group AuM figure represents HFM
  mandates under advice.3 AU255.2bn.Source
  Hermes as at 31 December 2014.

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Record of responsibility
Saker Nusseibeh, Hermes CEO, founds the 300 Club
Hermes becomes a signatory for further global
agreements. Hermes Global Equity ESG Fund is
launched.
The ESG Portfolio Monitor created Hermes
Emerging Markets appointed by leading US
sustainability focused investor
Hermes Equity Ownership Services is founded
Hermes Focus Asset Management is created
Hermes Real Estate publishes Responsible Property
Investment annual report
Ralph Quartano urges companies to do the right
thing I expect MS to be on the side of the
angels.
Hermes sets up a dedicated governance team
Hermes Real Estate clarifies the responsible
property investment principles Hermes becomes
founding signatory of UNPRI
Hermes Real Estate establishes energy strategy
Hermes signs the UK Stewardship Code Hermes
Responsible Ownership Principles published
The ESG Dashboard created Hermes Global Equities
awarded customized ESG mandate for large
Australian Superannuation Fund
Hermes signs the Banking and Finance Oath
Alastair Ross-Goobey seeks shorter contracts for
CEOs
Hermes explains what shareholders should expect
of companies
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Integration of stewardship at Hermes

• Hermes mission Active asset manager working to
  deliver excellent, long term performance
  responsibly
• Core investment belief It is the decisions we
  make on how we spend our beneficiaries money
  that shapes the society they live in. Our agenda
  is defined by them Saker Nusseibeh, CEO

• Embedding responsibility seeks to align all
  decisions an investment manager makes with the
  interests of clients and the beneficiaries they
  represent. This includes
• Delivering sustainable performance within the
  terms of the mandate and within the clients risk
  appetiteInvestment Office independently
  mitigates risk and ensures the rigour of our
  strategies
• Taking into account all material investment
  factors including environmental, social and
  governanceESG dashboard, portfolio monitor,
  input from EOS engagers, 3rd party research
• Acting as a responsible steward (rather than
  simply a trader) of investments through
  constructive dialogue taking action where
  necessaryEOS engagement as overlay to funds
• Engaging with public policy makers and industry
  bodies to encourage a sustainable economy beyond
  the timeframe of a specific mandateEOS public
  policy and best practice engagement programme

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Portfolio screening

• Controversial Company Report
• Highlights breaches of international norms and
  conventions
• UN Global Compact Principles, which cover the
  environment, human rights, labour rights, bribery
  and corruption, infringements of trade and arms
  embargos
• Controversial weapons
• Ottawa Convention on landmines Oslo Convention
  on cluster munitions
• Biological and chemical weapons conventions
• Involvement in nuclear weapons
• Integrates insights from Hermes EOS engagements
  and external research from Sustainalytics
• Spotlights material governance concerns
• Value to clients
• Used to inform exclusion and engagement
  decisions, manage reputation risk and hold
  in-depth discussions with fund managers
• Portfolio overview report (heat map showing
  risks)
• Detailed company reports on material risks

• Controversial Company Report
• Published Q1 2014

Chevron Corporation Chevron Corporation Chevron Corporation Report last reviewed Q4 2013
Chevron Corporation Chevron Corporation Chevron Corporation Report last reviewed Q1 2014
United States Industry Sector Energy Industry Sector Energy ISIN US1667641005
Engagement Rating Engagement Rating Engage Engage
Severity Score Severity Score High High
Screening Point Screening Point Issue Status Issue Status
Human Rights UNGC P1 P2 Human Rights UNGC P1 P2 Serious Serious
Labour Rights UNGC P4 Labour Rights UNGC P4 Moderate Moderate
Environment UNGC P7, P8 P9 Environment UNGC P7, P8 P9 Serious Serious

Issues Summary Issues Summary Issues Summary Issues Summary
Embargo The company is involved in an important infrastructure project in Burma. Human Rights/Labour Rights Chevron has been involved in several major controversies related to local communities in Nigeria, Burma, Angola and the United States including Alaska and California. Environment Chevron has been found liable for USD 9.5 billion in damages related to severe environmental violations which took place between 1954 and 1990 in Ecuador. The company refuses any liability for the damage claims. In addition, two spills occurred at Chevrons deepwater operations in Brazil in 2011 and 2012. These events further indicate the companys failure to properly manage the environmental risks of such operations. Embargo The company is involved in an important infrastructure project in Burma. Human Rights/Labour Rights Chevron has been involved in several major controversies related to local communities in Nigeria, Burma, Angola and the United States including Alaska and California. Environment Chevron has been found liable for USD 9.5 billion in damages related to severe environmental violations which took place between 1954 and 1990 in Ecuador. The company refuses any liability for the damage claims. In addition, two spills occurred at Chevrons deepwater operations in Brazil in 2011 and 2012. These events further indicate the companys failure to properly manage the environmental risks of such operations. Embargo The company is involved in an important infrastructure project in Burma. Human Rights/Labour Rights Chevron has been involved in several major controversies related to local communities in Nigeria, Burma, Angola and the United States including Alaska and California. Environment Chevron has been found liable for USD 9.5 billion in damages related to severe environmental violations which took place between 1954 and 1990 in Ecuador. The company refuses any liability for the damage claims. In addition, two spills occurred at Chevrons deepwater operations in Brazil in 2011 and 2012. These events further indicate the companys failure to properly manage the environmental risks of such operations. Embargo The company is involved in an important infrastructure project in Burma. Human Rights/Labour Rights Chevron has been involved in several major controversies related to local communities in Nigeria, Burma, Angola and the United States including Alaska and California. Environment Chevron has been found liable for USD 9.5 billion in damages related to severe environmental violations which took place between 1954 and 1990 in Ecuador. The company refuses any liability for the damage claims. In addition, two spills occurred at Chevrons deepwater operations in Brazil in 2011 and 2012. These events further indicate the companys failure to properly manage the environmental risks of such operations.

Engagement Summary Engagement Summary Engagement Summary Engagement Summary
We have engaged intensively with Chevron on these issues for a number of years. Specifically, we have addressed human rights concerns in Nigeria and Myanmar, environmental issues in Ecuador and risk management following Maccondo/Deepwater Horizon. We are pleased that Chevron is in the process of implementing an improved human rights strategy across its operations as part of our engagement with the company. Our work on risk management has included a visit from the companys San Ramon, California Headquarters to meet with the executives in charge of Chevrons environmental and risk management functions. We also met with Chevrons CEO and Head of Upstream Operations in 2013 to discuss these issues further. Overall, we were impressed by the CEOs description of Chevrons handling of operational risk as well as the improvements in oversight and assurance systems which are being put in place better to manage risk on an enterprise-wide level. We have engaged intensively with Chevron on these issues for a number of years. Specifically, we have addressed human rights concerns in Nigeria and Myanmar, environmental issues in Ecuador and risk management following Maccondo/Deepwater Horizon. We are pleased that Chevron is in the process of implementing an improved human rights strategy across its operations as part of our engagement with the company. Our work on risk management has included a visit from the companys San Ramon, California Headquarters to meet with the executives in charge of Chevrons environmental and risk management functions. We also met with Chevrons CEO and Head of Upstream Operations in 2013 to discuss these issues further. Overall, we were impressed by the CEOs description of Chevrons handling of operational risk as well as the improvements in oversight and assurance systems which are being put in place better to manage risk on an enterprise-wide level. We have engaged intensively with Chevron on these issues for a number of years. Specifically, we have addressed human rights concerns in Nigeria and Myanmar, environmental issues in Ecuador and risk management following Maccondo/Deepwater Horizon. We are pleased that Chevron is in the process of implementing an improved human rights strategy across its operations as part of our engagement with the company. Our work on risk management has included a visit from the companys San Ramon, California Headquarters to meet with the executives in charge of Chevrons environmental and risk management functions. We also met with Chevrons CEO and Head of Upstream Operations in 2013 to discuss these issues further. Overall, we were impressed by the CEOs description of Chevrons handling of operational risk as well as the improvements in oversight and assurance systems which are being put in place better to manage risk on an enterprise-wide level. We have engaged intensively with Chevron on these issues for a number of years. Specifically, we have addressed human rights concerns in Nigeria and Myanmar, environmental issues in Ecuador and risk management following Maccondo/Deepwater Horizon. We are pleased that Chevron is in the process of implementing an improved human rights strategy across its operations as part of our engagement with the company. Our work on risk management has included a visit from the companys San Ramon, California Headquarters to meet with the executives in charge of Chevrons environmental and risk management functions. We also met with Chevrons CEO and Head of Upstream Operations in 2013 to discuss these issues further. Overall, we were impressed by the CEOs description of Chevrons handling of operational risk as well as the improvements in oversight and assurance systems which are being put in place better to manage risk on an enterprise-wide level.

• For illustrative purposes only. The above
  information does not constitute a solicitation
  or offer to any person to buy or sell any
  related securities or financial instruments.

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Corporate engagement

• Global engagement activityCompany engagement by
  region between Q1 and Q4 2014

• Engagements in 2014
• We engaged with 446 companies and pursued 714
  separate engagement objectives
• Of the 714 objectives
• 15 were on the environment
• 48 were on governance and stewardship
• 22 were on social and ethical matters
• 15 were on strategy and risk management
• We have made progress on 48 of the companies we
  have engaged
• All engagements tracked using milestones

Milestone 0 Milestone 1 Milestone 2 Milestone 3 Milestone 4
Objective set Raised concern at appropriate level Company acknowledges issue Company commits to credible change Change implemented

• Source Hermes as at 31 December 2014.

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Intelligent voting

• Global voting activityIn 2014 we voted at 10,363
  meetings (99,724 resolution)

• Voting in 2014
• Voting is engagement-led and includes
  communication with management
• Voting covers more than10,000 companies
• Between Q1 and Q4 2014 we opposed management on
  10.4 of resolutions
• Includes communication with boards when voting
  against management
• Partnership with ISS provides best-in-class
  voting execution platform
• Value to clients
• Ability to exercise voting rights in alignment
  with bespoke policies, without the overheads of
  administering this internally
• Intelligent voting service focused on generating
  change

• Source Hermes EOS quarterly reports.

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ESG integration Investment analysis

• Hermes ESG Dashboard
• Proprietary analysis tool accessible through
  Bloomberg
• Best of breed data sources
• Hermes EOS, Sustainalytics, Trucost, Bloomberg,
  FactSet
• Hermes EOS engagement progress and voting
  decisions
• QESG Score shows whether a companys level of ESG
  risk is improving or worsening
• Highlights ESG controversies
• Environment impact assessments
• Sector-specific key performance indicators

• Source Hermes as at August 2014. For
  illustrative purposes only. The above information
  does not constitute a solicitation or offer to
  any person to buy or sell any related securities
  or financial instruments.

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ESG integration How it can influence decisions

• Selection of examples across Hermes equity
  strategies

Held/invested in stock notwithstanding awareness of ESG risk factors Held/invested in stock notwithstanding awareness of ESG risk factors
Viacom It is a controlled company but the risk is not deemed sufficient to warrant selling. We are taking a more qualitative approach to assessing ESG risk
Cosan Held this stock since 2010 but now considering selling due to strong governance concerns, complexity of structure and opaqueness.
Bayer Continue to hold. Aware of potential regulation that could impact crop science business.
Did not buy/reduced position due to concerns on ESG risk Did not buy/reduced position due to concerns on ESG risk
Barrick Gold Did not invest due to excessive ESG concerns, particularly around health and safety.
Kilroy Realty Sold because felt the consistently excessive remuneration of management, which was insufficiently correlated with returns for investors
Petrobras Sold due to a number of factors, including state interference in the governance structure and price of subsidies, which means it is not selling at market price
Held/invested in stock due to encouraging engagement Held/invested in stock due to encouraging engagement
Freeport Mc Moran Monitoring this company as it is exposed to ESG risks through its Grasberg mine in Indonesia. Aware of the risks but continue to hold while EOS are actively engaging
China Mengniu Dairy Investment that included lots of engagement around product safety. The company has recovered from a scandal and has now more stringent supply chain standards, company doubled in value in the last two years.
Sodexho Maintain position - good disclosure and ESG information. EOS engagement provides added value
Buy due to good ESG profile Buy due to good ESG profile
Novo Nordisk Business model addresses big thematic issues such as obesity and diabetes Growing trend - particularly in emerging markets
Gildan Activewear Buy due to great labour and community relations and very strong environmental credentials particularly through efficient and innovative operations
Randgold Very high QESG score. Committed to high social and ethical standards. Works with DRC governments. Employs locals to lead/manage the mines.
Conch Buy due to best in class among Chinese cement companies. Well prepared for new pollution legislation in China. Winner for the future.
Source Hermes as at February 2015. For
illustrative purposes only. The above information
does not constitute a solicitation or offer to
any person to buy or sell any related securities
or financial instruments. There is no guarantee
that Hermes continues to hold, nor does not as of
this date, hold the stocks mentioned above.
GEMS
Global Equities
Sourcecap
SMID
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ESG integration Case study (i)

• The regeneration of Kings Cross

• Responsible property investment at Hermes
• Hermes a key force in the conversion of the
  railway lands into N1C, the first new London
  postcode in a century
• New 67-acre site delivers both strong investment
  returns to Hermes clients and socio-economic
  benefits to the community
• Corporate offices Google, The Guardian, Eurostar
  and High Speed 1, Macmillan Science and Education
  Publishers
• Central Saint Martins campus, University of the
  Arts London
• 45,000 residents 2,000 new homes 300 social
  housing units
• Local apprentices trained during construction
  before securing full-time employment
• New primary school, nursery and community centre
  for the London Borough of Camden
• Heritage buildings restored and community spaces
  created

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ESG integration Case study (ii)

• China Mengniu Dairy Better returns from better
  governance
• Catalysts
• Milk consumption rising from low base in China
• New management underrated by market
• Consistent earnings growth, high RoE
• Dominant industry position
• ESG factors
• Improving supply chain and quality controls
• Market overstating ESG concerns
• Steps taken to improve food safety
• Hermes EOS engagement

• China Mengniu Dairy share price

• Source Bloomberg as at 28 February This stock
  was bought in March 2012 and is still held within
  the portfolio. For illustrative purposes only.
  Past performance is not a reliable indicator of
  future results. The above information does not
  constitute a solicitation or offer to any person
  to buy or sell any related securities or
  financial instruments.

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Public policy and industry best practice

• Hermes has a comprehensive programme of
  engagement with legislators, regulators, industry
  bodies and other standard setters to help shape
  capital markets

Corporate governance
Environment
Shareholder rights Single-class share structure,
related-party transactions, board disclosure,
proxy access, majority voting Board structure
Requisite skills, independence,
diversity Executive remuneration sSy on pay, pay
for performance, risk alignment

• Support the management of carbon emissions, water
  and pollution risk through engaging on
• Disclosure of resource use
• Best practice targets and delivery
• Carbon-pricing mechanism

Social
Stewardship
Sector and issue coverage
Appropriate board oversight and robust processes
on Labour rights Health and safety, right of
association, lack of discrimination, living
wage Unlocking human potential Local community
rights Access to finance and medicine Bribery and
corruption
Development of stewardship codes Fiduciary duty
clarification Effective company
reporting Minority interest protection Dialogue
between investors and directors
Banks Board structure, culture change,
compensation, risk, company structure.. Extractive
s Stranded assets, carbon emissions, pollution,
health and safety Retail Supply chain, labour
rights, indigenous populations
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Promoting responsible investment

• Helping to bring responsible investment from the
  fringe to the centre
• Hermes is actively involved with the following
  organisations
• UN PRI
• International Corporate Governance Association
• Asian Corporate Governance Association
• UN Environment Programme Finance Initiative
• Carbon Disclosure Project
• CFA Institute Centre for Financial Market
  Integrity
• Council of Institutional Investors
• Global Real Estate Sustainability Benchmark
• International Investors Group on Climate Change
• Eumedion
• Extractive Industries Transparency Initiative

• Regional and national forums
• Eurosif
• ASRIA (Asia Pacific)
• UKSIF
• NAPF
• USSIF (United States)
• RIAA (Australia)
• Canadian Coalition of Good Governance
• KOSIF (Korea)
• DSW (Germany)
• FIR (French Social Investment Forum)
• Assogestioni (Italy)
• Dansif (Denmark)

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Summary

• Hermes At the forefront of stewardship and
  responsible investment
• Our track record in stewardship and responsible
  investing began in 1993 and has grown stronger
  over time
• Stewardship functions portfolio screening,
  corporate engagement and intelligent voting
  inform the rigorous integration of ESG risks into
  our investment decisions
• As long-term investors in equity, fixed income
  and private markets, we seek to generate
  excellent performance for our clients
  responsibly
• This also helps to create a more sustainable
  environment and economy for pension fund
  beneficiaries, thus contributing to positive
  change beyond the scope of our mandate
• Our extensive engagement in public policy and
  industry forums helps promote stewardship in the
  investment industry

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Disclaimer

• This document is for Professional Investors only.
  In Australia this document is directed at
  Wholesale Clients only. Any investment products
  referred to in this document are only available
  to such clients. Investing with Hermes may be
  restricted in other countries and as such, any
  person who receives this document is required to
  make themselves aware of their respective
  jurisdictions and observe any restrictions.
• This document does not constitute a solicitation
  or offer to any person to buy or sell any related
  securities or financial instruments nor does it
  constitute an offer to purchase securities to any
  person in the United States or to any US Person
  as such term is defined under the US Securities
  Exchange Act of 1933. It pays no regard to the
  investment objectives or financial needs of any
  recipient. No action should be taken or omitted
  to be taken based on this document. Tax treatment
  depends on personal circumstances and may change.
  This document is not advice on legal, taxation or
  investment matters so investors must rely on
  their own examination of such matters or seek
  advice. Before making any investment (new or
  continuous), please consult a professional and/or
  investment adviser as to its suitability.
• Any opinions expressed may change. The value of
  investments and income from them may go down as
  well as up, and you may not get back the original
  amount invested. Any investments overseas may be
  affected by currency exchange rates. Past
  performance is not a reliable indicator of future
  results and targets are not guaranteed.
• All figures, unless otherwise indicated, are
  sourced from Hermes. For more information please
  read any relevant Offering Documents or contact
  Hermes.
• Issued and approved by Hermes Investment
  Management Limited which is authorised and
  regulated by the Financial Conduct Authority.
  Registered address Lloyds Chambers, 1 Portsoken
  Street, London E1 8HZ. In Singapore, this
  document is distributed by HFM Singapore, which
  is a capital markets services holder for fund
  management under the Securities and Futures Act,
  Cap 289 (SFA), and an exempt financial adviser
  under Section 23(1)(d) of the Financial Advisers
  Act, Cap 110 (FAA). Accordingly, HFM Singapore
  is subject to the applicable rules under the SFA
  and the FAA, unless it is able to avail itself of
  any prescribed exemptions. HFM Singapore is
  regulated by the Monetary Authority of Singapore.
• The main entities operating under the name Hermes
  are Hermes Investment Management Limited
  (HIML) Hermes Alternative Investment
  Management Limited (HAIML) Hermes Sourcecap
  Limited (HSL) Hermes Real Estate Investment
  Management Limited (HREIML) Hermes Equity
  Ownership Limited (HEOS) Hermes GPE (USA) Inc
  (Hermes GPE USA) and Hermes Fund Managers
  (Singapore) Pte. Limited (HFM Singapore). All
  are separately authorised and regulated by the
  Financial Conduct Authority except for HREIML,
  HEOS, Hermes GPE USA and HFM Singapore. HIML
  currently carries on all regulated activities
  associated with HREIML. HIML, HSL and Hermes GPE
  USA are all registered investment advisers with
  the United States Securities and Exchange
  Commission (SEC).
• Telephone calls may be recorded for training and
  monitoring purposes. Potential investors in the
  United Kingdom are advised that compensation will
  not be available under the United Kingdom
  Financial Services Compensation Scheme

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Excellence. Responsibility. Innovation.

• Hermes Investment Management
• Hermes Investment Management is focused on
  delivering superior, sustainable, risk-adjusted
  returns responsibly.
• Hermes aims to deliver long-term outperformance
  through active management. Our investment
  professionals manage equity, fixed income, real
  estate and alternative portfolios on behalf of a
  global clientele of institutions and wholesale
  investors. We are also one of the market leaders
  in responsible investment advisory services.
• Our investment solutions include
• Private marketsInternational Real Estate, Pooled
  funds, Segregated mandates, UK Real Estate, UK
  Real Estate Debt, Infrastructure, Private Equity.
• High active share equitiesAsia, Global Emerging
  Markets, Greater China, Europe, Global and Small
  Mid Cap.
• Specialist fixed incomeGlobal High Yield Bonds,
  Illiquid Credit, Multi Strategy Credit, UK
  Government Bonds and UK Global Inflation-Linked
  Bonds.
• Multi assetMulti Asset Inflation
• Responsible Investment ServicesCorporate
  Engagement, Intelligent Voting, Public Policy
  Engagement and PRI.
• OfficesLondon Singapore
• Contact information

United Kingdom 44 (0)20 7680 2121 Africa 44 (0)20 7680 2205 Asia Pacific 65 6808 5858 Australia 61 2 9924 6402
Canada 44 (0)20 7680 2136 Europe 44 (0)20 7680 2121 Middle East 44 (0)20 7680 2205 United States 44 (0)20 7680 2136
Enquiries marketing_at_hermes-investment.com marketing_at_hermes-investment.com marketing_at_hermes-investment.com
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