Engagement Reporting

Emerging and Frontier Markets Go to Top

Hermes EOS was pleased with the progress an emerging markets company has made in the implementation of its compliance programme. In its previous engagement, on behalf of PNO Media, Hermes EOS had raised concerns about the poor oversight by the parent company over its 22 local operations. Hermes EOS was encouraged that the new CEO, who took over in the first quarter of 2017, expressed the same view. In a call, Hermes EOS asked the chief compliance officer about the development of the compliance programme, which the company had presented to Hermes EOS in the second quarter of 2016. He described the structure that has been put in place, which includes the chief compliance officer, three regional compliance officers and a compliance officer in each local operating company who report to the local CEOs and regional officers. Hermes EOS asked about the actions aimed at establishing a group-wide compliance culture. As a first step and to develop a common culture across the group, the company held a workshop for all compliance officers. The policies and training resources meanwhile are being translated into the various languages of the countries where the company operates. In addition, as part of the scorecard, local senior management has key performance indicators which are based on compliance. Hermes EOS reiterated that the company’s poor oversight also impacts the relationship with the local regulators and asked about developments in this area. The company acknowledged the concern and highlighted that its new CEO has visited most of the regulators to improve the relationship. Furthermore, a group regulatory officer has been appointed to ensure a coherent approach to dealing with regulators. Hermes EOS will follow up with the chief compliance officer on training and the disclosure of compliance metrics.

Hermes EOS welcomed the commitment of another emerging markets company to disclose climate change data to the CDP initiative and to publish medium-term targets for its sustainability key performance indicators. On behalf of PNO Media, Hermes EOS had been pressing the company to submit its response to the CDP questionnaires on climate change, water and forests, as many of its peers already do. Therefore, Hermes EOS welcomed the plan to submit a public response to the climate change questionnaire in 2018 and to the other surveys subsequently. In a meeting with Hermes EOS, the company’s head of sustainability business intelligence also agreed with the request to disclose medium-term targets for carbon emissions, water and energy in relation to its key performance indicators. Hermes EOS discussed the climate change adaptation initiatives underway. The company described the increase in recycling rates of water and the reduction of water use per tonne produced. It is adapting its management techniques to regional weather characteristics. Hermes EOS was encouraged by the steps the company has taken to address its climate change risks and agreed to provide feedback once its sustainability targets and CDP responses are published.

Hermes EOS was pleased to learn in a meeting with the chair of the third-largest fund manager in China and a member of the Principles for Responsible Investment and the Asian Corporate Governance Association that China is to step up its commitment to address environmental, social and governance (ESG) issues, including the potential introduction of an ESG index and rating system for 2018 which suits the local markets. This is consistent with the message Hermes EOS received from the regulator’s research institute in June 2017 when it spoke at the country’s first responsible investment forum. Hermes EOS was invited to Beijing to participate in an educational session for stakeholders. It aims to continue to contribute to the development of the responsible investment industry in Mainland China.

The AmericasGo to Top

While Hermes EOS was pleased that a US company appears to be ahead of its existing low-carbon financing target, it again suggested that it increase this. Hermes EOS also pushed for the company to report fully against the recommendations of the Task Force on Climate-related Financial Disclosures. On behalf of PNO Media, Hermes EOS met the company’s the lead independent director and compensation committee chair, as well as a number of its senior management, as the company continues its progression from the financial crisis. Hermes EOS reflected on the wider strategy as the memory of the financial crisis fades and the company’s clients seek greater returns. The company maintained that it wants to grow responsibly and provided examples of how it is doing this through continued evolution of its pay and human capital management practices, in particular a continuous assessment of its pay practices to ensure there is no fatal flaw. On a different note, Hermes EOS agreed that the company should develop its succession plans for the lead independent director and will continue to encourage it to find a similarly high-quality successor.

On behalf of PNO Media, Hermes EOS, together with a number of large US pension funds, co-signed a letter to the lead independent director of another North American company, welcoming the two new appointments to its board, at the same time as seeking further reform to its governance. This includes additional board appointments to improve the company’s independence, diversity and human capital expertise. The group also sought a strengthening of the role of the company’s lead independent director, its executive pay policy and its implementation of proxy access. Furthermore, Hermes EOS focused on improving the company’s health and safety record, which seems poor. Given the company’s ambitious production plans, this could be an increasing risk. In a subsequent collaborative engagement, the company described its three-to-five year business strategy outlook, while Hermes EOS assessed its ability to manage its supply chain. The company is only at the beginning of its journey to manage human rights risks in its supply chain and recently joined the Electronic Industry Citizenship Coalition. It has participated in a number of supply chain audits with its main supplier, up to fourth tier suppliers at a certain level, which Hermes EOS was pleased with. However, Hermes EOS expressed concerns about the company’s limited disclosure of its supply chain management efforts and encouraged concrete actions to improve the transparency. It also pushed for a comprehensive strategy to promote the circular economy beyond the recycling of materials. The company promised to consider formulating a strategy in relation to this.

Hermes EOS agreed to become an endorser of the US Investor Stewardship Group, which has developed lowest common denominator corporate governance and stewardship codes for the US market. On behalf of PNO Media, Hermes EOS welcomes the initiative as an important step in the evolution of governance in the US, where regulators and stock exchanges lack the will to enact their own codes. While the codes are insufficiently stringent and lack a formal monitoring and review mechanism, Hermes EOS decided on balance that it is better to participate in the initiative and argue for change than to stand aside from it. It seeks to participate in the promised review of the provisions of the codes to seek further progress.

Asia-PacificGo to Top

Hermes EOS completed an engagement objective on integrated reporting with an Asian company, following the publication of its latest report. In 2016, the company published its first integrated report and promised to adopt a better methodology to calculate the value add of economic, environmental and social capital. This year, in line with the recommendations of the integrated reporting framework, the company provided more detail about the methodology behind its value measurement, the calculation method and value distribution among its stakeholders. The report also includes details about the impact of the UN Sustainable Development Goals (SDGs), as well as progress and plans in relation to these, building on last year’s SDG goal-setting process. Encouragingly, its global privacy policy will expand to cover more products and become more visible to customers and other stakeholders. However, Hermes EOS noted a significant lack of information about the company’s monitoring of its supply chains and audits beyond second tier suppliers. This was particularly disappointing after Hermes EOS had urged the company over the past year to focus on human rights violations and child labour issues in its supply chain. Hermes EOS again called on the company to strengthen its supply chain disclosures and to consolidate some of its 2,700 first tier suppliers that make end-to-end supply chain transparency difficult. It also recommended the company reach out to an NGO to gain an understanding of the areas where it needs to make improvements. Furthermore, the company’s 2016 efforts on greenhouse gas emissions, water intensity and recycling failed to meet their targets. On behalf of PNO Media, Hermes EOS called on the company to revise its environmental performance targets given the changing business composition and will continue to monitor its performance versus targets. On a different note, Hermes EOS was disappointed with the lack of progress the company has made in the recruitment of an independent director with executive and international experience. Hermes EOS will connect the company with a US-based Women in Governance group after it expressed an interest in having a female director with an understanding of the US market on board.

In view of high-profile global cyberattacks, Hermes EOS was reassured by the measures another Asian company has taken to strengthen its cyber security. As a member of the Financial Security Institute, an agency set up to safeguard the company’s financial sector, the company receives technical cyber security training, as well as information about cyberattack patterns and risk trends. Its cyber risk committee, which is made up of representatives from cyber security institutes, universities and white hat hacker groups, provides cyber risk updates and advice. In addition, a white hat hacker group is contracted to identify weak points in the company’s cyber security systems. The company uses this information to continually revise and upgrade its security systems. Positively, the company’s management of cyber risks led to the threat from a cyberattack being handled in an appropriate and timely manner.

The Hong Kong Stock Exchange put forward a new board consultation that aims to provide listing opportunities for companies with weighted voting rights structures. On behalf of PNO Media, Hermes EOS strongly advised against the suggested non-standard governance structure in a one-track or dual-track listed regime as proposed in the paper and provided comments on a number of arguments that sought to justify the weighted voting rights structures.

Europe ex-NetherlandsGo to Top

While Hermes EOS was pleased with the pioneering work of a European company on how it measures the impact of its products and behaviour on society, some questions about its implementation remain. Hermes EOS views the company’s value-to-society framework, which measures impacts across its value chain, as a positive attempt to holistically measure its sustainability performance. A shortcoming of the framework is that some social indicators, such as human rights, are not yet incorporated. In a meeting with Hermes EOS on behalf of PNO Media, the vice president of sustainability said that the company is collaborating with NGOs and insurance companies to overcome this. Importantly, the framework was developed in collaboration with 25 other companies and the company pointed out its willingness to share the learnings from this process. Hermes EOS also gained broad reassurance that the company has the right sustainability strategy in place, although the pace of progress against some of its set targets could be faster. Hermes EOS also questioned the slow progress on the company’s lost time injury frequency rate (LTIFR), which has hardly changed over the last four years, as well as on its greenhouse gas emissions reductions target, on which the company only made significant advances over the last year. The company admitted that it still has a long way to go on LTIFR although Hermes EOS was encouraged that its data collection distinguishes between different severities of injuries. Hermes EOS was also comforted that the company’s principles of its responsible care system apply to its contractors. In a third meeting with a member of the executive management board, Hermes EOS demanded greater disclosure from the company on its tax strategy and climate change lobbying. It believes that increasing sales of electrified vehicles should be positive overall for the company, assuming that regular combustion engines will continue to grow at 2-3% until 2025. Hermes EOS highlighted the long tenure of the company’s executive management team but the company argued that this allows for a more open discussion on sensitive topics. It pointed out that its governance structures are designed to prevent the emergence of an old boys’ network. The company pushed back on Hermes EOS’ enquiry about the disclosure of its climate change lobbying activities, saying that it sufficiently publicises its preference for a global agreement on climate change. However, Hermes EOS insisted that greater disclosure is necessary in view of its influence on global policy-making and the level of scrutiny the company continues to receive on its lobbying activities.

Hermes EOS gained extensive reassurance about the approach to human rights of another European company. Its head of human rights described how the company has strengthened the integration of the subject across the organisation. Hermes EOS commended the clear tone from the top, the extensive cross-functional training on human rights and the pragmatic collaborative project-based approach on the issue. Hermes EOS also understood how the company manages complex issues, for example through its focus on indigenous rights. Hermes EOS obtained good responses to its questions on specific countries and projects. It welcomed the company’s commitment to work alongside other stakeholders and to enhance the disclosure of its efforts on human rights. Its handling of these challenges has been recognised by the Corporate Human Rights Benchmark initiative. In addition, Hermes EOS was pleased that the company acknowledges that this is only the start of the journey, as it spoke about areas for improvements, such as due diligence and remediation. Furthermore, it gained additional insights into the company’s strategy to adapt to a low-carbon environment.

In a meeting with the Financial Conduct Authority (FCA), on behalf of PNO Media, Hermes EOS conveyed concerns about the proposed exemption to existing investor protection rules for companies with a sovereign controlling shareholder wanting to obtain a premium listing in the UK. The FCA acknowledged that the existing rules are a problem for only a small number of companies and provided reassurance that it does not want to dilute the UK’s standards of governance. Hermes EOS accepts that a national government is inherently a more complex organisation, which can lead to problems of compliance with existing rules. Nevertheless, it pointed out that not all sovereign-controlled companies have a good track record of utilising shareholder capital solely for the purposes of independent business. Therefore, a dilution of, for example, minority shareholder oversight of related party transactions is concerning.

The NetherlandsGo to Top

A Dutch company is contemplating updating its policies and procedures to ensure a more thorough check before it finances projects. The company was part of a group funding the controversial Dakota Access Pipeline (DAPL). The Standing Rock Sioux Tribe had opposed the construction as it intended to pass through historic lands, which is why the companies involved in the construction and financing of the DAPL have been criticised for their inadequate community engagement by the UN and others. As a signatory to the Equator Principles, the company is required to ensure adequate due diligence is undertaken, which includes verification of informed consent by indigenous peoples, before financing any projects. It stated that during the approval process of a transaction, a special committee takes into account credit, country and legal, as well as environmental and social risks. In the case of the DAPL, many factors gave the company reassurance about the mitigation of these risks. This included, in particular, approval by the US government for the project after meetings with 55 tribes and various public input hearings. However, the company’s chair said that the tribe did not raise its voice during the consultation process. On behalf of PNO Media, Hermes EOS will follow up with the company on the need to develop relationships built on trust with indigenous communities when seeking free prior informed consent.