Improving corporate governance in emerging markets, decarbonizing investment portfolios, and tackling inappropriate remuneration are other topics that the Active Ownership team will tackle this year.
The team selects new engagement themes every year in a structured way, in close consultation with clients and Robeco’s investment teams. The themes always focus on financially material topics that address environmental, social and governance (ESG) issues in a variety of investible arenas.
“Robeco’s investment teams bring a deep understanding of a company’s specific circumstances, strengthening our engagement approach,” says Carola van Lamoen, Head of the Active Ownership team. “By consulting with our clients during our annual client panel, we also make sure that the topics we engage upon are relevant to them as well.”
With the five new topics added for 2020, the multinational and diverse Active Ownership team now has 23 engagement themes in scope.
Combatting biodiversity loss
“Biodiversity loss is one of the major global ecological threats expected to impact society in the coming decades,” says Van Lamoen. “Investors are exposed to biodiversity loss predominantly through land use change as a result of deforestation through clearing land for expansion of agricultural production.”
“We want companies that produce soy, cocoa or palm oil, or companies that manufacture food to conduct a biodiversity impact assessment of their operations and/or their supply chains. We also want them to develop plans to achieve zero net deforestation by 2023.”
“What the impact of biodiversity is on a specific company is difficult to pinpoint. In the short term, if there are fewer bees or fewer species of birds, that’s not a big issue for individual companies.”
“But if you look at this on a global scale, if we face the extinction of species, then the world will become very different. This will have a large impact on the ability of companies to produce food at the current scale of production. It’s a very challenging topic, so we are collaborating with different stakeholders related to it, such as universities, NGOs and the DNB Working Group on Biodiversity, to gain input on how to approach this topic from an investor perspective.”
Improving mining safety
The second theme is improving safety at mining companies after a number of fatal accidents involving tailing dams – an embankment used to store the byproducts of mining operations. Some 248 people were killed when a Brazilian tailings dam collapsed in January 2019.
“We've seen recent accidents that highlight the environmental, social and financial impact of tailings dam failures,” says Van Lamoen. “Existing guidelines are insufficient to prevent failures from reoccurring – and some companies have had recurring incidents.”
Robeco is an active member of the Investor Mining and Tailings Safety Initiative, a global engagement program co-led by the Church of England and the Swedish Council on Ethics. Engagement specialist Sylvia van Waveren sits on its steering committee.
“So far, this initiative has contacted over 600 companies requesting that they disclose their tailing dam risks,” says Van Lamoen. “But our engagement will be broader than the focus of the joint initiative. We will also look at water management practices which are highly relevant for mining companies, as we want to align water management with best practices.”
Governance in emerging markets
The third engagement theme will focus on emerging markets. “The starting point is that the governance standards in emerging markets are often different from those in developed markets,” says Van Lamoen.
“Often, those differences are not beneficial for institutional minority shareholders, so if we improve the corporate governance of such companies, then we can also notably improve the position of institutional investors.”
"The main focus for these engagements will be on markets like Brazil, South Korea and China. We will also look at opportunities for policy engagement in collaboration with local investor initiatives.”
These local initiatives include the Asian Corporate Governance Association (ACGA) and the Associação de Investidores no Mercado de Capitais (AMEC) in Brazil. Robeco is closely involved in those investor collaborations; Hong Kong-based engagement specialist Ronnie Lim serves as an ACGA council member, while Rotterdam-based emerging markets portfolio manager Daniela da Costa-Bulthuis is an AMEC board member.
Decarbonizing companies and portfolios
The fourth theme is focused on the increasingly urgent need to decarbonize companies – and thereby portfolios – to meet commitments to the Paris Agreement, which aims to restrict global warming to 1.5 degrees Celsius above pre-industrial levels by 2100. To achieve this, the world needs to halve its carbon footprint by 2030 and become carbon neutral by 2050.
“This is a follow-up on our climate action theme that we launched in 2018,” says Van Lamoen. “It is clear that climate change represents a significant threat to investments and the global economy. To protect against this threat, investors should align their portfolios with the goals of the Paris Agreement.”
“The main aim of this engagement will be on decarbonizing companies, not only focusing on the high polluters in absolute terms, but also on the high polluters in portfolios, as measured by their Weighted Average Carbon Intensity.”
Seeking sensible remuneration
Finally, the team will engage on executive pay, aiming to make sure that remuneration reflects company performance (both financial and ESG-related), is aligned with the interests of stakeholders, and conforms to existing pay practices with a focus on simplicity.
“Looking at remuneration is of course not new, as we already vote at shareholder meetings on remuneration policies and reports, so we will extend this focus via engagement,” says Van Lamoen.
“There is renewed momentum for engagement both in the US and EU, where the new Shareholder Rights Directive II requires companies to have their remuneration policies approved by investors in advance, and to improve their practices. The remuneration policy of key executives should be aligned with the long-term value creation of the company.”