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HSBC Global Asset Management

PRI reporting framework 2017

You are in Direct - Listed Equity Active Ownership » Engagement

Engagement

Overview

LEA 01. Description of approach to engagement

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate whether your organisation has a formal engagement policy.

01.2. Indicate what your engagement policy covers:

          Escalation process
        

01.3. Attach or provide a URL to your engagement policy. [Optional]

01.4. Provide a brief overview of your organization’s approach to engagement

We recognise a fiduciary responsibility for the oversight of companies in which we have invested on behalf of clients. Engagement is a core element of our stewardship activities; it improves our understanding of investee companies, allows us to signal support for / concern with management actions, and promotes market good practice. These activities seek to enhance long term value for shareholders and protect client assets.

Our stewardship responsibilities apply to holdings in both active and passive funds.  For active equity funds, ESG issues are raised by fund managers and analysts in the course of their dialogue with companies to the extent relevant to the investment thesis. By monitoring and engaging with companies held in our passive funds we pursue benefits for the companies concerned and for the market as a whole. We apply the same engagement approach to other asset classes as appropriate.

We focus on engagement with investee companies but may also engage with stakeholders, regulators, industry partners and academics to inform standards and practices that will benefit the long-term interest of our funds.

01.5. Additional information [optional]

The outcomes of our engagement activities include but are not limited to:

-               Upholding our commitments to the UN Principles for Responsible Investment and Stewardship Codes in markets where we invest

-               Enhancing the sustainability of returns for investee companies

-               Meeting clients’ expectations of our stewardship activities

-               In depth engagements that effect significant improvements at investee companies

-               A deeper understanding and internal dialogue about how ESG factors impact investment returns.


LEA 02. Reasoning for interaction on ESG issues (Not Completed)


Process

Process for engagements run internally

LEA 03. Process for identifying and prioritising engagement activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

03.1. Indicate whether your organisation has a formal process for identifying and prioritising engagement activities carried out by internal staff.

03.2. Describe the criteria used to identify and prioritise engagement activities carried out by internal staff.

other description

          To support fund managers as part of an investment decision
        

03.3. Additional information. [Optional]


LEA 04. Objectives for engagement activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

04.1. Indicate if you define specific objectives for your engagement activities.

04.2. Indicate if you monitor the actions that companies take following your engagements.

04.3. Indicate whether your organisation defines milestones and goals for engagement activities carried out by internal staff.

04.4. Indicate if you do any of the following to monitor and evaluate the progress of your engagement activities carried out by internal staff.

04.5. Additional information. [Optional]


Process for engagements conducted via collaborations

LEA 05. Process for identifying and prioritising collaborative engagement

New selection options have been added to this indicator. Please review your prefilled responses carefully.

05.1. Indicate whether your organisation has a formal process for identifying and prioritising collaborative engagements

05.2. Describe the criteria used to identify and prioritise collaborative engagements

other description

          Where we believe we can have a positive influence
        

05.3. Additional information [Optional]


LEA 06. Objectives for engagement activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

06.1. Indicate if you define specific objectives for your engagement activities carried out collaboratively.

06.2. Indicate if you monitor the actions companies take following your collaborative engagements.

06.3. Indicate whether your organisation defines milestones and goals related to engagement activities carried out via collaborations.

06.4. Indicate if you do any of the following to monitor and evaluate the progress of your collaborative engagement activities.

06.5. Additional information. [Optional]


General processes for all three groups of engagers

LEA 09. Share insights from engagements with internal/external managers

09.1. Indicate if insights gained from your engagements are shared with your internal or external investment managers.

Type of engagement

Insights shared

Individual/Internal staff engagements

Collaborative engagements

09.2. Additional information. [Optional]


LEA 10. Tracking number of engagements

10.1. Indicate if you track the number of engagements your organisation participates in.

Type of engagement
Tracking engagements

Individual / Internal staff engagements

Collaborative engagements

10.2. Additional information. [OPTIONAL]

We track all contacts with investee companies globally. Whilst our ESG Engagement lead focuses on companies held passively, effort is made to share information relating to this activity with Fund Managers who hold these companies within their active portfolios.


Outputs and outcomes

LEA 11. Number of companies engaged with, intensity of engagement and effort

11.1. Indicate the amount of your listed equities portfolio with which your organisation engaged during the reporting year.

Number of companies engaged

(avoid double counting, see explanatory notes)

Proportion (to the nearest 5%)
Specify the basis on which this percentage is calculated

Individual / Internal staff engagements

2000 Number of companies engaged
30 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

Collaborative engagements

159
5 Proportion (to the nearest 5%)

Specify the basis on which this percentage is calculated

11.2. Indicate the proportion of engagements that involved multiple, substantive and detailed discussions or interactions with a company during the reporting year relating to ESG issue.

Type of engagement

% Comprehensive engagements

 

 

Individual / Internal staff engagements

 

 

Collaborative engagements

11.3. Indicate the percentage of your collaborative engagements for which you were a leading organisation during the reporting year.

Type of engagement

% Leading role

 

 

Collaborative engagements

11.5. Additional information. [Optional]


LEA 12. Engagement methods

12.1. Indicate which of the following your engagement involved.

          In some instances we felt it appropriate to escalate our engagement beyond that described above.
        

12.2. Additional information. [Optional]

In 2016 we publicly declared our intention to support some shareholder resolutions in an effort to encourage a company and other investors to act, we were signatory to a statement read out at a company’s AGM and we co-filed a shareholder resolution to be tabled at the company’s 2017 AGM.


LEA 13. Engagements on E, S and/or G issues (Not Applicable)


LEA 14. Companies changing practices / behaviour following engagement

14.1. Indicate whether you track the number of cases during the reporting year where a company changed its practices, or made a formal commitment to do so, following your organisation’s and/or your service provider's engagement activities.

14.2. Indicate the number of companies that changed or committed to change in the reporting year following your organisation’s and/or your service provider's engagement activities.

Number of company changes or commitments to change

Individual / Internal staff engagements

Collaborative engagements

14.3. Additional information [Optional].


LEA 15. Examples of ESG engagements

15.1. Provide examples of the engagements that your organisation or your service provider carried out during the reporting year.

Topic or ESG issue
          We engaged with FTSE250 outsourcing company on a number of occasions in 2016 over concerns relating to historic human rights abuses, internal control and governance.
        
Conducted by
Objectives

Historic alleged human rights abuses and mis-reporting had had a material impact on the company: substantial reputational damage, contract reimbursement, ineligibility to bid for UK government contracts and failure to renew New Zealand Government contract. Whilst the ban from tendering for UK Government contracts had been rescinded, the company had been involved in over 25 controversies since 2013 in the UK, Australia, Indonesia and New Zealand. Given their dependence on government contracts these remained a concern and we sought to understand the efforts management are taking to mitigate their reoccurrence as well as how these issues may impact shareholder value going forward.

Encourage adoption of and adherence to the UNGC principles.

Flag concern that some elements of the company's Long Term Incentive Plan were not sufficiently stretching

Scope and Process

The practices of the company were studied and on three occasions we met their Director Business Compliance & Ethics to discuss these.  The company underwent a corporate renewal to strengthen governance and transparency. There has been significant board refreshment as well as the establishment of a Corporate Responsibility and Risk Committee, which, was later separated into two committees to ensure the Risk Committee received increased attention. We sought to understand the role of this committee in business development and the extent to which ethical issues are part of decision making. New opportunities in both existing and new locations are reviewed by the risk committee as are contracts considered high risk, such as services involving children. In 2015 the company decided not to bid for an Australian Government’s offshore detention contract demonstrating the company’s ability to uphold its ethical and cultural values in favour of short term commercial opportunity.  Adherence to UNGC principles are part of our investment process. We challenged the company on not being a signatory to the principles to date. In a separate meeting with the CEO we raised the concern that some elements of the LTIP did not appear sufficiently stretching against broker forecasts for the company

Outcomes

We are confident that there is genuine commitment to the human rights agenda at the top of the company.The current governance structures around corporate responsibility and risk provided comfort of the company’s commitment to prevent reoccurrence of past failings.      

The company has committed to review its non-signatory status to the UN Global Compact Principles and how this could fit with the refreshed company's values, alignment with the strategy and priorities going forward.

Topic or ESG issue
          We engaged with Indonesian palm oil company on concerns relating to labour standards, sustainable palm oil practices and carbon emissions.
        
Conducted by
Objectives

There had been a high number of fatalities (15) at the company in the previous year. We wished to communicate our concern on this issue and understand what the company was doing to improve health and safety standards and prevent a reoccurrence, improve oversight and where relevant encourage action.

The company has been ordered to cease new plantings on a concession by the RSPO due to concerns relating lack of Free, Prior, Informed, Consent being obtained, lack of required permits and failure to complete the appropriate land assessments. We sought to understand what the company was doing to resolve this complaint and whether this would have any impact on shareholder value going forward.

Two of the company’s facilities, a refinery and a kernel crushing plant as well as a bulking station are alleged to have bought palm oil from CPO mills that are implicated in illegal deforestation. Due to the commercial sensitivity of unaccredited palm oil we sought to communicate concern over such alleged practice as well as encourage the company to increase its efforts to achieve traceability in the supply chain.

Scope and Process

We met with Chief sustainability Officer, Investor Relations and VP External Affairs to raise our concerns and encourage the company to address these issues and followed up with the company in writing.

Outcomes

1. The company agreed to provide details of fatalities and clear measures the company will be taking to address them as well as establish a publicly available reduction target for health and safety performance with reference to fatalities. 

2. Seven out of nine parts of the RSPO complaint have been settled and the company is working towards settlement of the final two. The company provided assurance that they were working towards a settlement,   holding meetings every other month and expected settlement of the final issues to be in 2-3 meetings' time.

3. The company acknowledges supply chain risks and has made the public commitment to make supply chain traceable back to plantation, own mills by 2016, independent mills by 2020. It also entered the companies into its grievance procedure, a mechanism to investigate problems

Topic or ESG issue
          We engaged with FTSE listed company via the Investor Forum, which we joined in 2016. During 2015 and 2016 the actions of the company, notably
        
Conducted by
Objectives

Comprehensive improvement has been sought in the following areas:

Corporate governance, board oversight and effectiveness,

Related party transactions and potential conflicts of interest,

Employment practices,

Acquisition strategy and associated due diligence,

Oversight of key supplier relationships and management of the store portfolio

Scope and Process

Following direction and input from members, the Investor Forum has engaged extensively with the company, with the board as a whole and specifically with the Chairman. We attended the company’s AGM, toured the company’s warehouse and met with the Board along with 12 other investors.

We voted against the re-election of the Chairman at the AGM along with the majority of the company’s independent shareholders.

Outcomes

The company has announced that having considered concerns raised by independent shareholders, the governance review would be led by an independent party with a wider scope .Despite this extensive engagement we remain disappointed at the limited progress the company has made.

Topic or ESG issue
          Concerns that one oil & gas major is lagging behind its peers in respect of disclosure of climate risks
        
Conducted by
Objectives

As a global investor, we are aware of the potential risks climate change presents to our investments and are committed to playing our part in addressing the issue of climate change. The transition to a low carbon economy implies significant structural changes to the global economy. We expect companies to recognise the potential risk this presents and to demonstrate to shareholders that they are minimising and disclosing the risks presented by climate change. 

Scope and Process

At the company’s 2016 AGM we publically pre-declared our intention to support resolution requesting the company annually assess the portfolio impacts of 2 degree policies in an effort to demonstrate our disappointment with progress on climate related disclosures made by the company to date. This resolution achieved 38% support from shareholders but this was insufficient for adoption. Collective engagement with the company continued. In addition to this we raised our concerns directly with the company on several occasions. This engagement did not result in commitment from the company to address shareholder concerns and provide information on the resilience of the company’s portfolio. At the end of 2016 we co-filed a resolution in a continued effort to seek the same disclosure. The resolution will be tabled at the company’s 2017 AGM

Outcomes

2016 engagement still in progress

15.2. Additional information. [Optional]


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