Predicting the future is notoriously risky but here is my take on what will keep the team at Hermes EOS busy on your behalf in 2015.
It is safe to say that stewardship will continue its meteoric rise up the global agenda. Last year saw the launch of stewardship codes governing investor behaviour in Japan and Malaysia. We are excited to hear that codes are on the horizon in a number of other Asian markets, such as Singapore and Taiwan, and will contribute to the development of these. The UK’s Financial Reporting Council (FRC) has announced a crackdown on funds that are merely paying lip service to its Stewardship Code so the spotlight on asset owner responsibilities is unlikely to dim anytime soon.
In the governance arena, we are already planning some high-profile interventions at shareholder meetings in Europe and Asia as we escalate intensive engagements with a number of companies. Board composition will continue to be a key area of focus for us – get this right and the battle for better governance is more than half won. But all too often we are still neither given enough information about candidates nor able to vote directly for the individuals we want to see on the board.
The team at Hermes EOS will be working hard to improve levels of board diversity. Until now the debate has centred on gender but this year we predict a broader interpretation will come to the fore, which includes diversity of background, experience and nationality. This will help promulgate the right culture throughout the organisation, another key topic of our engagement work in 2015.
As we start the year, oil prices are at an all-time low, giving extra urgency to Hermes EOS’ environmental engagements, particularly in relation to oil and gas assets that might be too costly to exploit as a result. “Stranded assets” became common parlance in 2014, which is hardly surprising considering that $1 trillion of assets are already stranded. How to drive cost efficiencies without compromising health, safety and environmental performance is a key challenge and one we will raise with executive and non-executive directors. We will also urge extractives companies to stress-test their assumptions on carbon prices more rigorously and undertake extensive scenario planning at the project evaluation stage. In December 2015, the world’s governments will meet in Paris to set targets for carbon emissions reductions so it is going to be a big year for climate change.
Beyond carbon, Hermes EOS engagers will tackle broader environmental themes including air pollution, water stress, “leapfrog” technologies, biodiversity and land use for forestry and agriculture. Many companies set themselves 2015 as the deadline for switching to sustainable palm oil and many more have sustainability targets falling due this year. This opens the door for an in-depth assessment of progress so far on the issues material to them and on future plans.
A number of key risks are coming to the fore for many companies. Geopolitical risk looms larger than ever. Tax transparency and its link to reputation is better understood. The cyber attack on Sony Pictures at the end of 2014 was a timely reminder of the growing prevalence of this type of crime. We will continue to urge boards to make sure all of these big picture risks are appropriately managed.
Other risks are more sector-specific. Increasingly onerous regulation in the banking sector and the growing complexity of supply chains for retailers and global manufacturers are just two examples. Hermes EOS plans to work closely with the charity Save the Children in 2015 to help promote a more intelligent approach to managing the problem of child labour than an outright ban.
In the pharmaceutical sector, Hermes EOS will tackle the transparency of clinical trials as evidence continues to emergence that often neither those prescribing nor those taking drugs are fully informed about them. In our engagements, we will strongly encourage full disclosure of trials’ information.
To do all of this effectively, we will continue to grow the Hermes EOS team and engage with even more companies on your behalf. We will keep on pushing boundaries, gaining board access in markets where shareholder engagement is still not widely understood and using new engagement techniques creatively to pursue objectives. And we will keep you more closely informed than ever thanks to the new, improved EOSi portal.