putting principles into practice

Transcription

1 putting principles into practice Insight s Annual Report on Responsible Investment 2013

2 The information presented in this document (the Information ) is for information purposes only. Under no circumstances should the Information be construed as: (i) legal or investment advice; (ii) an endorsement or recommendation to investment in a financial product or service; or (iii) an offer to sell, or a solicitation of an offer to purchase, any securities or other financial instruments.

3 Contents Foreword // 5 Responsible investment at Insight // 7 How Insight meets its commitments // 11 RESPONSIBLE INVESTMENT ACTIVITIES IN 2013 // 17 HOW INSIGHT IMPLEMENTS ITS RESPONSIBLE INVESTMENT POLICY // 27 STEWARDSHIP: THE NEXT PHASE IN RESPONSIBLE INVESTMENT? // 45 MANAGING ENVIRONMENTAL RISKS IN INVESTMENT PORTFOLIOS // 55 APPENDIX: SRI extract from insight global farmland due diligence checklist // 63 Insight s Annual Report on Responsible Investment

4 4 Insight s Annual Report on Responsible Investment 2013

5 Foreword In 2013, the importance of accountability across our public and private institutions came into clear focus. The discussion over how to encourage responsible practice in journalism, banking and politics intensified: perhaps most notably, revelations of widespread surveillance of citizens activities, often without the knowledge of our elected representatives, has driven intense debate over how we can effectively hold those in power to account. Abdallah Nauphal At Insight, this focus on accountability and responsible practice is not new. We remain Chief Executive Officer committed to encouraging responsible investment by the world s largest institutions, and hold environmental, social and governance issues at the heart of our investment process. We believe investors can hold company management to account and encourage them to bear such issues in mind. This is at the core of our efforts for clients, as a clear focus on sustainable and responsible conduct can support business growth and generate better returns in the long term. This report explains Insight s continuing efforts in 2013 to ensure that responsible investing remains an integral part of our investment process. Our analysts reported on issues relevant to environmental, social and governance issues for many individual companies, and last year we produced our first annual report focusing on our responsible investment processes with regard to our global farmland investments. We remain convinced that businesses have a clear impact on the environment and their local communities, and will continue to encourage our peers to adopt a similar approach to their investments. January 2014 About Insight Investment Insight Investment is a leading investment management firm. Over the past decade we have grown rapidly, based on the quality and focus of our investment capabilities and an open engagement with clients aimed at delivering customised investment solutions. Insight offers multi-asset and absolute return strategies, active global fixed income and currency, real asset strategies, liability risk management and structured solutions. The business is highly rated including ranking number one for both liability driven investment and fixed income management in the Greenwich Associates 2013 survey 1 and is well regarded by its industry peers, demonstrated by well over 50 significant awards since 2007 including UK Pension Awards Investment Manager of the Year 2013, Global Investor Asset Manager of the Year 2013, AiCIO LDI manager of the Year 2013 and Financial News Fixed Income Manager of the Year Insight has 273bn 2 under management and has been wholly-owned by BNY Mellon Investment Management since November Insight enjoys complete investment autonomy within BNY Mellon s unique multi-boutique asset management model. 1 Source: Greenwich Associates UKIC FI-13 fixed income investment: results are based on interviews with 15 UK consultants evaluating fixed income managers; UKIC LDI-13 segregated LDI investing: results are based on interviews with 13 UK consultants evaluating LDI managers. 2 Assets under management figure represents the combined assets under management of Insight Investment Management (Global) Limited and Pareto Investment Management Limited, which became part of the Insight group on 1 January Data as at 31 December Insight s assets under management are represented by the value of cash securities and other economic exposure managed for clients. Insight s Annual Report on Responsible Investment

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7 Responsible investment at Insight At a glance: key figures in (2012: 492) listed companies in fixed income environmental, social and governance (ESG) coverage 75 company ESG risk reviews completed 7 separate thematic ESG studies undertaken 1,013 (2012: 903) separate management meetings 271 (2012: 192) management meetings in which ESG issues were raised 2,922 (2012: 2,495) total equity votes cast 93 abstentions, withheld or votes against management 80 formal requests for responsible investment/esg information from prospective clients Insight remains committed to investing responsibly on behalf of our clients as we pursue their investment objectives. We recognise that institutional investors have a role to play, both as creditors and shareholders, in holding companies management to account for their performance and conduct. Our Responsible Investment Policy (see page 9) continues to be guided by three aims: An appropriate consideration of ESG issues in investment decisions The efficient exercise of our governance responsibilities Engagement with management to better understand matters that affect the long-term performance of the business The Responsible Investment Policy is implemented by our investment teams with the support of a dedicated Responsible Investment Adviser. The assessment of ESG risk is an integral part of our enhanced investment process and our analysts meet regularly with management to discuss all aspects of performance. Insight s investment professionals are equipped with all the information and tools necessary to assess the standards of corporate governance practised by the companies in which we may invest, as well as the management of social and environmental aspects of their business activities. Our principal data provider is GMI Ratings (GMI), which provides Insight with tailored access to its comprehensive global database of governance and management indicators as well as its full rating reports. This data is incorporated into a proprietary risk scoring and screening tool, maintained by the Responsible Investment Adviser, used during a formal quarterly review of ESG risks across a customised coverage universe of over 550 listed companies. Our specialist fixed income credit analysts incorporate ESG risks into their investment appraisals, alongside other financial and non-financial risk factors, to form a view on the relative risk and return characteristics of each potential investment. Analysts are encouraged to raise any issues of concern with the company. Insight monitors all contact we have with management, recording instances where ESG issues have been raised with them and the responses received. We also integrate ESG considerations in each aspect of the investment process with regard to Insight s farmland investments. We believe the most sustainable farming operations will be the most profitable. We ensure that relevant issues are identified and the implications assessed as an integral part of the due diligence and investment selection process, and we operate farms using an integrated farm management (IFM) approach, as defined by the European Initiative for Sustainable Development in Agriculture. Insight s Annual Report on Responsible Investment

8 responsible investment team Insight Investment does not have a separate responsible investment team. Our philosophy and approach towards responsible investment places an emphasis on the integration of responsible investment and stewardship principles within investment decision-making. This means that responsibility for considering the environmental, social, and governance (ESG) performance of the companies in which we invest rests principally with our team of 35 investment analysts and decision-makers. Insight has, over a number of years, embedded ESG considerations into our standard process for investments including equities, fixed income and farmland. To assist our investment professionals in this task we have sourced data and developed proprietary toolkits, described elsewhere in this report, and provided appropriate training where necessary. The investment teams are supported in their responsible investment activities by a specialist who monitors the implementation of our responsible investment policy and acts as an adviser to the analysts and portfolio managers. Outside the investment department, representatives from our risk and communications departments assist in surveillance of regulatory developments and codes of practice, and in meeting our commitment to transparency. 8 Insight s Annual Report on Responsible Investment 2013

9 Insight s Responsible Investment Policy Insight believes that management can influence the long-term financial performance of companies through an awareness of the environmental and social aspects of their business and by maintaining good standards of corporate governance. As such, responsible investment and asset ownership practices should be accepted and upheld throughout our industry. We therefore support key industry associations such as the UK Sustainable Investment and Finance Association (UKSIF), the Institutional Investor Group on Climate Change (IIGCC), and the Carbon Disclosure Project, alongside initiatives such as the Principles for Responsible Investment in Farmland. In addition, as a founding signatory to the United Nations-supported Principles for Responsible Investment (PRI), Insight is committed to the principles enshrined by this important global initiative, as well as those of the Financial Reporting Council s UK Stewardship Code. With regard to the implementation of responsible investment practices at Insight we are guided by three core aims: (i) An appropriate consideration of environmental, social and governance (ESG) issues in investment decisions Where material, ESG considerations are incorporated in our investment analysis and form a key part of our assessment of the risks inherent in the companies in which we invest. In line with the Principles of the UN-supported PRI we encourage disclosure of ESG issues, participate in industry efforts and disclose our practices to our clients. The effective management of environmental, social and other business risks gives an indication of the quality of a company s overall management. Where relevant to investment value or risk, Insight s investment teams monitor the standard of governance in its investee companies and their management of the social and environmental aspects of their businesses. In particular, our investors have access to a proprietary risk scoring framework which covers board accountability, financial controls, risk management, as well as social and environmental considerations. Detailed data is provided by GMI, a specialist governance information provider. With regard to farmland, the investment process assesses a variety of different indicators. The sustainability criteria that apply to each investment have been established with reference to guidelines for Integrated Farm Management. As is appropriate within each situation, an assessment will be conducted by a combination of the fund s operational team, the SRI committee and, if necessary, external SRI expertise. (ii) The efficient exercise of our governance responsibilities At Insight we take our responsibilities as shareholders seriously and believe that high standards of governance ensure management is held accountable for a company s performance and conduct. In this regard, we believe that our investment processes are consistent with the principles of the UK Stewardship Code and allow us to effectively discharge our responsibilities as shareholders. With respect to share ownership, where Insight holds any physical equity positions we routinely vote on behalf of our clients with regard to the UK companies in which they have a shareholding. We employ the services of a specialist proxy voting agency, Manifest, which analyses resolutions and tests them against our voting policy templates which determine the direction of the vote. (iii) Engagement with companies in the most appropriate way available to better understand matters that materially impact the long-term performance of the business Insight recognises that the long-term performance of the companies in which we invest is, to a considerable degree, influenced by their management and their understanding of the long-term drivers of value and the risks inherent to their businesses. We therefore engage with management where necessary to discuss issues such as strategy, deployment of capital, performance, remuneration principles, and attitudes to risk, including environmental and social issues that may have a material impact on the financial strength of the company. With regard to farmland, Insight uses a dynamic integrated farm management approach. Specific recommended practices are adapted and incorporated into the management plan for each farm. Subject to client confidentiality, Insight is committed to transparency with regard to its research and engagement on social and environmental issues and the effective exercise of its governance responsibilities. A review of Insight s responsible investment activities is published annually. Insight s Annual Report on Responsible Investment

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11 How Insight meets its commitments Summary of Insight s delivery of the UN-supported PRI The UN-supported PRI seek to integrate environmental, social and governance (ESG) issues into investment decision-making and ownership practices, thereby improving long-term returns to beneficiaries. They were developed by a group of investment professionals representing 20 large institutional investors from 12 countries who came together at the invitation of the then UN Secretary-General, Kofi Annan, supported by a group of experts from the investment industry, intergovernmental and governmental organisations, civil society and academia. At launch in April 2006, institutions from around the world managing in excess of $2 trillion of assets signed up to the Principles. Today, nearly 1,200 signatories representing $34 trillion of assets back the PRI, demonstrating their mainstream acceptance. 1 Insight was a founding signatory to the Principles and a member of the expert group that developed them. The six Principles are designed to be compatible with the investment styles of large institutional investors that operate within a traditional fiduciary framework in any asset class. They provide strong independent endorsement for Insight s efforts over the last 11 years to invest responsibly on behalf of our clients Incorporating ESG issues into investment analysis and decision-making processes. Insight has fully integrated ESG risk analysis into its investment process. Using ESG risk scores and screening procedures, fixed income analysts are able to assess the materiality of ESG risks as a standard element in their appraisal of potential investments. A formal ESG risk review is conducted across the applicable investment universe every quarter, through which a watchlist of higher risk companies is maintained. 2. Being active owners and incorporating ESG issues into ownership policies and practices. As a large fixed income investor, Insight has good access to senior management to discuss corporate strategy, policies and attitudes to risk. Our ESG risk scoring and review procedures enable us to prioritise and target our ESG engagement with companies on issues of concern. 3. Seeking appropriate disclosure on ESG issues by the entities in which we invest. Weaknesses in disclosure practices are revealed in our data, supplied by GMI, and reflected in our ESG risk scores. Insight s engagement activities in 2013 have also been directed at improving disclosure of ESG-related risks: for example, we continued to support the work of the Carbon Disclosure Project (CDP). 4. Promoting acceptance and implementation of the Principles within the investment industry. We regularly communicate Insight s approach to the integration and implementation of the Principles to our clients and investment consultants. In addition, Insight is a member of the steering committee for the Fixed Income Work Stream of the PRI, and is working to develop and promote best practice in this asset class. 5. Working together to enhance our effectiveness in implementing the Principles. In addition to our involvement with the PRI, Insight has continued to support a number of other key collaborative investor initiatives, including the UKSIF, the IIGCC, and the CDP. 6. Reporting on our activities and progress towards implementing the Principles. Insight regularly discloses how ESG issues are integrated within our investment process and where we have engaged with companies. This annual review forms part of our commitment to transparency. 1 At April 2013, according to the PRI web site: 2 For the early evolution of Insight s approach to non-financial risk, see Kerry ten Kate and Andy Evans, Integrating governance, social, ethical and environmental issues into the corporate bond investment process (2006), published in Rory Sullivan and Craig Mackenzie, eds., Responsible Investment (2006) Greenleaf Publishing Ltd, Sheffield. Insight s Annual Report on Responsible Investment

12 Summary of Insight s delivery of the Farmland Principles Growing demand for agricultural produce is putting increasing pressure on the farming sector. Institutional investors are well placed to provide support, as they can deliver the long-term capital that the sector needs to invest for growth into the future. Farmland is one of the essential supporting pillars of the global population and economy and is central to many lives and communities: it is therefore crucial that such investment is responsible and sustainable. The Principles for Responsible Investment in Farmland were developed in 2011 to guide institutional investors who wished to invest in farmland in a responsible manner. The Farmland Principles are not part of the United Nations-supported Principles for Responsible Investment (PRI) initiative, but their agendas are aligned, and it is a requirement that all signatories of the Farmland Principles are also signatories of the PRI. As part of our commitment to SRI across our investment capabilities, we are also committed to an Integrated Farm Management approach, which closes the gap between industrial and organic farming by encouraging farmers to do more to protect and enhance the countryside. This is championed in the UK by Linking Environment and Farming (LEAF), which is one of the six national organisations forming the European Initiative for Sustainable Development in Agriculture (EISA). The CEO of LEAF is part of Insight s SRI Committee. The combination of Integrated Farm Management and an independent committee helps ensure SRI principles are embedded both as part of the due diligence process when making a purchase and in the management of the assets. Investing in farmland is not just a way to potentially generate inflation-hedged returns that match liabilities. It can also help promote sustainable agricultural practices for the long term. 1. Promoting environmental sustainability At Insight, we assess the environmental conditions and any relevant impacts of our farmland investments. We endeavour to maintain, and if possible improve, the environmental sustainability of our farming operations. 2. Respecting labour and human rights Insight seeks to employ local and indigenous people in the farmland businesses within which we invest, providing employment opportunities regardless of race or gender and being sensitive to specific local conditions and concerns. 3. Respecting existing land and resource rights We are committed to operating within existing local frameworks, including engaging positively with local landowners and those with prior rights to land in which we invest. 4. Upholding high business and ethical standards Insight is committed to upholding high business and ethical standards across our business and at the businesses in which we invest. In our farmland investment portfolio, some of the criteria by which we assess where we might invest include a consideration of local laws and customs regarding bribery and corruption. 5. Reporting on activities and progress towards implementing and promoting the principles Insight publishes this report annually, covering all our investment processes and how SRI principles are embedded within them. This report includes information on our farmland investments alongside our equities and fixed income processes. We also intend to publish regular reports focusing on our fulfilment of the Farmland Principles, and published the first edition in We intend to use both these documents to show progress towards implementing the Farmland Principles, and we expect these reports to encourage other investors to follow suit. 12 Insight s Annual Report on Responsible Investment 2013

13 summary of Insight's delivery of the UK stewardship code As a major fixed income investor, Insight welcomed the changes made to the Stewardship Code in The revised Code has a wider focus across different asset classes and much of the equity-specific language, such as references to shareholder value, has been amended. Stewardship is now described as more than just voting and is defined to include both monitoring and engaging on matters of interest to investors. As before, these include strategy, performance and risk, but the revised Code adds capital structure, corporate governance, culture and remuneration to the range of issues concerning which investors may wish to monitor and engage companies. We believe that the revised Code properly recognises that stewardship is not the sole responsibility of shareholders. Although Insight s equity investment activities are comparatively small, we take our stewardship responsibilities as shareholders seriously. Our Responsible Investment Policy states that, where necessary and appropriate, we will engage with companies as part of both our fixed income and equity investment activities in order to understand matters which may materially impact the long-term performance of their business. With respect to our clients rights as shareholders, we maintain a voting policy that ensures that we routinely vote on their behalf with regard to the UK companies in which they have a shareholding. We retain the services of Manifest, a specialist proxy voting service, to manage our voting activities. Manifest s sophisticated proprietary system analyses resolutions against a set of voting policy templates to determine the direction of the vote. (A summary of Insight s voting activities in 2013 can be found on page 22). Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities. Our Responsible Investment Policy and statement of compliance with the UK Stewardship Code are disclosed publicly, on Insight s website and in its annual report on responsible investment, Putting Principles into Practice. The latter provides further details on how Insight implements its policy and integrates stewardship activities, including monitoring and engaging with companies, within the wider investment process on behalf of our clients. Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed. Insight has a publicly disclosed policy on managing potential conflicts of interest in relation to stewardship. It sets out three overriding principles: (i) that Insight does not ordinarily act as principal; (ii) equal treatment of all clients; and (iii) effective Chinese walls between Insight and its parent group. The policy identifies circumstances in which conflicts may arise and how they should be handled. With regard to voting, it states that Insight will always seek to act in the best interests of its clients when making investment decisions or casting votes on their behalf. Where BNY Mellon, Insight or the clients themselves have business relationships with investee companies, these will be disregarded by Insight in making its investment or voting decisions. Principle 3: Institutional investors should monitor their investee companies. Insight s Responsible Investment Policy states our belief that company management can influence the long-term financial performance of companies through an awareness of the environmental and social aspects of the business and by maintaining good standards of corporate governance. We routinely monitor the performance, value and risks of the companies in which we invest. In addition, we regularly review ESG risks in our fixed income investments using data provided by a specialist data provider. Insight maintains and publishes a record of the contact we have with companies, the purpose of any meetings, and whether specific ESG issues have been discussed. Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their stewardship activities. Insight s risk monitoring procedures (see Principle 3) help our investment teams identify areas of concern, including issues of corporate governance or matters relating to the environmental and social aspects of an investee company s activities. Meetings with company management provide the most effective and timely opportunity to raise these issues. If Insight does not already have regular meetings with a company s management, our investment teams are encouraged, in the first instance, to request a meeting with them. Where this is not possible, or additional action is deemed appropriate in order to further the interests of our clients, we may consider raising the issues with the company s broker or, if appropriate, the chairman. Insight s Annual Report on Responsible Investment

14 Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate. Insight joins with other institutional investors when it believes it to be in the interests of clients, and it is deemed the most appropriate course of action to address a specific issue or concern. To this end, Insight has worked with other investors as members of, or signatories to, industry bodies or campaigns, through collective engagement initiatives, and through its participation in working groups. We publish details of these each year in our report on responsible investment activities. Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity. With respect to share ownership, where Insight does hold physical shareholdings in UK companies we routinely exercise our vote on behalf of our clients. We employ the services of a specialist proxy voting agency, Manifest, which analyses resolutions and tests them against our voting policy templates to determine the direction of the vote. Further details are provided in our separately published voting policy. Our voting activities are disclosed annually in our report on responsible investment. Principle 7: Institutional investors should report periodically on their stewardship and voting activities. Insight publishes a detailed annual report about its responsible investment activities, on its website, together with separate copies of its Responsible Investment Policy and Voting Policy. Our annual report provides detailed descriptions and data relating to policy implementation, ESG risk analysis and key themes, case studies, company engagement activities, participation in collective initiatives and voting activity. 14 Insight s Annual Report on Responsible Investment 2013

15 The BNY Mellon Code of Conduct Insight Investment has been wholly-owned by BNY Mellon Investment Management since November 2009, and its employees agree to abide by BNY Mellon s Code of Conduct. Titled Doing what s right, the Code is based on the belief that working together to promote ethical behaviour generates positive social effects. Building on this reputation for honesty, accountability and transparency is essential to achieving our goal of making BNY Mellon the trusted global leader in investment management and investment services. We understand the company s customers and shareholders expect the company and its employees to conduct business activities not only in full compliance with all laws and regulations, but also in accordance with the highest possible standards of ethical conduct. When ethical situations arise in the normal course of doing business, the company encourages all stakeholders to make decisions that are consistent with its reputation for integrity. A number of resources are available, including: A dedicated Ethics Office to assist employees when they need guidance The company s Code of Conduct The company s Personal Securities Trading Program Options to report suspected or actual breaches of law, regulations, the Code of Conduct, or the Personal Securities Trading Program Every employee receives annual ethics training that focuses on the importance of ethical behaviour and understanding the Company's Code of Conduct, related policies and values. The objective is to assist employees in understanding the importance of their individual decisions in ensuring corporate-wide ethical business conduct. Each year all employees are required to reaffirm their compliance with the Code and related policies. Employees are required to confirm their obligation to uphold the company's values and to do business in full compliance with the Code. Values and key principles The BNY Mellon values provide the framework for decision-making and guide our business conduct. Incorporating these values into our actions helps us to do what is right and protect the reputation of the company. These values explain what we stand for, our shared culture, and the promises we make to our clients and other stakeholders: Client focus Trust Teamwork Outperformance Our Code of Conduct is expressed under key principles which set out in detail how we put our values, policies and procedures into action: Respecting others Avoiding conflicts Conducting business Working with governments Protecting assets Supporting our communities Insight s Annual Report on Responsible Investment

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17 Responsible Investment Activities in 2013 Insight s Responsible Investment Policy (see page 9) incorporates three core aims: An appropriate consideration of environmental, social and governance (ESG) issues in investment decisions The efficient exercise of our governance responsibilities Engagement with companies in the most appropriate way available to better understand matters that materially impact the long-term performance of the business Together, these three policy commitments reflect Insight s approach to responsible investment in close adherence to the practical principles laid down by both the UN-supported Principles for Responsible Investment (PRI) and the FRC s Stewardship Code. The PRI s first two Principles concern the incorporation of ESG issues into investment analysis and decision-making and to engage actively with the companies in which an investment is made. Together with the Stewardship Code s Principles 3 and 4, regarding the monitoring of investee companies and the escalation of issues of notable concern with management, these have been explicitly reflected in Insight s Responsible Investment Policy and put into practical effect in our investment processes. In this section we summarise the activities and initiatives that Insight has undertaken during 2013, demonstrating our ongoing commitment to being a responsible investor. With regard to our investment processes, we have implemented our Responsible Investment Policy in two important areas of our business: fixed income and farmland. In each case, we have included ESG considerations in our decision-making procedures and engage with management. These are discussed in detail later in the report. Table 1: Key activities and achievements in 2013 Q Q Q Q Quarterly ESG Risk Review Quarterly ESG Risk Review Quarterly ESG Risk Review Quarterly ESG Risk Review 37 companies engaged on ESG issues 55 companies engaged on ESG issues 32 companies engaged on ESG issues 147 companies engaged on ESG issues Environmental risk analysis Social risk analysis: labour standards and workplace safety Environmental risk analysis Sustainability reporting and disclosure study Refreshed carbon and water risk lists Governance risk analysis: CEO Duality study Refreshed carbon and water risk lists 12 RI/ESG client information requests 28 RI/ESG client information requests 19 RI/ESG client information requests 21 RI/ESG client information requests 2012 Responsible Investment review published Employee training: Ethical leadership and BNYM code of conduct 2013 Farmland Principles Report published Signatory to CDP Investor program 2013 Renewed commitment as signatory to UN-supported PRI UN-supported PRI FISC conference call Joined UN-supported PRI FI Advisory Group Signatory to CDP Carbon Action 2013 Renewed IIGCC membership and participated in global investor survey on climate change UKSIF/Aviva Investors roundtable on Vedanta Resources IIGCC members meeting Signatory to CDP Forest Footprint Disclosure 2013 Co-operative Group bondholder meeting Co-operative Group bondholder meetings and engagement Contributed to IUCN Business and Biodiversity seminar Farmland Principles Working Group conference call Insight s Annual Report on Responsible Investment

18 Insight s main activities and achievements regarding responsible investment in 2013 are summarised above (see Table 1), divided into internal activities, which refer to our own investment processes and client reporting, and external activities, which involved collaboration with others. Our internal activities in 2013 included UK the systematic integration 46 of ESG analysis and engagement within our fixed income credit area, beginning with the ESG France review procedure we 11 follow each quarter covering over 550 listed companies by the end Germany 5 of the year (see page 27). We also conducted separate ESG studies and analyses to examine important risks and themes, Japan 4 including carbon and water-related risks within our investment universe, the widespread adoption of sustainability reporting, Switzerland 4 the persistence of joint CEO-chairman Australia roles on company 3boards, and risks relating to labour standards and workplace safety. For the first time, we tracked the USA volume of requests we 3receive from prospective clients for information on our responsible investment practices and ESG in Netherlands general (see Figure 1). 2 Europe 1 Spain 1 Figure 1: Requests for information on responsible investment practices and ESG practice Number of requests Origins of requests UK France Germany 5 Japan 4 15 Switzerland 4 12 Australia 3 10 USA 3 5 Netherlands 2 0 Europe 1 Q Q Q Q Spain 1 Our analysis of ESG issues, integrated within the investment process, aims to enhance the quality of decision-making and 30 facilitate the careful monitoring of client investments. We routinely meet with the management 28 of investee companies, or potential investments, to discuss all aspects of performance, and the 25 analysis of ESG risks enables our analysts to have 21 informed and effective conversations with company management. This 20active role that institutional investors 19 perform in relation to their client s portfolios is increasingly referred to as stewardship (see page 45 for further discussion of 15 stewardship). It is the application of a much broader concept of responsible management 12 to the activities of investment 10 intermediaries. 5 Stewardship 0 According to the Financial Reporting Council (FRC), stewardship activities include Q1 2013monitoring Q and engaging Q3 2013with companies Q on strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement is defined in the Code as purposeful dialogue with a company s management or board on these matters, as well as on issues that are the subject of votes at general meetings. In the spirit of the FRC Stewardship Code and Principle 1 of the UN-supported PRI, Insight does not make a sharp distinction between ESG and other investment considerations. Within fixed income, for example, ESG is regarded as a subset of risk factors which form an integral part of our credit analysis and subsequent investment appraisal. As a result, ESG issues are frequently raised as part of our normal dialogue with company management (see Figure 2). During 2013 Insight recorded 1,013 separate interactions between its decision-makers in the fixed income and equities areas and company management. This represents a 12% increase on 2012, partially reflecting a generally buoyant environment for capital markets: 264 meetings were held to discuss proposed new issuance of corporate securities compared to 201 in the previous year. Nevertheless, over half of the meetings attended by Insight s analysts and portfolio managers were unrelated to new capital raising and provided an opportunity to receive an update on company performance and to discuss management s future plans. In nearly two-thirds of all meetings the CEO or CFO was in attendance or, occasionally, the chairman or other board member. 18 Insight s Annual Report on Responsible Investment 2013

19 ntact ntact rpose rpose r present r present ssed ssed Results update 77 Group meeting 313 Private meetings (1:1) 389 New issue/ipo 264 Telephone (1:1) 23 Group meeting 313 Management contact Strategy 13 Conference call 43 Telephone Purpose (1:1) 23 M&A 17 AGM/EGM 1 Conference call 43 ESG-specific 14 Presentation 102 AGM/EGM 1 Not classified 133 Other event 4 Presentation 102 Figure 2: Dialogue with company management in 2013 Site visit 4 Other event 4 Not classified 134 Site visit 4 Management contact Purpose of meeting Not classified 134 Chairman 6 Private meetings (1:1) 389 Board General member update 4952 Group meeting 313 CEO Results update General update 495 Telephone (1:1) 23 CFO/FD New issue/ipo Results update 77 Conference Senior officer call present 43 Strategy CRO 130 New issue/ipo AGM/EGM Purpose M&A Treasurer Strategy 13 Presentation 102 ESG-specific Capital markets M&A 17 Other event 4 Not CSR classified officer ESG-specific 14 Site visit 4 IR officer 115 Not classified 133 Not classified 134 Senior manager(s) 49 Not classified 60 Numbers of meetings with senior officer present ESG issues discussed Chairman 6 General update Board member 2 Results Chairman update CEO New Board issue/ipo member CFO/FD 286 Strategy CEO Senior officer present 500 ESG M&A CFO/FD issues discussed CRO Treasurer 88 ESG-specific CRO Not Treasurer classified Capital markets 39 CSR Capital markets officer IR officer CSR officer Senior manager(s) 49 IR officer 115 Senior manager(s) 49 0 Not classified 60 Chairman 6 Not classified Board member Yes No Not classified CEO ESG CFO/FD penetration rate CRO ESG Treasurer issues discussed Capital markets CSR 20 officer IR officer % Senior 192manager(s) Not classified Yes 2013 No Not classified Yes No Not classified Proportion of management meetings in which 500 ESG issues were raised (%) Since 200 ESG factors form an integral 139 component of our decision-making process, ESG issues have become an area of specific 136 focus 100 in our discussions with company management. Insight believes that companies are increasingly prepared and willing to discuss 0 ESG issues with current and potential investors. Over the course of 2013, ESG issues were raised with management on separate occasions, compared 2012 to 192 the previous year. The CEO or chairman was present in 73 of these meetings, Yes compared No Not to classified 56 meetings in In only 42 of these meetings was the CSR officer or an investor relations specialist the most senior company officer present. Number of meetings Number of meetings Number of meetings Number of meetings Insight also holds meetings or conference calls with company management specifically to discuss ESG issues. A total of 17 such meetings took place in 2013, compared to only two in However, on only one occasion was the CEO present. In most cases specific enquiries of this kind are handled by a dedicated CSR officer, as in 11 meetings over the year, or an investor relations specialist, as was the case in four meetings. See Table 2 for details of some meetings between Insight and company management that were focused specifically on ESG concerns. Insight s Annual Report on Responsible Investment

20 Table 2: Examples of ESG-specific engagement Date Company ESG issues raised by Insight Comments 11/03/2013 Goldman Sachs CEO duality; board independence and effectiveness; the role of the lead independent director. 19/04/2013 BNP Paribas Board independence and effectiveness: director tenure, inter-locking and over-boarding; role of nominations committee. 17/06/2013 PG&E Workplace safety and regulation; CEO duality; board independence and effectiveness; risk committee expertise; CEO remuneration; environmental impacts. 28/06/2013 Exelon Senior management changes; executive remuneration; asset valuation and accounting. 12/07/2013 Duke Energy CEO duality; board independence and effectiveness; risk committee expertise; nuclear plant shutdown; environmental impacts. 13/07/2013 Banco Santander Board independence and effectiveness: executive chairman; director tenure; lead independent director; over-boarding; risk governance. 17/07/2013 Dominion Resources CEO duality; board independence and effectiveness; CEO remuneration; workplace safety; environmental investigations and investment. 26/07/2013 Du Pont Environmental impacts and management: water and waste intensity; regulatory fines/investigations 30/07/2013 Dow Chemical Environmental impacts and management: water and waste intensity. Arguments for/against CEO duality in the US legal framework and the role of the lead director were discussed. We concluded that the composition of the board is likely to improve. Though board structure may not have a direct impact on strong credit ratings, we highlighted our concerns that BNP's board structure does not conform to governance guidelines in France or internationally. Although ESG issues are unlikely to affect credit ratings, safety problems have been financially material. We were satisfied that safety improvements are being addressed, although these may require regulatory tariff concessions. The ESG risk profile contributes to a cautious view on longer-term credit quality, favouring regulated operated companies insulated from most ESG concerns. The company confirmed plans to split CEO and chairman role with the appointment of an independent chairman. Environmental and plant repair costs are unlikely to have an impact on credit quality given current state regulation. The company provided details on monitoring by the nominating committee and provided details on risk management and oversight. We have no current client holdings. ESG risks were judged not to be material to credit risk but pension liabilities to be monitored closely. The company described management systems following recent regulatory violations and penalties in relation to hazardous waste, and their work with local farmers on soil management. The company provided details on water releases from their sites and slurry monitoring controls and technologies. Sustainability reporting in Insight s ESG universe Insight considers access to company management to be very important. It provides a vital opportunity to hear at first hand the management s view of business prospects, their attitude to risk, and to seek clarification on key policies, governance and internal controls. Sometimes these meetings enable our decision-makers to learn more about the company or its industry than we can glean from their published reports and statements alone. Indeed, as a result of our fixed income ESG review process our analysts will often recommend that the investment implications of the issues identified through our risk screening procedure are inconclusive, pending clarifications from the management. In general, greater transparency by companies leads to accurate and efficient decision-making by investors. The initial identification of ESG issues or risks relies heavily on companies own reporting and disclosure. The better the ESG information we, and our information provider GMI Ratings, have access to, the more effective the time we spend with management can be. Insight therefore encourages companies to release appropriately detailed information, ideally in a standardised and harmonised reporting framework, that can assist our analysts in understanding the ESG and other non-financial risks and opportunities facing the companies in we invest on our client s behalf. We therefore welcome sustainability reporting frameworks such as the Global Reporting Initiative (GRI) and that of the International Integrated Reporting Council. Corporate reporting facilitates stewardship by ensuring that the dialogue between companies and their investors is indeed purposeful and effective. 20 Insight s Annual Report on Responsible Investment 2013

21 In Q we repeated an earlier survey of our entire ESG coverage universe, consisting at that time of 548 listed companies, to see how many of them publish sustainability reports, and what proportion of these adopted the GRI framework for doing so. High environmental and social impact Sustainability reporting No Yes Total Yes No Total Source: Insight and GMI Ratings. We found that 402 (78%) companies which operate in either environmentally or socially sensitive industries published information on their sustainability performance, either in a separate report or on a dedicated part of their corporate website. A much smaller proportion however published their sustainability information to the GRI reporting standard. Less than half of the same group of companies (230 or 44%) report in accordance with the GRI framework. Sustainability reporting Country Yes No Basic Materials 49 9 Cyclical Consumer Goods / Services Energy Financials Healthcare 12 5 Industrials Non-Cyclical Consumer Goods / Services 39 5 Technology 15 2 Telecommunications Services 27 5 Utilities 33 8 Total Source: Insight and GMI Ratings. Across Insight s coverage universe, we found that between 71% and 89% of the companies in each of the industry groups undertook some kind of sustainability reporting. The range of GRI reporting was however both lower and wider at between 29% (cyclical consumer) and 82% (technology). Sustainability reporting Country Yes No Total Australia and New Zealand Japan and Asia Emerging markets Canada United States Europe United Kingdom Total Source: Insight and GMI Ratings. Geographically, the proportion of companies that publish sustainability information within each region ranged from 100% in Canada (13 companies) to 61% in emerging markets. Of the major regions, the US (77%) lagged Europe (83%). Insight s Annual Report on Responsible Investment

22 Voting policy With respect to share ownership, in the majority of the current equity investment strategies Insight does not have material investments in physical holdings. Where Insight does hold physical equity positions we routinely vote on behalf of our clients with regard to UK companies in which they have shareholding. Insight retains the services of Manifest Information Services for the provision of proxy voting services and votes at meetings where it is deemed appropriate and responsible to do so. Manifest provides research expertise and voting tools through sophisticated proprietary IT systems allowing Insight to take and demonstrate responsibility for voting decisions. Independent corporate governance analysis is drawn from thousands of market, national, and international legal and best practice provisions from jurisdictions around the world. Independent and impartial research provides advance notice of voting events and rules based analysis to ensure contentious issues are identified. Manifest analyses any resolution against Insight-specific voting policy templates which will determine the direction of the vote. Where contentious issues are identified, these are escalated to Insight for further review and direction. Insight 2013 voting statistics Meeting type Number of meetings Number of resolutions (votes) AGM Class 5 5 Court 0 0 EGM GM SGM 0 0 Total Insight 2013 abstentions and withheld votes Resolution type Abstain Against Withhold Total Annual report 1 1 Auditor remuneration 1 1 Director election Dividend 1 1 LTIP / share plan Remuneration report Share issuance Share repurchase 1 1 Total Collaborative engagement Both the Principles for Responsible Investment (PRI) and the FRC Stewardship Code call on institutional investors to work together to promote responsible and active ownership across the industry. The PRI s Principle 5 encourages investors to act together to enhance effective implementation of the Principles. Activities may include supporting or participating in networks, information sharing platforms or other collaborative initiatives. Principle 5 of the Stewardship Code is somewhat narrower, calling investors to be willing to act collectively with other investors, where appropriate, to improve the effectiveness of their engagement with companies. We believe that collective efforts are particularly appropriate to address issues of common concern beyond specific investment decision-making. These include matters such as disclosure and reporting, as well as other aspects of good 22 Insight s Annual Report on Responsible Investment 2013