Corporate governance, climate change and human rights in the digital economy are primary focuses for Northwest & Ethical Investments in 2020.
The Canadian firm’s annual corporate engagement focus list highlights five key themes and 26 investee companies it intends to engage with throughout the year. It’s planning to engage companies on governance issues including board diversity and board and director independence. The firm also wants to see companies link equitable compensation to environmental, social and governance outcomes.
“We don’t want a company finding another way to make a target they can meet and boost their salaries,” says Jamie Bonham, NEI’s director of corporate engagement. “If this is core to your company and it’s a core risk or opportunity, then absolutely we should be able to see that within the compensation framework.”
Companies that are taking this approach tend to compensate based on short-term incentives, where NEI would like to see them take a longer-term view, he adds.
The firm also wants to see boards of directors take a more hands-on role in overseeing material ESG issues, including climate change and human rights. “To date, I think boards have really relied too heavily on what management is telling them around various issues,” says Bonham. “That is really down to a question of independence and how able the board is to have an independent view of what the company is doing and get its information in an objective way. That’s a fundamental challenge now in governance. And to be fair to boards, . . . it’s a whole new ballgame. There’s so much they’re expected to have oversight on now.”
As part of its climate change and energy transition focus, NEI has targeted Suncor Energy Inc., Canadian Natural Resources Ltd. and Teck Resources Ltd. for engagement around their strategic response to the energy transition and how they plan to be part of helping Canada reach its Paris Agreement targets.
Some energy sector companies — such as Cenovus Energy Inc. and, more recently, Teck — have committed to reaching net-zero emissions by 2050. While Bonham credits the companies ambition, he says part of NEI’s engagement is a better understanding of how those companies hope to reach that milestone.
“A big part of our dialogue this year is getting more colour around, ‘What are the pathways you’re looking at and, realistically, how do you think you’re going to get there?’. . . It’s not a zero commitment, it’s a net-zero, so to me that says offsets — how much are you going to rely on that and how credible is it? And how will you cap that? If a company’s talking about net-neutral 2050 but has no mid-term targets that’s a huge concern. You do have insights on five to 10 years from now, so you should set something reasonable.”
The firm is also planning to engage with automakers Ford Motor Co. and General Motors Inc. on evolving their fleets for a low-carbon future and engaging with their own parts suppliers, as well as utilities firm AltaGas Ltd. and ATCO Group about renewable energy and low-carbon opportunities.
Another major area of focus is addressing human rights concerns in the digital economy, including data privacy, freedom of expression and the implications of artificial intelligence. “These are issues that cover the globe in terms of their impact,” says Bonham. “To date, I don’t feel that we’ve seen the proper due diligence or attention to the actual impacts of all this tech development. The first thought has been, ‘How can you monetize this?’ and the second thought is, ‘What’s the impact of this after you’ve already monetized it?’ And that’s just not the way to develop things that are mindful of human rights impacts.”
NEI plans to work with other investors on grabbing the attention of companies like Google’s parent company Alphabet Inc., a feat which Bonham says is easier said than done. The Investor Alliance for Human Rights, which includes NEI, has been unsuccessful in setting up a meeting with the company’s board and it’s currently advancing a resolution at the annual general meeting to implement board-level oversight of human rights issues.
Looking more broadly at these issues, NEI will engage with companies including Canadian Tire Corp., Ltd. and Loblaw Companies Ltd. on human rights risks in their supply chains.
The firm’s also targeting the big five Canadian banks for discussions on implementing the recommendations from the task force on climate-related financial disclosures, as well as best practices for responsible lending, including aligning their processes with frameworks such as the United Nations Declaration on the Rights of Indigenous Peoples.
Today, banks and institutional investors alike need to look no further than the recent widespread protests and rail blockades in response to the Coastal GasLink pipeline, says Bonham, noting that banks have been very receptive to the engagement. “What we’ll be talking to them about is, how effective is their oversight on this issue? What are the expectations of the companies that they’re loaning to? What is their role? And what kind of levers can they use as a lending bank to influence the proper steps on the ground?”
The firm will also work with PepsiCo Inc., Starbucks Corp. and Unilever on new plastic use and recycling targets; Johnson & Johnson Inc., Pfizer Inc. and others on equitable access and fair pricing for important new medicines; and Amazon.com Inc. on human rights issues.
In 2019, NEI engaged with 152 companies, representing 32 per cent of its year-end equity holdings. Within that group, it initiated “intensive dialogue” with 86 organizations with overall positive results. Ninety per cent of those companies were responsive or highly responsive to the engagement, while only 10 per cent were defensive or negative.
Following the dialogues, 23 per cent of the outcomes were on target, 65 per cent were progressive, seven per cent were neutral and just five per cent were negative. The company also voted in 10,775 proxy items at 858 meetings in 2019.