20 Mar 2024
The Value Equities team provide an insight into the companies they have engaged with in 2023 as part of their annual stewardship report.
Over the past few years, we have seen a significant rise in the amount of regulation, transparency, reporting and questioning of Environmental, Social and Governance factors (ESG). In our fourth dedicated annual stewardship report 1 we review some specific areas we have found particularly interesting over the past year, including:
Record of Engagement
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*Voted against or abstained at, at least 1 meeting
On the Jupiter Value Equities team, we believe that direct active company engagement is crucial to be able to understand issues and help drive positive change of our investee companies. We think Environmental, Social and Governance factors are part of the financial analysis process and are impossible to disaggregate. We conduct the ESG analysis ourselves as part of our integrated investment process and are aided by a dedicated in-house stewardship team who run analysis in parallel to us. In 2023, we held over 50 engagements with actual/potential investments. Most engagements cover multiple topics. In the chart below we have highlighted the split of engagements to indicate the main areas of discussion and debate.
Percentage of company engagements
Each category is defined below, including a list of some of the companies we engaged with on these topics:
Capital allocation: acquisitions, capital expenditure and balance sheet strength.
Remuneration: executive and employee pay
Climate: de-carbonisation and other GHG reduction plans
Management: executive and non-executive
Sustainability: health & safety, product design and supply chain
Successful vs unsuccessful engagements
We are frequently asked to report on how successful or unsuccessful our engagements have been. As value investors we invest in companies where something has typically gone wrong to make the valuation so low. It is not unusual for there to be serious issues regarding ESG, however we believe that we can have a positive impact by actively engaging with company management and holding them to account. We believe that companies have the ability to change and our hope is that over time the companies will improve and this process will be positive for both the company and shareholders alike, however, if after multiple engagements we feel there is no sign of improvement we will reassess and on occasion choose to walk away.
It is very difficult in our view to assign direct causality between engagements and outcomes. Change at companies comes from numerous sources – internally, customers, society, regulation – as well as from the shareholders. We act on behalf of our customers to try and push for change at companies where we believe it will make a difference. Crucially we need to explain and justify this course of action. The examples below are where we think we have had some success or have failed. We don’t want to presume that it was our actions alone though, but we hope that we can at least make some difference.
Successes: We have had two instances where we have made our views clear to the board that we didn’t want certain acquisitions to take place. Sky NZ and ITV both made announcements about potential acquisitions they were interested in. Sky NZ wanted to diversify away from the core pay TV model and ITV was potentially interested in an acquisition that we thought would place too much pressure on its balance sheet. In each case we felt that capital shouldn’t be deployed and spoke to the Chair of each company. We were pleased that neither acquisition took place. Clearly, we can’t prove that we were correct as the acquisitions might ultimately have been successful, but we do believe that material moves in capital allocation add significant risk.
Failures: We have been engaging with South32 on health and safety for many years. The remuneration is now far better aligned to reflect poor health and safety and yet the fatalities still occur. In our view there is no shortage of management or board commitment to reducing fatalities. Should we see this as a failure? It could be interpreted that way when considering the underlying data in comparison to Rio Tinto but when extending that comparison to Sibanye-Stillwater (South African exposure) its less clear
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Source: Rio Tinto Health, Safety & Wellbeing 2022, South32 sustainable development report 2023, Sibanye-Stillwater 2022 performance-safe-production report
Remuneration and the importance of getting it right: UK vs US
According to Deborah Hargreaves in her book ‘Are Chief Executives Overpaid’ the average UK CEO’s remuneration was £1m in 1998 and the ratio between average CEO pay and employee pay was 48 to 1. The current average pay for FTSE 100 CEO’s is just over £4.5m and the ratio vs the average employee is 87 to 1. In the US these figures are even more stark, average remuneration for S&P 500 CEOs was $19m last year and the ratio vs the average employee was 253 to 1.2
As stewards of our clients’ capital, we need to think very carefully about how the CEO’s of the companies in which we invest are remunerated. This is an area with a clear conflict of interest between management and shareholders. It is usually in shareholders’ best interests to keep remuneration low, as any money spent on paying management is not available to shareholders in the form of profits and ultimately dividends. However, it is also important to ensure the best people are attracted to run the companies in our portfolios, so the right answer is not totally straightforward.
For this reason, we spend a lot of time engaging with our companies on the topic of remuneration. Recently, an area of particular focus has been the gap between CEO compensation in the UK relative to the US. Many of the companies we have engaged with have argued for higher pay for UK-based CEOs on the basis that they might leave to run US companies where the remuneration is higher.
For example, Pearson, the UK-listed publisher, engaged with us this year before putting forward proposals to significantly increase CEO pay for this exact reason. We voted against the proposals on the basis that the quantum was far too high. Evidently, we weren’t the only ones to think this with 46% of votes cast voting against the remuneration policy (albeit the policy still passed with a simple majority). In this instance it appears that Pearson won the battle but lost the war: CEO Andy Bird announced his departure soon after the AGM.
Pearson is by no means the only company where we have voted against management proposals at the AGM. Over the past 3 years, we have done so at 31 separate AGMs. Of these, 22 involved a vote against remuneration. It is by far the single biggest cause for us to vote against management proposals at AGMs.
However, we think the objective statistics understate the amount we have had to push back against remuneration. This is because an AGM ballot is often changed in advance following consultation with the major shareholders. It is embarrassing for any board to have shareholders vote against their recommendations. Shareholder votes are very public. For this reason, even the threat of a vote against can lead to meaningful change. Another company in our portfolios engaged with us this year on a similar issue. They are a global company and their divisional heads in the U.S. are paid more than the London-based CEO. They were proposing to rectify this by increasing the CEO’s pay but there must not have been sufficient support from shareholders because the proposal was pulled in advance of the AGM.
Clearly this is not just the case for remuneration but in all AGM voting matters. One tangible example of this from a few years ago was a FTSE 100 Chair deciding not to stand for re-election after we had made it clear we would be voting against them at the upcoming AGM. Since then, the new Chair has dramatically improved the corporate governance at the firm. Despite the improved governance, however, our investment in the shares wasn’t profitable which shows that investing is rarely about any single thing.
We also think the examples above highlight another point: shareholders have significant power in deciding how a company is run and these responsibilities should not be taken lightly. At Jupiter it is the fund managers who decide how to vote on behalf of the clients rather than a centralised corporate voting team. Doing it this way is by no means ubiquitous across the City but we feel that it is vitally important for us to be able to vote in the manner which maximises the value of our clients’ interests. The right answer is not always obvious and a ‘one-size-fits-all’ approach is unlikely to work. Doing it this way consumes a reasonable amount of our time and resources but we think it is worth the effort involved.
Carbon Emissions: how we stack up against last year
Jupiter is a signatory to the Net Zero Asset Managers’ Initiative (NZAMI). Our stewardship team periodically assesses in-scope funds on the extent to which their investee companies are aligning to a net zero by 2050 target. By 2030, our strategy aims to be entirely either aligned, aligning or committed to align with the group level decarbonisation target. Currently 85% of the companies within the portfolio meet this standard. 3
The decarbonisation progress of our strategy is unlikely to be linear; we continually recycle capital into the pockets of the market where we see the most ‘value’, which may well be carbon-intensive industries. Our preference is therefore to assess emission reduction momentum for each individual holding, as a tool to inform our engagement activities. Our focus is only on Scope 1 & 2, as the emissions most directly controlled by our portfolio companies, rather than Scope 3 where data quality and coverage are poor.
For the 90% of current holdings that have reported data for Scope 1 and 2 emissions every year since 2019, the absolute reductions in carbon emissions are as follows:
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The portfolio holdings in the above data set are as at November 2023. We have looked at how they performed over 2019-2022, though some holdings may not have been held in the portfolio for the whole period. This has been done to show the trajectory of the current portfolio. We have ensured the data is as up to date as possible and have adjusted the MSCI dataset to reflect the most recent company reports where appropriate and have then used the company restated numbers where applicable. Restating numbers is a manual task where we inevitably assume risk regarding the consistency of company methodologies and the potential for human error. Total refers to the overall emissions change for the strategy assuming a constant portfolio; average holding looks at the equal-weighted average of emissions reductions for each holding.
Two-thirds of holdings reduced their carbon emissions over 2021-2022. Despite this, the mean change was positive. This was materially influenced by a >200% increase in emissions at airline easyJet, as COVID-19 restrictions diminished significantly during its fiscal year ending September 2022 compared to the year prior.
Since 2019, more than half of the companies held in the portfolio have reduced Scope 1 and 2 emissions by over 20%. This is a striking number, but there are some important caveats to consider. As political focus on carbon has intensified over the past few years, companies have likely tackled the easiest opportunities for decarbonisation first, such as buying renewable energy certificates. This may lead to a period of large year-on-year improvements after which the pace of change is more moderate. Equally, though we endeavour to exclude emissions figures that are not sufficiently comparable between years, there may be instances where companies have different thresholds for restating their emissions in the event of a divestment.
Four companies increased their emissions over the 2019-2022 period. Fresnillo is the only of these that is considered ‘High Climate Impact’ in accordance with Institutional Investors Group on Climate Change (IIGCC) definitions. The company have explained this increase as less ore grade at some of its mines, requiring a higher level of mineral processing. The approach to net zero is a key engagement topic for us with this holding.
Conclusion
Stewardship is embedded into our process and something we take very seriously. This document is designed to highlight any areas of particular interest that we have engaged on over the year and that often means it may be slightly controversial as it focuses on where we are actively pursuing improvements/ changes. With the regulatory landscape ever evolving and the implementation of the UK Sustainable Disclosure Requirements (SDR), further reporting on ESG will undoubtedly progress and we look forward to updating you.
1 For reference, last year’s report can be found here: Jupiter Value Equities Team: 2022 Stewardship Report – UK Value – Jupiter Asset Management (jupiteram.com)
2 Source: Bloomberg, as of 13.02.24
3 As of 1.11.2023.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
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