On our ESG radar: David Sheasby – Martin Currie

Climate, Trump and big data among fund manager’s preoccupations.

David Sheasby, Head of Governance and Sustainability at Martin Currie Investment Management, talks about the themes on their ESG radar this year.

Can you outline a few sustainability themes that you are currently focused on?
We have made significant strides with regards to ESG over the years, but even so, integration is a dynamic process that requires continuous refinement. The overarching goal is to ensure that our sustainability analysis adds as much value as possible to our fundamental research. The quality of company disclosure is naturally key, and here we observe ongoing improvements across markets both due to regulation and shareholder pressure. For instance, listed companies in Hong Kong and Singapore face enhanced ESG reporting requirements under a ’comply or explain’ framework, with Singapore recently becoming the latest member of the United Nations Sustainable Stock Exchanges Initiative. The following are a number of important areas where our G&S work is ongoing:
Climate change
It continues to loom large and although there is lingering uncertainty as to what President Trump will do here, the long-term trajectory of the global energy mix is clearly not one where fossil fuels can maintain their historic prominence. As seen with the strong support for climate-related proposals at annual general meetings in recent years, we expect to see continued pressure on businesses – particularly in the energy sector – to prove that they can handle a scenario of more stringent regulation and/or sped-up demand destruction, due to the rapidly improving economics of renewable energy, battery storage and electric vehicles (EV). Indeed, we see companies continuing to shift their focus from the operational ramifications of climate change legislation to thinking very seriously about the strategic consequences for their businesses. When it comes to EV penetration it is difficult to make exact forecasts but it is evident that lithium battery costs have dropped to such a degree that we may be getting close to an inflection point, with long-term implications for oil demand.Water scarcity
Closely connected to climate change, the supply/demand imbalance is set to get worse over the coming decades. Key long-term drivers such as population growth, urbanisation, rising living standards, infrastructure deficits, changing weather patterns and regulation will continue to gather momentum in the years ahead. At the same time, water quality and safety remains under constant threat of pollution from many sources. Indeed, the previously mentioned Chinese five-year plan underscores the country’s commitment to tackle the issue of severe water pollution. The Indian government has also implemented an ambitious infrastructure development and water treatment plan. Companies increasingly recognise the seriousness of the issue, and for us it is manifesting itself in continued engagement efforts, including a PRI collaborative effort on water usage in the agricultural supply chain.
Cyber security
Big data and increasing digital interconnectivity is having a dramatic impact on socio-economic structures but also exposing many aspects of business to increased risks. Cyber security has been hitting the headlines over the last couple of years and is an increasingly important consideration for company boards. Recognising this growing risk we have joined the steering committee of the PRI collaborative engagement on cyber security. This committee aims to set the terms of engagement, as well as the particular areas of focus and identify target companies. Our internal work has involved narrowing down a number of key questions to ask our investee companies, focusing on board awareness and accountability, prevention and mitigation of attacks.
Has become an increasing focus for investors over the last couple of years with a recognition that a breadth of experience and perspective can bring real benefits to the corporate board and more widely within organisations. We believe that this ties into our focus on governance and culture and plays a key role in how a company is managed. Diversity is most readily articulated through gender diversity but is increasingly demonstrated
through a broader skills matrix at board level. Shareholders are placing a greater emphasis on the need for a balanced mix of expertise, experience and skill- sets, as evidenced by an increasing number of diversity-related proposals put forward to shareholder meetings. Regulators have also been indicating a desire to see improved disclosure in this area, particularly when it comes to board composition. For example, US Securities and Exchange Commission (SEC) chair Mary Jo White, stated in June 2016 that low levels of board diversity in the US is unacceptable and that the SEC is considering introducing requirements for greater disclosure on this issue.
Executive pay
Has remained high on the agenda over the last year, and as we go into 2017 there is no letup in the debate around this issue. In 2016, two FTSE 100 companies had their remuneration reports voted down, one of Australia’s largest banks withdrew the incentive grant to the CEO after a shareholder revolt and other companies across the world received very significant negative votes over a range of pay issues. In summer 2016, the UK Executive Remuneration Working Group (an independent panel set up to address the concern that executive remuneration has become too complex and is not fit for purpose) produced its recommendations for improvement. These included a call for boards to explain the reasons behind their company’s maximum pay level and greater transparency around target setting for bonuses. Pay has been a key area for our company engagement and we are pleased to report success in a number of cases – it is certain to remain on the agenda for us in 2017 too.What is on the G&S radar for 2017?
As mentioned, we will watch developments in the US closely as these will be of both domestic and international consequence. While the contours of Trump’s policy agenda are slowly emerging, there is still significant uncertainty as to his ultimate approach in many areas – climate change and energy being particularly hard to call given his many contradictory remarks here. Beyond this, we are likely to spend more research effort around major issues such as food safety and corporate governance reform. The importance of the former cannot be overstated, with the World Health Organisation having warned that antibiotic resistance is one of the biggest threats to global health today. Worryingly, an expanding list of infections, including pneumonia, tuberculosis and blood poisoning are becoming increasingly difficult and sometimes impossible to treat. The overuse of antibiotics in agriculture is widely recognised as a contributing factor to this crisis. As investors we need to understand the attendant systemic risk affecting the food, farming and pharmaceutical industries. As for corporate governance, we expect to see greater government-led efforts – particularly in the UK where proposals are currently out for consultation – spanning topics such as executive pay, directors’ duties and board composition. The outcomes of some of these initiatives are likely to inform some of our company engagement in 2017.