Active Ownership

Responsible Investment Philosophy:

Responsible investment (RI) is an umbrella term used to describe a broad range of approaches that can be used to incorporate ESG considerations into the investment process. RI is also sometimes referred to as sustainable investment. PH&N views ESG integration as systematically incorporating ESG factors into investment processes with the goal to identify potential risks and opportunities and improve long term, risk-adjusted returns.

Their approach to RI is comprised of three pillars, and PH&N takes specific actions under each of these pillars to deliver investment returns without undue risk of loss.

• Fully integrated ESG: All investment teams integrate relevant ESG factors into their investment processes.
• Active Stewardship: PH&N conveys its views through thoughtful proxy voting, engagement with issuers and regulatory bodies, and collaboration with other like-minded investors.
• Client-driven solutions and reporting: PH&N aligns solutions with client demand and provide transparent and meaningful reporting.

Integration in the Investment Process:

Rather than applying a top-down ESG investment screen, PH&N teams assesses the risks and opportunities associated with issuers’ ESG practices throughout the due diligence process. A team’s main goal is to understand the impact of such practices on the company’s overall sustainability and credit quality. The teams employ a wide range of resources to expand their insight of pertinent ESG information, including management and rating agency engagement, as well as third-party research. PH&N does not force themselves to look for ESG factors in order to fulfill an arbitrary requirement but, instead, believe it is prudent and vital to look at a corporate bond in its entirety. This research naturally includes ESG considerations to the extent that they reflect the quality and value proposition of an investment.

Case Study – Canadian Energy Company:

The PH&N Fixed Income team formally reached out to a Canadian energy company to discuss its positioning for the energy transition and capital allocation to renewable energy. As part of this engagement, the team expressed support for a recent strategic asset realignment.

The team also encouraged the company to consider further diversifying its operations through a greater capital allocation to clean energy infrastructure. On the back of this, the team spoke directly with management to provide more details on the rationale behind some of its suggestions. The team felt this was a productive discussion as it allowed for the company to directly address the team’s concerns and provide a long-term view on the issuer’s strategy to address transition-related risks.

Management reported that the team’s feedback would be included as part of their board meeting. The team will continue its engagement efforts with the company and will monitor its progress over time.

ESG Philosophy:

Whether one calls it corporate governance, corporate social responsibility, ESG, responsible business conduct, or sustainability, the underlying concept is the same: a company’s character matters. In our experience, the odds of a company achieving a successful combination of growth and longevity cannot be separated from its corporate character. Good corporate behaviour can increase the probability of exceptional returns.

Being long-term investors with an investment horizon of 5-10 years and beyond, Baillie Gifford seeks to ask the right questions and get to know companies deeply. Business fundamentals – such as a company’s market opportunity, returns, capital deployment, and sustainability of competitive advantage – are considered together with the intangible notions of business culture, adaptability, and role in society. In other words, an analysis of corporate character is intrinsically built-in to our investment approach.

Integration in the Investment Process:

Baillie Gifford integrates potentially material ESG issues affecting holdings through its 10 Question Stock Research Framework. Specific questions target a company’s sense of wider responsibility and ESG considerations are embedded into several questions.

Case Study – Illumina:

Illumina is a U.S. biotechnology company specializing in gene sequencing equipment and consumables. Baillie Gifford started to develop concerns in recent years about leadership and decision-making at Illumina. In particular, it was concerned about two strategic decisions taken at the time by the CEO, Francis deSouza: firstly, to repurchase GRAIL, a company that develops non-invasive liquid biopsy tests that screen for multiple types of early-stage cancer, that had been initially spun out of Illumina in 2016. Baillie Gifford questioned this decision with Mr. deSouza in 2020 when this acquisition was announced and again in 2022, prior to the close of the deal before full regulatory approval.

Baillie Gifford’s reviews of Illumina and other companies in the genome sequencing market led it to become increasingly concerned about the rising competition facing Illumina. Despite being the global leader in its field, growth in Illumina’s core genome sequencing business appeared to have decelerated in recent years, in part due to a lack of internal innovation and because of poor strategic decisions. Given its concerns about the possible consequences for its long-term investment thesis, Baillie Gifford reduced the portfolio’s holding in Illumina in late 2022.

Activist investor Carl Icahn then took a stake in the company in February 2023, proposing three nominees to the board and the rapid resolution of the GRAIL acquisition. Illumina reached out to Baillie Gifford to discuss the matter, and after conducting its own research, Baillie Gifford agreed to support management on that occasion, albeit using the occasion to discuss its various concerns about the company. In May 2023, Baillie Gifford met with various directors and executives, including the Chair of the Audit Committee, the Chair of the Nomination and Corporate Governance Committees, and the CEO and CFO. The discussion was broad, but Baillie Gifford again raised its key concerns around leadership and growth.

Not long after, the CEO and Chair stepped down and new directors joined the Board. With signs of intensifying competitive pressures and ongoing regulatory challenges relating to the GRAIL acquisition, Baillie Gifford further reduced the portfolio’s holding in October 2023. It then engaged with various directors and executives, including the new Chair, the Co-Chair of the Nomination and Corporate Governance Committees and the Co-Chair of the Compensation Committee. The purpose of this engagement was to discuss the recent appointments, changes to executive compensation, and the latest regulatory deliberations concerning GRAIL.

In summary, Baillie Gifford engaged with the company over multiple years with the expectation that the core business, which remains important to the gene sequencing revolution, would prove its strength and that the situation with the poorly executed acquisition of GRAIL would ameliorate. While the subsequent change of management and Board shake-up were belated recognition of a poorly run business, Baillie Gifford remained concerned about the erosion of Illumina’s competitive position in the sequencing market. It therefore decided to sell the holding from the portfolio in late 2023.

Responsible Investment Philosophy:

Since 1986, C WorldWide has been investing in sustainable companies which is the essence of its active and long-term focused investment philosophy and process. Anchored in their long-term investment horizon, proactively focusing on good business practices has been core to their approach – not just to do less harm or to avoid risk, but to fully understand the long-term merits and viability of the investee company.

As active stock investors, C WorldWide favors a proactive engagement approach rather than an approach based on extensive exclusion lists. Its objective is to have an ongoing dialogue with invested companies. Integrating environmental, social and governance (ESG) factors in its investment decisions is an essential part of our fundamental analysis process as they evaluate what is material to all stakeholders of the investee company over the long-term and not just the next few quarters or even years. Addressing stewardship with investee companies results in a dialogue that will assist the investee companies’ adaptability to changing markets. There is no doubt, after 30 plus years’ experience, that shareholders are the first to benefit from a longer-term approach.

Integration in the Investment Process:

• ESG equals sustainability. Although the focus on the term ESG has increased significantly over the past years, ESG has always equaled sustainability and been aligned with active, long-term portfolio management.
• C WorldWide believes that a strong ESG company profile starts with the G – i.e. governance. Good corporate governance is typically anchored with good company managements. A good corporate governance foundation is a key steppingstone to a good ESG profile. For companies to improve their social and environmental agenda they require, first and foremost, a robust governance framework.
• ESG factors make a difference to long-term active portfolio management and the firm believes there is no conflict between stock returns and sustainability. It believes that investments in sustainable companies are drivers for higher, longer term risk-adjusted shareholder returns. This mitigation of risk is a key contributing factor when ESG considerations are taken into account.
• C WorldWide’s active, high conviction equity portfolios reinforce its commitment to ESG. This is because the firm’s focus on concentrated stock-picking lifts company specific ESG awareness. Its experience is that sustainable companies often make a good stock resulting in higher returns at a lower risk and therefore outperforming over the longer term.

Case Study – Amazon.com, Inc.:

Amazon.com, Inc. (Amazon) is an American multinational technology company, engaged in e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. In recent years, the company has faced significant scrutiny over recurring health and safety issues and workers' rights. These challenges have prompted extensive engagements to drive improvements across its global operations. Those issues included frequent health and safety incidents, including fatalities and serious injuries, reportedly surpassing the average for the US retail industry.

Despite limited initial engagement, C WorldWide believed that Amazon has taken substantial steps to address these issues. The company established a Safety Leadership Index in 2018 to measure employee perceptions of safety and, between 2019 and 2022, invested $1 billion in safety projects and initiatives (unrelated to COVID-19) across Amazon, and in 2023 alone, committed $550 million to safety efforts.

Amazon has also faced significant controversy over its labour practices, particularly regarding unionization efforts with workers seeking to address concerns about working conditions and fair treatment. The company has been involved in ongoing discussions about the role of unions and employee representation, highlighting the broader debate about workers' rights and corporate practices. During the last engagement call with Amazon’s Head of ESG, C Worldwide addressed the issue of unionization. Amazon responded by emphasizing its commitment to caring for its employees and being responsive to their concerns. Amazon clarified that it does not actively promote or discourage union membership and have implemented manager training to ensure proper communication and understanding of employee rights. Amazon also highlighted the presence of a human rights due diligence team to uphold its practices and commitments in this regard.

Overall, C WorldWide believes that Amazon has demonstrated a commitment to improving corporate ethical behaviour and has made notable progress in addressing health and safety and workers' rights issues through substantial investments and strategic initiatives. Moving forward, C WorldWide believes that continuous engagement will focus on enhancing these efforts and ensuring long-term improvements through comprehensive strategies and effective implementation.

Responsible Investment Philosophy:

Responsible Investing is central to what Walter Scott does and what it believes. The firm understands that Environmental, Social, and Governance factors, as much as financial metrics, determine the long-term success of an investment. It believes integrity, sustainability, and governance factors are important in assessing a company’s ability to prosper over the long term. Because of this, Walter Scott fully integrates its assessment of these factors into the firm’s investment process. Walter Scott is member or signatory to a number of select groups that it believes best represents the industry in pushing for meaningful change or where it feels the educational element will complement its own research in a material way.

• Principles of Responsible Investment (PRI) Walter Scott has been a signatory since 2017. Our 2020 rating is A+, A, A.
• Carbon Disclosure Project (CDP)member
• UK Investment Associationmember
• Climate Action 100+member
• International Corporate Governance Network member

Integration in the Investment Process:

• Responsible: The firm is entrusted to invest on behalf of our clients over a long-term investment horizon. As such, it has a duty to understand each company in which it invests, including its approach to Environmental, Social, and Governance (ESG) matters. Water Scott’s experience has taught them that only those companies that strive towards appropriate ESG standards are likely to prosper over the long term. Companies that do not meet the firm’s rigorous standards will not be considered as potential investment candidates.
• Integrated: The research team assesses the ESG factors that may affect the operating and financial performance of each company. ESG considerations could include air and water pollution, human rights, labour standards, safe development of medicines, board leadership, remuneration, and conflicts of interest among others. The list is not exhaustive and not every factor considered will apply to every company. The firm’s assessment is a key part of our engagement discussions with company management. Given the importance of these factors in determining the long-term sustainability of a business, we do not delegate ESG analysis to a separate team. We believe it is essential that each member of the firm’s Research team has responsibility for understanding a company’s ESG profile.
• Engaged: Engagement with companies is pivotal to good stewardship. Walter Scott expects every company it invests in to engage on issues of sustainability. By actively engaging with a company, the firm gains a better understanding of its business, including its ESG credentials. It also means Walter Scott can use its influence as investors to effect meaningful change. Through its long-term investment horizon, and very often long-term tenure through the firm’s clients as significant shareholders, Walter Scott has built excellent relationships with corporate management teams. The firm’s direct engagement with companies allows better assessment and understanding of how they approach ESG issues. The firm expects management teams to assess the materiality of ESG factors and to target, disclose, monitor, and provide progress reports accordingly.

Case Study – Paychex:

Paychex is a U.S. based provider of integrated human capital management solutions for payroll, benefits, human resources, and insurance services. In November 2023, Walter Scott initiated an engagement for change with Paychex to encourage greater independence at both the board and committee level.

Encouragingly, Paychex has taken some steps to address the issue of independence: an ongoing board refresh programme recently led to the appointment of three new non-executive directors, and they are focusing on equivalent skills between new appointments and existing members to facilitate board rotation. However, Walter Scott feels the company can do more to expedite this shift. In respect of overall board independence, Paychex sits below Walter Scott’s expectation of majority independence due to the number of long-tenured directors (i.e., it presumes directors are not independent if they have served on the board for ten or more years). While it welcomes the recent addition of an independent non-executive board member, it would like to see further steps taken to refresh membership – with a particular focus on long-tenured independent non-executive directors - while retaining an appropriate balance of experience and skills.

Regarding the chair of the board, Walter Scott understands the reasons why Martin Mucci, who recently stepped down as CEO, currently holds that role. However, in such circumstances where there is not an independent chair, it is Walter Scott’s strong preference for a lead independent director to provide independent challenge and oversight. Ideally, this individual should be a shorter-tenured independent non-executive director than is currently the case.

Under Walter Scott’s definition of “long tenured,” the Paychex compensation and leadership committee also falls below its threshold of a minimum level of 50% independence together with an independent chair. Walter Scott outlined to Paychex that it would like to see the membership of that committee evolve over time to increase the level of independence, preferably to 100%, including a shorter-tenured independent non-executive director in the role of chair. Similarly, Walter Scott prefers 100% independence on the audit committee and expect that committee to be chaired by an independent director. This is not currently the case at Paychex.

While the changes proposed appear significant, Walter Scott feels they could be addressed with relatively small changes to the current structure of the board, by adding more independent directors or replacing a small number of existing long-tenured independent non-executive directors, and Walter Scott expects this engagement for change with Paychex to be ongoing.

Responsible Investment Philosophy:

Brookfield’s business philosophy is based on its conviction that acting responsibly toward its stakeholders is foundational to operating a productive, profitable and sustainable business, and that value creation and sustainable development are complementary goals.

Brookfield defines material ESG considerations as those that have the potential to have a direct, substantial impact on an organization’s ability to create, preserve or mitigate erosion of economic value, environmental or social value for itself and its stakeholders. The elements on which we focus may differ across certain industries, activities, geographic locations and types of business (i.e., control, joint control, minority, public equity or debt). Its approach to ESG incorporates leading ESG frameworks and standards, including Sustainability Accounting Standards Board (“SASB”) standards and the Taskforce for Climate-related Financial Disclosures (“TCFD”).

Integration in the Investment Process:

Brookfield embeds material ESG considerations and evaluate risks and value creation opportunities throughout its investment process. The firm actively looks to advance ESG initiatives and improve ESG performance in driving long-term value creation throughout the lifecycle of our investments. Its investment processes align with the PRI’s six Principles.

Case Study – Data4:

As part of its decarbonization journey, Brookfield Infrastructure’s European Data Centers business, Data4, continually looks for innovative technical solutions to reduce emissions. In 2023, Data4 successfully implemented several emissions reductions initiatives, including utilizing:

• Concrete developed through low carbon methods, from 2023 onwards, which has 40% lower emissions than conventional concrete for new data center builds;
• Low carbon, hydrotreated vegetable oil for generators, from 2023 onwards, which has 70% lower emissions than conventional fuel oil;
• Refrigerant fluids with a low global warming potential for chillers and progressively replacing old fluids that have high global warming potentials; and
• Artificial intelligence to reduce refrigerant leaks by 25% between 2022 and 2023.

Responsible Investment Philosophy:

Macquarie believes the identification, assessment, and responsible management of ESG risks and opportunities is essential to the sustainable long-term development of assets and the communities in which they operate.

ESG considerations are embedded within Macquarie’s investment decision-making approach and the asset management frameworks that inform the way in which portfolio companies assess and improve their performance. Macquarie partners with its portfolio investments to share best practices and drive positive change. They seek to improve working conditions, minimize environmental impact, and preserve the cultural heritage of the communities in which they invest.

Integration in the Investment Process:

To ensure the consistency and adequacy of these assessments they have comprehensive due diligence scope checklists and external expert advisers are engaged as needed on specific ESG issues.

Results from ESG due diligence assessments include:

• Permit and license requirements and issues arising from investigations;
• Key ESG risks and potential liabilities;
• Recent regulatory actions taken, reviews and/or third-party actions or claims against the company;
• Ongoing obligations/regulatory standards to be met post-acquisition;
• Assessment of the ESG risk management framework in place against accepted good practice; and
• Recommendations for any remediation actions.

Engagement Case Study:

Issue: Macquarie’s Climate Solutions strategy focuses on investing in two "buckets" of companies: High-emitting companies actively working toward reducing, displacing, and/or sequestering their GHG emissions ("Reducers") and companies who are helping others to reduce emissions through development of products and services ("Facilitators"). In late 2022, Macquarie became concerned that one of the companies that it had identified as a facilitator was not advancing their efforts to further direct capital towards solutions to reduce carbon emissions.

Actions: Macquarie arranged a meeting with the company’s Chief Financial Officer and Investor Relations and Sustainability staff to gauge the company’s commitment towards developing products that will help drive reduction in GHG emissions.

Outcome: Macquarie discussed the main areas of the company’s business and their impacts on emissions savings. Although the company does offer products, such as towers for wind turbines, that ultimately assist in the reduction of GHG emissions, Macquarie reached the conclusion that the company was not investing capital to substantially grow the business nor looking to develop new products and services to promote GHG emissions reduction. As a result, Macquarie exited from the position in early 2023.

Responsible Investment Philosophy:

BentallGreenOak (BGO) is guided by its purpose as a fiduciary to create sustainable spaces that deliver long-term value for our clients, tenants, and the communities that we serve. Empowered by this responsible investment mindset, the firm is committed to realizing ESG goals that enhance asset value, ensure compliance, promote industry-leading management practices, and drive superior performance. This commitment to responsible investment and ESG integration is carried across BGO’s global real estate debt and equity investment platform, at both the portfolio and property levels.

While BGO’s decade of ESG leadership has achieved global recognition to date, the increased focus over the last several years on the climate crisis, social unrest, and the COVID-19 pandemic have brought ESG risk management to the fore. To successfully respond to these critical ESG issues and continue to be at the forefront of environmental and social change, the firm incorporates ESG considerations throughout an asset’s entire lifecycle. Through this approach, BGO is building a portfolio of the future that recognizes the relationship that we all have to our buildings, and our desire for safer, healthier, and more inclusive cities.

Integration in the Investment Process:

BGO’s approach to responsible investment is built on the following core pillars:

• Operational Efficiency:

Data Analytics, Target Setting, and Green Building Certifications

State-of-the-art sustainability data management system and comprehensive ESG programs to drive operational excellence and support data-driven decision-making.

• Climate Risk and Resilience:

Climate Risk Analysis and Portfolio Planning

Climate risk profiling and customized adaptation planning tools.

• Social Impact:

Socially Impactful Investments, Equity, Diversity, and Inclusion, and Community Engagement

Proprietary Social Impact Assessment Tool, sound supply chain policies and practices, community engagement activities, and an extensive suite of equity, diversity, and inclusion (EDI) initiatives to drive positive impact for our stakeholder partners and society.

• Tenant Experience:

Tenant Engagement and Health and Well-Being

Bespoke tenant engagement programs that further drive sustainability performance, enhance occupant health and well-being, and strengthen tenant loyalty and satisfaction.

• ESG Governance:

ESG Policies and Disclosure

Firm-wide policies that delineate our approach to sustainable investment, environmental stewardship, responsible procurement, and ethical conduct, and robust disclosure practices that enable us to manage ESG risk, strengthen transparency and accountability, and create value for our clients and stakeholder partners.

CRREM Case Study:

BGO recently piloted the CRREM tool to evaluate transition risk and stranding risk for the Prime Canadian fund. Carbon Risk Real Estate Monitor (CRREM) is a leading global initiative for establishing targets for operational carbon emissions for standing real estate investments consistent with the Paris agreement. BGO is a sponsor and participant in the CRREM North American Initiative to create more granular decarbonization pathways for CRE in Canada and the US. CRREM considers country-specific decarbonization pathways, including associated government policy.