Engagement Reporting

Emerging and Frontier Markets Go to Top

Hermes EOS was delighted with the improvements in sustainability that an emerging markets company has made over the last 12 months of the engagement it has conducted on behalf of PNO Media. The company has developed and implemented a sustainability strategy in line with the UN Sustainable Development Goals. Furthermore, it has set and committed to disclosing quantitative targets in relation to the adaptation to climate change, use of clean energy, recycling practices and the circular economy. It has a three-year plan, which includes case studies and will be disclosed in its ESG report. The company has also begun to include sustainability indicators in the remuneration of the managers of its operational sites. It has been recognised as an industry leader by its peers and is involved in the development and promotion of best practice standards. Positively, the company is, as a result of the pressure applied by Hermes EOS, also considering participating in a training of the CDP initiative.

On behalf of PNO Media, Hermes EOS commended another emerging markets company for the publication of its first integrated report, which sets a benchmark in its home market. In its previous engagements with the company’s head of sustainability, Hermes EOS had encouraged it to adopt the integrated reporting framework and provided examples of best practice. It reviewed the sustainability targets published in the company’s integrated report and was encouraged that the company had responded to its previous engagements on supply chain sustainability by committing to cover 55% of its procurements with due diligence and audit procedures by 2020. While commending the company for publishing this ambitious target, Hermes EOS challenged the feasibility of achieving it by 2020, given that at the moment only 17% of its purchases are covered by the programme. The company acknowledged the ambitiousness of the target and admitted that to date progress has been slow. However, it sought to reassure that the group-wide target is achievable. The issue is now part of the executive committee’s agenda and local management in each country of operations has been set a supply chain target under the programme. Hermes EOS also gained an insight into the governance of sustainability at the company. It was particularly pleased with the appointment of a senior executive for the new position of vice president of sustainability. Hermes EOS believes that his participation in the executive committee means that environment, social and governance issues – such as supply chain management, occupational safety and environmental impact – are of even greater priority. However, Hermes EOS raised concerns about the lack of diversity at the company’s board. The board has no female directors and, despite being a multinational company, all the directors are nationals of the company’s home market. In a call with Hermes EOS, the new board secretary confirmed that the board intends to increase its diversity in terms of gender and nationality by nominating a woman and a national from a country where the company has extensive operations. However, while it has the candidates lined up, they may not be available to join the board in 2018. Furthermore, Hermes EOS questioned the plan to replace the long-serving directors, as, according to best practice, they can no longer be considered independent. The board secretary promised to convey the concerns to the chair. On behalf of PNO Media, Hermes EOS pressed the company to perform an independent external board evaluation and highlighted the possible benefits of increasing board effectiveness and identifying gaps in skills. The board secretary again promised to discuss the matter with the chair and asked for examples of best practice, as board evaluations are uncommon in the country.

On behalf of PNO Media, Hermes EOS spoke at China’s first responsible investment forum, which was hosted by the asset management association of the China Securities Regulatory Commission. Keynotes from director-generals from the National Social Security Fund and Development Research Centre of the State Council sent a strong message of the Chinese government’s commitment to responsible investing, from assessments of environmental, social and governance (ESG) factors to impact investments. Encouragingly, the chair of the China Association for Public Companies advocated the involvement of boards in the sustainability strategies of companies to promote ESG awareness and implementation.

The AmericasGo to Top

An behalf of PNO Media, Hermes EOS had a positive call with the head of sustainability and corporate secretary of a bank about the lessons learned from the Dakota Access Pipeline (DAPL) project. Unusually, it publicly posted updates on its website acknowledging that it had made serious mistakes in relation to the due diligence in its financing of the project. The bank intends to apply the lessons it has learned from the DAPL to future projects. It also noted a disparity between the Equator Principles and domestic US law, in particular regarding the free, prior and informed consent of indigenous peoples to projects affecting them. The bank has since updated its policies and procedures and is working on a thorough enhancement of its processes. It believes that its higher diligence standards will mean that from now on it will not lead or join consortia with standards below its new expectations. Furthermore, while agreeing to disagree on a number of the shareholder proposals which Hermes EOS supported, the corporate secretary said the company would review the disclosure in relation to its political and lobbying activities. Hermes EOS also encouraged the company to explain the reasons for any gender pay gap and how it is addressing it. Meanwhile, the company has been working on anti-discrimination against women and minorities in hiring and performance management, using targeted measures, such as diverse interview panels and analysis of the reasons for discriminatory behaviour by line managers and others. More widely, it continues its ethical leadership training across the business globally. The company has also further improved the structure of its pay schemes over the past year. Hermes EOS’ engagement objective on better targets and risk management in relation to its pay strategy appears complete, subject to internal review.

On behalf of PNO Media, Hermes EOS signalled its opposition to the passage of the US Choice Act 2017 by writing to the chair and the ranking member of the US House of Representatives’ Committee on Financial Services, endorsing the letter that the Council of Institutional Investors (CII) had sent to them both. Hermes EOS also co-signed a letter from the CII to selected members of the House of Representatives. Among the counter-reforms contained in the draft legislation are plans to make it more difficult to file shareholder proposals, greater regulatory requirements on proxy advisory firms, restrictions on voting in contested director elections, as well as reductions in the rights of shareholders to an advisory vote on executive pay and in the ability of the Securities and Exchange Committee to carry out its regulatory functions. Hermes EOS is concerned that these measures will make it harder for shareholders to hold boards to account in the US and so will continue to seek ways to push back against the proposals.

Asia-PacificGo to Top

Hermes EOS was pleased that, despite the challenges of addressing human rights issues in its home country, an Asian company took the first step by publishing a policy and associated due diligence guide for responsible supply chain management and conflict minerals, leading local best practices. This was at least partly the result of the extensive engagement by Hermes EOS on the company’s supply chain. The company’s efforts to improve the management of its supply chain were already reflected in its 2015 sustainability report, with further notable progress outlined on its website in 2016. The company has identified conflict minerals from the Democratic Republic of Congo and adjoining countries as one of its salient human rights issues. It has laid out the actions to be taken to ensure that its supply chain is free from human rights violations and created a five-step framework for risk-based due diligence in mineral supply chains. This includes independent third party audits and improvements in reporting and public disclosure over time. Hermes EOS commended the efforts in addressing human rights issues within the company’s sphere of influence.

Another Asian company has developed corporate social responsibility (CSR) strategies with performance indicators to be met by 2020, which were published online alongside its CSR report. It also conducted an in-depth analysis of how its business objectives are aligned with eight key Sustainable Development Goals. Furthermore, the company has committed to becoming carbon-neutral and has taken on board the suggestion of Hermes EOS to report on human rights according to the UN Guiding Principles (UNGP) Reporting Framework. In 2016, it conducted human rights assessments at seven of its major subsidiaries and 24 partner companies. Human rights risks were identified in one subsidiary and three partner companies, which the company plans to resolve. The confirmed potential threats to human rights are the protection of customer privacy, insufficient whistle-blowing and grievance channels, as well as long working hours. The company described the steps it has taken to address these issues and how its partner companies are working to improve the conditions of, and communication with, their workers. It provided details on how it leverages its position to establish a responsible supply chain as per the UNGP. Overall, the 2016 CSR report demonstrated a thoughtful view on the integration of environmental, social and governance factors into business models, accompanied by a culture that reflects the value of compassionate finance for its customers and focuses on human capital management. On behalf of PNO Media, Hermes EOS also had a productive discussion at the company’s headquarters on strategy, cyber security, diversity and human rights reporting. Overall, it was pleased with the progress the company has made in these areas. The executives explained the reasons for growing the business for small-to-medium enterprises, linking culture, capabilities and corporate mission.  Furthermore, Hermes EOS was pleased to hear that it has an impact-driven business which focuses on supporting successful entrepreneurs in South Korea, which has been replicated in Vietnam, and may now start in Indonesia. The business focus is always adjusted to suit the needs of local communities. The company took on board Hermes EOS’ suggestions to include additional information on cyber security and data privacy in its upcoming sustainability report. It also reviewed best practice in human rights reporting and improved its own reporting, using the UN Guiding Principles Reporting Framework. Nevertheless, Hermes EOS told the company that it could improve in capital efficiency and dividend payout, human capital and human trafficking.

On behalf of PNO Media, Hermes EOS, in response to a consultation by the Singapore Exchange (SGX), made clear that it is not supportive of the proposed introduction of a dual-class share framework in Singapore. Hermes EOS expressed its strong belief in the principle of one-share one-vote, which gives all shareholders equal rights and aligns voting rights with economic interests and investment risks. Nevertheless, it acknowledged the thorough consideration the SGX has given this matter and the steps it has suggested to address the risks of a dual-class share structure. While Hermes EOS continues to believe that allowing these structures would be a step backwards and potentially harm market integrity, the suggestions were mostly reasonable and, if implemented correctly, could be effective in mitigating much of the risk of abuse by owner managers. Hermes EOS therefore urged the SGX to mandate all of the suggested criteria and safeguards should it proceed with the introduction of a dual-class share structure in Singapore.

 

Europe ex-NetherlandsGo to Top

Hermes EOS was satisfied that the data privacy policy of a European company follows best practice. Following its previous engagement with the board secretary, Hermes EOS examined the policy in detail. It covers what data is collected, and how it is obtained, analysed and protected. The policy also establishes a grievance mechanism for data subjects to exercise their rights of access, rectification and cancellation. On behalf of PNO Media, Hermes EOS challenged the company on how it develops a culture of compliance with data privacy rules, given that it collects an enormous amount of consumer data. The company assured Hermes EOS that extensive training is provided to all employees. A data privacy unit, which is led by the company’s chief data security officer, enforces the policy. Hermes EOS also investigated the processing of consumer data by contractors providing services to the company. The company explained the contractual provisions and audit procedures in place to ensure contractors comply with its data protection standards.

Hermes EOS was pleased about the implementation of human rights action plans by another European company. On behalf of PNO Media, it asked the company about the progress of the human rights action plans that were the result of a comprehensive assessment undertaken in 2014/2015. Hermes EOS was satisfied that all the issues raised in the assessment have been addressed and almost all action plans have been implemented. As some plans are permanent in nature, however, the company does not report them as completed. Hermes EOS also commended the company for publishing its sustainability indicators targets but challenged the carbon footprint target, which does not seem to be sufficiently stretching. The company took the comments on board and explained that in order to set a science-based target it is developing the methodology to assess its carbon footprint. This should be ready in the fourth quarter of 2017. Furthermore, Hermes EOS raised concerns about the reputational risk of the company’s joint ventures in Brazil, China and Pakistan, as all of them have been involved in controversies relating to land ownership and labour rights. It asked how each local operation is dealing with the controversies and was encouraged with the actions taken to improve relationships with the communities. More broadly, on behalf of PNO Media, Hermes EOS challenged the company on how it oversees its joint ventures. The head of investor relations outlined the framework in place to mitigate reputational risk. A dedicated team at the head office oversees the joint ventures, and members of staff sit as non-executive directors on local boards. Hermes EOS gained reassurance from the progress on human rights and sustainability indicators and will follow up on the revised carbon footprint target.

On behalf of PNO Media, Hermes EOS provided a response to the UK Financial Conduct Authority’s (FCA) discussion paper reviewing the effectiveness of the UK’s primary markets. Hermes EOS explained its view that the existing market structure is well understood and provides for a multitude of listing options for companies. The paper questioned whether the listing regime should be re-balanced to create an international segment with more relaxed requirements for overseas than for domestic companies. Hermes EOS argued strongly that it does not see any merit in this proposition and believes that the same rules should apply to domestic and overseas companies listing on the UK market. More broadly, it argued that the ownership of shares should evolve with the way investors invest and in particular impose a greater responsibility to be good stewards than is recognised by investors today. Hermes EOS suggested that, within the remit of the FCA, changes could be introduced to help markets better fulfil their purpose.

 

 

The NetherlandsGo to Top

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