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Alliance Bernstein

PRI reporting framework 2019

Export Public Responses
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Outputs and outcomes

LEA 09. Number of companies engaged with, intensity of engagement and effort

Indicate the proportion of companies from your listed equities portfolio with which your organisation engaged with during the reporting year.
We did not complete any engagements in the reporting year.

Number of companies engaged

(avoid double counting, see explanatory notes)

Proportion of companies engaged with, out of total listed equities portfolio

Individual / Internal staff engagements

236
.3

Collaborative engagements

3
0

09.2. Indicate the proportion breakdown of engagements conducted within the reporting year by the number of interactions (including interactions made on your behalf)

No. of interactions with a company
% of engagements
One interaction
2 to 3 interactions
More than 3 interactions
Total
100%

09.3. 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

09.5. Additional information. [Optional]


LEA 10. Engagement methods

10.1. Indicate which of the following your engagement involved.

10.2. Additional information. [Optional]

We take a holistic approach to evaluating and monitoring the issuers in which we invest, including an assessment of the financial performance, strategy, and management performance, and how the issuer addresses ESG issues. Situations occur where we have reservations about an issuer’s approach to protecting shareholders’ interests. We believe that each case must be judged on its merits, which is why we have not adopted rigid guidelines on when and how such escalation should take place. Initially, the research analyst and/or the investment governance team will generally communicate our concerns to the issuer’s management. In cases where our concerns are not dealt with satisfactorily, discussions may be escalated to the board of directors and may include AB’s portfolio managers and/or chief investment officers. Our analysts, portfolio managers and chief investment officers work together closely and form a case-by-case judgment of how best to protect clients’ interests in particular circumstances. Assessment of the outcome of intervention and next steps is also conducted case by case. In some instances, for example, where we consider proposed executive pay arrangements to be contrary to our clients’ interests, or where we do not believe an issuer’s management is giving sufficiently serious consideration to a takeover offer, we will intervene with an issuer’s chairman or other board members. In situations where issuer actions are not sufficient to address the concerns, we may vote against the directors and/or relevant ballot items on the proxy. Similarly, where a fixed-income investor proposes to undertake a strategic action that violates or may impair our legal rights under a covenant or other aspect of the investment, or jeopardizes the economics of the investment, we will seek to enforce our rights or seek offsetting financial compensation. This can be done in a variety of ways including, but not limited to, direct action against the issuer, participation in a bond holders group or class action litigation, or seeking relief through the applicable insolvency regime.


LEA 11. Examples of ESG engagements

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

ESG Topic
Human rights|Health and Safety|Labour practices and supply chain management
Conducted by
Objectives

Objective: We received a set of allegations from an outside organization regarding this Industrial Commodities company's employment practices, which we have investigated.

Background: the group alleged that the company has systematic failures in its industrial relations. The union believes that the company should engage it to audit, monitor and appraise their performance on these issues on an ongoing basis for a fee. The company's response is that many of the issues raised by the group are factually incorrect and others represent local disputes that have been resolved and are within the normal scope of industrial relations. Management argues that there are no systematic issues and that the outside organization has not provided evidence of such in its reports or face-to-face meetings. Moreover, the company believes that employee relations are best managed at the local level, according to group policies.

We also discussed the company's approach, policies and organization for managing health, safety, environment and communities (HSEC). The company has group policies that are applied in all operations. Standards are not set locally.

Scope and Process

HSEC resources, such as training, monitoring, issues resolution and stakeholder engagement, are deployed in the operations at the commodity segment and centrally reported to the CEO. Responsibilities go through the business line to the CEO. A board committee, including the chair and the CEO, oversees performance. The company standards apply to both employees and contractor labor on its sites. They recognizes the right to unionization in all operations. Where serious incidents occur, the company will suspend operations while the issues are investigated. This is not a threat of closure (as alleged by the outside organization), and employees continue to be paid during the suspension.

Management denies that there is a culture of covering up problems and says that the focus is on learning, training and mitigation to prevent incidents. In the case of fatalities, the responsible general manager is required to present to the board on causes and corrective measures. Finally, the central HSEC team manages a register of catastrophic safety and environment risks, including mitigation measures and progress on actions. We believe that the company has appropriate policies and management infrastructure for managing HSEC issues.

Outcomes
ESG Topic
Climate Change
Conducted by
Objectives

Objective: Gain a deeper understanding of the company's approach to climate change. 

Background: This company is a flat product steel producer with operations in Australia, New Zealand, Pacific Islands, North America and Asia. The company identified the following major sustainability topics: governance and business conduct; climate change and energy; safety, health and wellness; supply chain sustainability; and diversity and inclusion. During an in-person meeting in August, our ESG analyst discussed, among other issues, the company's approach to climate change and energy with the head of investor relations, the sustainability manager and the government relations manager.

Steelmaking generates significant greenhouse gas emissions. In 2011, the company closed a blast furnace, reducing its Australian emissions by more than 40% and effectively eliminating surplus steelmaking capacity. The company supports the intentions of the international climate agreement developed at the 2015 Paris Conference of Parties, as well as the intended nationally determined contributions of the countries in which it operates.

Scope and Process

The company recognizes that the changes required to achieve these targets will require organizations around the world to reduce greenhouse gas emissions to transition to a more sustainable economic model. For example, the company reduced large flaring to lower its emissions. The company is also developing emissions intensity reduction targets in line with detailed sector models from the International Energy Agency 2°C Scenario. As recommended by the Task Force for Climate-Related Financial Disclosure (TCFD), management conducted scenario analysis on the physical risk of climate change, as well as the transitional risk of moving to a low-carbon economy, to the business. On the downside, the company believes that the demand for steel and the required raw materials will grow, which makes setting targets harder. New technologies to reduce emissions as part of the production process are not yet scalable. Management expects to communicate more on the company’s approach to climate change in its 2018 sustainability report.

We are pleased to see that the company has committed to increased transparency by reporting in line with the TCFD recommendations. We will review the data once available.

Outcomes
ESG Topic
Climate Change|Pollution
Conducted by
Objectives

Objective: Evaluate the impact of new environmental regulations for emissions from shipping. 

Background: The International Maritime Organization (IMO) has drafted new regulations for emissions from shipping to take effect in January 2020. The main type of “bunker” oil for ships is heavy fuel oil, derived as a residue from crude oil distillation. Crude oil contains sulphur that, following combustion in the engine, ends up in ship emissions. Sulphur oxides (SOx) are known to be harmful to human health, causing respiratory issues and lung disease. In the atmosphere, SOx can lead to acid rain, which can harm crops, forests and aquatic species and contribute to the acidification of oceans. Limiting SOx emissions from ships will improve air quality and protect the environment. IMO regulations to reduce SOx emissions from ships first came into force in 2005, under Annex VI of the International Convention for the Prevention of Pollution from Ships (known as the MARPOL Convention). Since then, the limits on SOx have been progressively tightened. 

 

Scope and Process

​Beginning January 1, 2020, the limit for sulphur in fuel oil used on board ships operating outside designated emission control areas will be reduced to 0.50% mass by mass. This will significantly reduce the amount of SOx emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts. Our analysis indicates that the primary route to enable ship owners to meet these new, much more demanding limits on SOx emissions will be for oil refiners to provide marine fuels with greatly reduced sulphur content.

This year, we have been investigating the readiness of oil companies to supply this fuel, to remove sulphur from crude oil and to achieve this profitability. During the quarter, we had important conversations with an integrated oil company and an independent refiner. The integrated oil company was able to confirm our assessment that it has leading positions in sulphur removal and supply of clean middle distillates—which are key to the solution—and has a business plan to thrive under the new regulations.

Outcomes
ESG Topic
Human rights
Conducted by
Objectives

Objective: Engage with the company to clarify their approach to human rights in light of a shareholder proposal. 

Background: The Australasian Centre for Corporate Responsibility (ACCR) is a member-based organization formed in 2012 with the objective to improve Australian-listed companies’ performance on ESG risk indicators. It tries to change corporate behavior through engagement and filing resolutions to be put forward at annual general meetings (AGM) for shareholders to vote on. A human rights risks resolution put forward by ACCR was included on the ballot at the AGM of this large Australian airline in October 2018. In our meeting with the company's head of investor relations, we discussed ACCR’s shareholder resolution regarding human rights risks.

On a high level, the resolution on human rights risks asks the board to commit to engaging in a heightened due diligence process in relation to any involuntary transportation activity the company is involved in as a service provider to the Australian Department of Home Affairs. ACCR argues that numerous international authorities have found that Australia’s refugee law is not in line with international human rights law. Airlines involved in forcible transportation of refugees would also violate international human rights law. 

 

Scope and Process

The company explained how it engaged with ACCR to address the organization’s concerns. The main objective of ACCR by putting the resolution forward is to end its involvement with the involuntary transportation of refugees. This is not something the company can easily accommodate, as it has a contract with the Department of Home Affairs, which arranges the transportation. This contract covers a much broader group of people being transported—not only refugees. The company does not know in advance whether the person being transported is a convicted prisoner or a refugee. They also confirmed that the company does not fly to countries where there are increased human rights risks, as suggested by the ACCR. For example, they do not transport refugees to Iran, where there could be an increased risk of capital punishment. Overall, the company's management believes that it is not its position to question the government’s policy. It values the importance of the contract, as well as its relationship with the government. It does not believe its current participation poses a financial or reputational risk to the company.

Based on the company’s current policies and procedures, we voted against the shareholder proposal on human rights risks. 

Outcomes
ESG Topic
Health and Safety
Conducted by
Objectives

Objective: Engage with the company on anti-microbial resistance and trends in the use of antibiotics in their business.

Background: This company is a large producer of medicine and vaccinations for pets and livestock. The company has benefited financially from the continuing shift away from antibiotics – particularly in the US poultry segment. Today “no-antibiotics ever” (NAE) approaches, which refer to raising poultry without antibiotics, represent 40% of the industry—up from 20% just two years ago. Management believes that this trend will only continue.

The firm is well-positioned with antibiotic alternatives, specifically their line of ionophores. These chemical-based products strengthen a chicken’s gut, helping avoiding illness.

 

Scope and Process

The company made a strategic shift years ago, moving away from marketing antibiotics in medicinal feed additives and toward vaccines. In addition to this being “where the world is going,” vaccines have higher margins than antibiotics and a larger competitive moat.

Poultry will continue to move toward NAE, and so will swine and cattle—although lifecycle differences will prevent them from reaching the extent of NAE in poultry. Poultry have an eight-week cycle, which reduces the probability of sickness; swine and cattle have six-month and two-year cycles, respectively.

The company continues to conduct more R&D in the vaccine area—particularly in fish. Its entire fish business is focused on salmon vaccines. The world has moved away from salmon antibiotics in the past few years, but antibiotics continue to be used in other types of edible fish. The company is hoping to develop vaccines for other types of fish that would lessen the need for antibiotics.

Outcomes
ESG Topic
Health and Safety|Labour practices and supply chain management
Conducted by
Objectives

Objective: Discuss worker safety and labor practices.

Background: This company is a large processor and marketer of chicken, beef, and pork. The company has one of the worst results in the industry when it comes to total recordable incident rate (TRI). In response, the company made a commitment to a 15% year-on-year reduction and they expanded their safety communications program. 

Oxfam America released a report called No Relief: denial of bathroom breaks in the poultry industry in May 2016. It outlined issues such as low wages, injuries and a climate of fear at the top chicken companies, including this company, which control roughly 60% of the US market. In addition, there have been a number of class actions and settlements regarding labor practices (wages/hour claims and discrimination) over recent years.

In January 2018, our equities, fixed income and ESG analyst covering the company jointly engaged with the Chief Human Resources Officer to address our concerns and recommendations.

 

Scope and Process

Safety: The company improved internal monitoring and reporting by 1) distributing monthly safety reports, 2) quarterly review of the numbers by the governance and nominating committee, and 3) including safety in the yearly goals of executive and senior managers. As part of their Safety Process Improvement Plan, the company implemented a new software system producing real-time data to all levels in the organization and improving leading and lagging indicators. The software system can then send out text/email alerts for incidents and risks. 

Labor standards: They have a number of measures in place to enable employees to file complaints (anonymously), including a help line. They track and report complaints to the governance and nominating committee. The company has also conducted 55 social compliance audits, of which 96% had no issue identified. The remaining 4% had minor issues which have been resolved. Nonetheless, they did take the Oxfam report seriously and introduced a training program in different languages to make employees aware of company policies, including those entitling people to use the restroom.

Overall, we were pleased with the outcome of the engagement. Although the company still has to make significant progress to improve their safety record. 

Outcomes
ESG Topic
General ESG|Other governance
Conducted by
Objectives

Objective: Meet with the CEO and CFO of this energy company to discuss ESG issues, including tax concerns and board structure. 

Background: The company has an ongoing dispute with the Portuguese government regarding a temporary tax that was instated after the euro crisis to help reduce the deficit in Portugal but that has not yet been withdrawn. Management updated us on the matter, explaining that it has had constructive discussions with the new Portuguese energy minister and has received important clarity about what conditions must be met to end the tax. In addition, the company has long-term contracts to supply power to the Portuguese state. When these contracts were signed, there was a great amount of external scrutiny to determine that they were fair and balanced. Since then, market conditions have made the contracts more favorable to the company than the government expected, and the government has lowered its payments. Management believes that the government is not complying with the terms of the contracts to the detriment of company shareholders and we agree. The company is pursuing the matter through the courts, which we see as appropriate even if we expect a resolution to take some years.

Scope and Process

Finally, we spoke to management about the company’s board structure. A Chinese state-owned hydropower company has a substantial stake in the company and in 2018 made a bid to take a controlling stake that the the company board rejected. Management is in ongoing discussions regarding how to improve the bid. Our greatest concern is that the board will not do an adequate job of protecting other shareholders, given that the hydropower company holds multiple board seats. It was clear during our meeting with management that the CEO had thought a great deal about the risks from the bid and how to ensure that minority shareholders are protected.

We were reassured that the CEO proactively identified potential issues during our discussion. There appears to be a very clear plan for corporate governance should the hydropower company take control, as well as options to maximize value if an improved bid is not forthcoming.

Outcomes
ESG Topic
Pollution|Sustainability reporting
Conducted by
Objectives

Objective: Gain a clear understanding of the company's environmental standards and how they plan to improve their ESG efforts. 

Background: We continue to engage with this Chinese energy company on a regular basis regarding its MSCI ESG rating and its environmental standards. The company had a lower ESG rating but has been working with MSCI and investors to improve its disclosures and ESG reports. The company was upgraded from CCC to BB in September 2018. During the quarter, we spoke with investor relations and the board of directors to discuss the company’s efforts toward improving its ESG performance. Although the company has made significant progress, we believe that there is more room to improve. 

The company runs a gas distribution business, providing gas for cities, including household, industrial and commercial users. Because natural gas is viewed as a cleaner alternative to coal, the company's business helps improve its environmental standing from an ESG perspective. 

Scope and Process

Recently, MSCI was concerned about the company's underground pipelines and the effect of its distribution network on the environment. However, the company has been working with the local government to obtain the appropriate environmental protection permits and to comply with national emission standards, which are on par with global standards.

The company also has certain risks related to its lack of disclosures regarding labor. While they must comply with all applicable labor laws and employees already have a lot of protection, MSCI is penalizing them in this area because the company does not specifically disclose its labor practices, nor does it mention risks or health. This is a common issue among Chinese companies when considering their ESG ratings from MSCI.

The company's management will continue to try to improve the company’s rating, disclosures and ESG reports. We will continue to engage with them regularly.

Outcomes
ESG Topic
Health and Safety
Conducted by
Objectives

Objective: Gain insight as to how the company is adapting to new regulation around consumer health. 

Background: In our recent meeting with the management of this consumer goods company, we discussed how they were faring with the recently announced increases in taxes on certain sugary products in Norway. The company has a material presence in the Norwegian confectionary market, and sales have suffered (prices on chocolates have risen by the equivalent of US$2/pound after a tax rise of +80%). Much of that sales loss has come from Norwegians purchasing confectionary in neighboring Sweden, where the company has a lower market share.  

Our engagements with the company left us with the conclusion that they are well ahead of its competitors in making its products healthier and more nutritious. Management has prioritized the reduction of salt, sugar and saturated fats in the products it sells, and it has committed material research and development spending to changing recipes to meet those aims. 

 

Scope and Process

However, the commercial reality of the situation suggests that the company should move slowly and after much consumer testing. The company owns some of the most popular brands of food in Norway, so any recipe change (even when designed to make products healthier) could be met with significant customer pushback. The company highlighted to us that in 2017 (2018 numbers will be published in April next year) the company reduced salt in its food by 80 tons, used 1040 fewer tons of sugar and 96 tons fewer saturated fats—all while selling more food.  

We also agree with the company that the recently announced tax changes in Norway are poorly designed. For example, chocolates are subject to tax, whereas cakes and muffins are not. The company is working with the government to better align taxes to meet the country’s goal of reducing sugar intake by 12.5%. 

 

Outcomes
ESG Topic
Cyber security
Conducted by
Objectives

Objective: Examine the company's cybersecurity policies and procedures

Background: We learned that in August 2018, this semiconductor manufacturing company suffered a major computer virus attack that forced the company to halt production. The company was installing new tools into its computer network, but one of those new tools was embedded with a computer virus, which spread to all their fabrication plants in Taiwan when the equipment was connected to the central network. The company took the unprecedented step of shutting down all production facilities in Taiwan for three days while it rooted out the virus from the system. We believe that the production halt will likely negatively impact revenues and gross profitability for the quarter.  

Scope and Process

We met with management shortly after the incident. We examined they company’s cybersecurity policies and procedures to understand whether there were any blind spots within the company’s standard operating procedures (SOP). It appeared that the virus was introduced was in a part of the SOP that required human intervention, and that the incident was caused by human error. The company is now reviewing its entire process and introducing automated checks in places where there was only human oversight. We are glad to see management take such quick steps to rectify the situation and to address the growing prevalence of cybersecurity risk. 

 

Outcomes

11.2. Additional information. [Optional]


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