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A trio of concerns set to dominate institutional investors’ agendas at AGMs

Institutional investors will be looking for companies to address concerns around their management of climate change, board diversity, and executive remuneration during this year’s AGM season, says Dr Hans-Christoph Hirt, Head of Hermes EOS, the stewardship and engagement team at Hermes Investment Management.

Climate change
Following the Paris climate agreement in 2015, and the devastating effects of hurricanes and other extreme weather events in 2017, climate change will once again be at the top of investors’ agendas in 2018.

For companies where the materiality of climate change is likely to be high, we expect to see comprehensive reporting against the guidelines produced by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). This should include the results of testing the resilience of a company’s strategy against a range of climate change scenarios.

A global coalition of investors will push for more standardised disclosures, based on the TCFD’s recommendations, through the Climate Action 100+ initiative, which we actively support by leading engagements with some of the world’s most systemically important carbon emitters.

In addition to enhanced corporate disclosure, the objectives of this initiative are to encourage companies to implement a strong governance framework and take action to reduce greenhouse emissions.

We have already started to put Climate Action 100+ firmly on the agenda of our engagements with companies, for example, at the AGM of Siemens on 31 January, and will continue to do so in the run up to and at the AGMs of companies around the world, including at Chevron and Exxon Mobil in the US.

Board composition and diversity
Board composition rightly remains a focus for institutional investors during the voting season. We believe that companies should seek diversity in its broadest sense, taking into account the company’s long-term strategic direction, business model, employees, customers, suppliers and geographic footprint.

We took a robust stance on gender diversity in 2017, systematically opposing the election of nomination committee chairs, in cases where the proposed board composition did not meet our expectations on the representation of women directors. This resulted in recommendations to vote against, for example, the chairs at Glencore and Rio Tinto last year.

In the UK, we expect boards to have already achieved a minimum of 30% female representation. We will vote against the election of nomination committee chairs of companies, if boards fall significantly short of the 2015 Davies’ review target of a quarter of their directors being women and cannot demonstrate credible plans to achieve the goal of 33% women directors by 2020.

We will increase our efforts on gender diversity across the world in 2018 with stricter voting policies, taking into consideration the local context. Consequently, we recently recommended a vote against the nomination committee chair of Novartis.

Executive remuneration
Remuneration practices are an important factor in aligning the activities of executives with a company’s purpose, strategy and performance. While not a panacea, we do believe that the signals sent through well-structured remuneration policies can be an important factor in aligning the interests of executives with those of investors and other stakeholders.

Encouragingly, companies in some markets appeared to have listened to the concerns of shareholders on remuneration and so in 2017 there was more constructive dialogue and steps in the right direction at some companies, not least in the UK, including on performance metrics (Unilever), structure (RBS) and potential quantum (WPP).

However, more progress needs to be made and in 2017 we voted against a record number of resolutions related to executive remuneration; in Germany we opposed 42% of remuneration resolutions and in the UK and the US we recommended voting against about 30% of proposals.

To keep up the momentum, we will continue to push for changes in pay policies and practice at companies around the world. Importantly, we have market level discussions based on our 2016 Remuneration Principles complementing our work with individual companies. For example, we have set up an initiative in Germany with the objective of developing guiding principles for local companies.

Investors are increasingly finding their voices and engaging with management and boards of companies on the whole range of material sustainability issues. Through Hermes EOS, we seek to be at the forefront of these efforts thus contributing to holistic returns, outcomes that go far beyond the financial, impacting on the social fabric, the environment and the wider world for the clients we represent.

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