With value investing1, something has typically gone wrong with one of the companies we invest in, to make their valuations low. It is not unusual for them to have an ESG issue. This is one reason why we don’t simply exclude companies based on ESG ratings, but instead carefully consider ESG risk before deciding to invest. A key part of our investment process is looking for opportunities to engage where we can improve shareholder value. We are supported in this effort by our in-house Stewardship team, who run pre-investment ESG analysis to identify weakness and help us in our engagement strategy.
ESG metrics are often backward looking. Our focus is on engaging with companies to ensure they are improving.
In this document we have provided a summary of the engagement we have had with our investee companies in 2021, and highlighted 3 areas of particular interest:
- Engaging with our Japanese holdings
- Carbon emissions data
- Managing emissions reductions
Jupiter Global Value Strategy: Record of Engagement
|Level of participation||100%||100%|
|Voted against/abstained2||13 meetings (33%)||9 meetings (19%)|
In Focus: Engaging with our Japanese holdings
Corporate Japan, however, has a complex approach to governance and stakeholder management that differs from what we are accustomed to in other developed markets, and there are many obstacles when seeking to engage or even vote. Less than 40% of companies on the Tokyo Stock Exchange permit electronic voting3, meaning postal turnaround makes voting more arduous. Meetings with management or board members are rare: in a 2020 survey, half of Japanese mid-cap companies reported that the CEO and/or CFO participate in fewer than 10 Investor Relation meetings a year4. Many companies demonstrate little culture of engagement with foreign shareholders, often due to language barriers. In our case, only 1 of our 8 Japanese holdings can accommodate meetings in English, and for 4 of them we had to resort to sending a letter to initiate contact.
In 2020 we recruited Ellen Mann to the team. Ellen speaks fluent Japanese, meaning we can now engage directly with these companies to learn about their ESG initiatives and propose improvements. In 2021 we began the process of contacting all our investee companies setting out our expectations on capital structure, shareholder returns, board composition, and climate reporting.
We have since received some form of contact from all but one of our Japanese holdings. Over the course of 2021 we were able to meet with representatives from 5 of them. An encouraging theme across these meetings was assurance that other shareholders are also increasingly persistent in demanding improved capital allocation.
Below we have summarised the key interactions with our Japanese holdings:
Overview of select engagements in 2021
Toagosei develops and manufactures chemical products for use in a wide range of industries. Its capabilities are readily adaptable to serve customers navigating the green transition. For example, the company manufactures polymers used in lithium-ion batteries for electric vehicles. Further, Toagosei are developing new chemical technologies that might themselves reduce environmental impact. Last year, they patented an energy-efficient and more economically viable method for producing cellulose nanofibers (CNF), a biodegradable material that when mixed into a resin is five times stronger and eighty-percent lighter than iron.
From a governance and capital deployment perspective, Toagosei’s rate of positive change has been perhaps the most encouraging of our Japanese holdings. Since we established a position in 2018, they have removed their ‘poison pill’ clause, the board has become 1/3 independent, and the company have announced a 3-year plan to buy back over 6% of outstanding shares. They have also increased capital expenditures after years of underinvesting in business growth and are working to implement TCFD in full.
At our first meeting with Toagosei in May 2021 the company’s representatives were eager to hear our opinion on areas where governance and capital strategy might be improved. We were pleased to find that many of the revisions to the company’s updated Corporate Governance Policy, published October 2021, address these areas. In light of the company’s substantial net cash balance, the revisions include the introduction of a target to distribute 50% of profits in dividends and buybacks, targets to reduce cross-shareholdings, and a change in emphasis from ‘building up’ internal capital reserves to investing in business growth. The policy reforms also include diversity criteria for board appointments and promise shareholders the opportunity to meet with Independent Directors.
TS Tech is an automotive seat manufacturer that primarily supplies carmaker Honda, which is also its largest shareholder. They were prompt to respond to our letter and we are pleased to have an open line of contact. When we met with management, we expressed our support for their increasing focus on the environmental and social impacts of the business. We made a series of recommendations for improving disclosures on employee health and safety. We were pleased to find some of these changes incorporated in the company’s most recent Corporate Report.
Nevertheless, we emphasised to TS Tech that governance and capital allocation are areas where change is urgently needed. It continues to have the highest balance of net cash relative to market capitalisation of all our holdings despite recently conducting its first ever share buyback. Moreover, we believe further measures are necessary to improve company oversight given the high risk of conflicts of interest regarding its relationship with Honda. On this basis, we voted against the President at the AGM. We continue to actively monitor this holding.
Hazama Ando is a resource-intensive construction and civil engineering firm. The company has a poor record for governance and employee safety; it attracts the worst Sustainalytics ESG risk score in our entire portfolio, despite not receiving the full analytical review*. (*The 4 areas of Sustainalytics coverage are: overall exposure score; environment-risk score; social-risk score and governance risk score. Some companies do not get coverage for all 4 areas, which leads to a higher dependency on algorithms than company specific analysis).
When we met with the company, our primary focus was on governance. Despite multiple buybacks, Hazama Ando’s cash reserves are extremely high; we criticised the company’s proposals to invest a substantial portion of this cash into real estate without a clear business plan. We also highlighted insufficient disclosures on employee safety and welfare and expressed our support for a recently passed resolution to consider the company health and safety record in the calculation of long-term share incentives for executives.
We remain unsatisfied with the treatment of shareholders and voted against the President at the 2021 AGM. We have co-signed a further letter, with another Jupiter fund that owns shares in the company, that questions the business strategy and requests further ESG disclosures.
We believe the investment case for Hazama Ando shares still holds due to both the extremely low valuation and the involvement of a prominent activist asset manager. We have introduced ourselves to this activist, the largest shareholder in the company, to share our policy on voting and stance on governance. To date, we believe this activist’s campaign has had a positive effect on the company’s investment case. The shares rose 20% in November 2021 after Hazama Ando agreed to return an additional 35bn yen back to shareholders through March 2023. The company are aiming to distribute over 100% of profits to shareholders in buybacks and dividends.
Nippon Television Holdings
Nippon Television Holdings is the holding company for Nippon TV, Japan’s leading private broadcasting network. It is our sole Japanese holding that receives full Sustainalytics coverage, receiving a total ESG Risk Score of ‘Low’ with risks related to Environment, Social, and Governance each recorded as ‘Negligible’. This is an example where we consider the ESG ratings are too lenient. Regarding social factors, employee uptake of paid leave is very low at just 40%, and that the presence of two former senior bureaucrats on the board may obstruct objective reporting. Our primary concern, however, is the Company’s weak governance, where there remain key failings regarding best practice:
- Of the 4 independent directors, 3 have served for over 10 years
- Only one independent director has corporate experience; they have served on the board for over 14 years
- Insufficient disclosures, in English, on the relationship with their largest shareholder (almost 30% ownership)
Weak governance is further evident from the fact that the company has failed to deliver value for shareholders, with declining return on equity and wholly unsatisfactory capital allocation. Based on this and their failure to pay dividends to non-registered shareholders, which we view as in conflict with the Japanese Corporate Governance Code, we have voted against the Chairman of Nippon TV since 2018. We raised all these points at our meeting with the company, and although their representatives welcomed our opinions, we were disappointed by a reticence to action. We continue to actively monitor this holding.
In Focus: Carbon Emissions Data
Absolute Emissions and Carbon Intensity (Scope 1 and 2)7
Many metrics are backward looking, but as Value investors, a company’s direction of change matters more to us than its present status. Therefore, below we have highlighted the year-on-year changes for the Global Value strategy.8 By definition, Scope 1 emissions refer to direct greenhouse (GHG) emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles). Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.
The average reduction of absolute Scope 1 + 2 emissions for our holdings9
The reduction in total Scope 1+2 emissions for our holdings, equivalent to almost 26m tons
The average reduction in carbon intensity (Scope 1+2 emissions/$100m revenue) for our holdings
The reduction in carbon intensity (Scope 1+2 emissions/$100m revenue) for our holdings
These are by no means perfect metrics, and each reflects a combination of genuine decarbonisation and one-off changes in activity due to the pandemic. The metrics for the total strategy are particularly skewed by a nearly 60% decrease in emissions for Swire Pacific, the controlling shareholder of airline Cathay Pacific, due to travel restrictions. The change in total emissions for the portfolio excluding this holding is -9% and the total change in carbon intensity +4%.
|Global Value Strategy||MSCI ACWI|
Net Zero Plans: Proportion signed up to the Science-Based Targets Initiative (SBTi)
As a reference point for now, however, we include below the statistics11 for how much of our portfolio assets is in companies registered with the SBTi, an organisation related to the UN that defines, promotes, and verifies emissions reduction targets in line with climate science. Please note that not all companies with genuine science-based emissions reductions targets have necessarily joined the SBTi coalition.
In Focus: Managing Emissions Reduction
We are long-term, engaged shareholders in Standard Chartered, owning its shares across several of our funds. In recent years, the bank has attracted scrutiny from some stakeholders for its decision to support corporate customers with high emissions through the transition to a low-carbon world. The Group’s financing activities focus on emerging markets where industrialisation is ongoing; over half of their footprint markets do not have a 2050 net zero commitment12.
In July 2021, Standard Chartered approached us to discuss their net zero ambition. We consulted with them twice alongside our colleagues on the Stewardship team, providing our suggestions for appropriate policies and disclosures. While we appreciate the bank’s aim to work with its clients that might otherwise struggle to obtain financing as they reposition to more sustainable business models, we encouraged stretching and proactive measures to reduce climate risk. The Group has since published interim targets and methodology for their pathway to net zero. The strategy aims to reduce absolute financed thermal coal-mining emissions by 85% by 2030, with all clients in power, mining, metals, and oil and gas sectors expected to have a strategy to transition their business in line with the Paris Agreement by December 2022. The bank additionally plans to mobilise $300bn in green and transition finance by 2030 to further position their business for a low-carbon future. Much work remains to be done; however, we view these commitments as a significant step forward for the firm. We expect continued engagement on this topic.
The oil and gas sector faces a profound challenge in adapting to the energy transition. BP has set ambitious targets to reduce its climate impact, including a 40% reduction in oil and gas production by 2030. Over the course of 2021 we met with company representatives on three occasions to continue our dialogue on its radical energy transition strategy.
A focal point among our discussions was a resolution filed by Follow This, an NGO, requesting detailed, annual disclosures on the company’s strategy to meet short, mid-, and long-term targets to align with the Paris Agreement. We chose not to support the resolution in the context of the company’s existing climate strategy and commitments which were agreed following the Climate Action 100+ resolution approved by shareholders in 2019, for which Jupiter acted as a member of the co-filing group. In our view, BP has embarked on the most rapid energy transition strategy of any oil major, and we consider that continued engagement on implementation, rather than a binding resolution, is the most effective means to ensure the company successfully achieves its climate objectives.
Given the scale of transformation occurring in the energy sector, we have emphasised to BP our belief that they should focus on improving their financial flexibility by paying down debt rather than undertaking share buybacks. We have expressed similar concerns about the level of dividends; however, the Company has responded that they believe the commitment to retaining their dividend leads to improved discipline on capital projects, which will ultimately benefit shareholders.
This is our first comprehensive report on the stewardship activities we undertake on behalf of investors in the Global Value strategy. It builds on the work and reporting we have done for several years on the UK funds. Our aim is to highlight areas that will be of interest to clients. These are typically the more controversial themes where we are pursuing change. For example, the perceived and actual difficulty of engaging in Japan and the progress on reducing carbon emissions across the companies in the strategy. Throughout we have tried to balance subjective views on governance and sustainability with more objective measures such as emissions. Whilst the strategy does not have an ESG ‘tag’ we hope it is clear that assessing sustainability is a critical part of our process to understand the broader investment risks for each company and push for improvement where necessary. There are companies in the strategy that do not score well according to 3rd party ESG rating providers; we often find these ratings and their interpretation too backward looking. For us, opportunities are attractive when they come with the promise of a company changing to improve the element of ESG that has gone wrong in the past, or a viable chance for us to pursue this through engagement.
Reporting on ESG is changing rapidly, and it is likely our own reporting and assessment of companies’ progress will change too. Jupiter itself, as part of its commitment to net zero, will present updates to its reporting in April 2022. This will include the methodology on how we assess if a company is aligned to net zero targets and information on how well the companies are doing with setting good forward-looking targets and achieving them. We expect to update our reporting once we have the outcome of this report.
We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Past performance is no guide to the future. Company examples are for illustrative purposes only and are not a recommendation to buy or sell.
2 Voted against or abstained from voting at a minimum of one resolution at nine meetings in 2021. For example, we voted against the remuneration policy at Hugo Boss, where there is insufficient alignment between the CEO and ordinary shareholders. We voted against directors at TS Tech and Hazama Ando where we have concerns around capital allocation policies.
3 As at the end of December 2021. Data available through ICJ, Inc.
4 Nomura Research Institute, 2020. Mid-cap refers to companies with a market cap between 100-300bn JPY (roughly 900m to 2.7bn USD). https://www.meti.go.jp/shingikai/economy/shin_sokai_process/pdf/005_s01_00.pdf
5 TCFD refers to the Task Force on Climate-related Financial Disclosures, a framework for public companies to disclose climate-related data and risks.
6 The following disclosures apply to this comparison table. The value for the percentage of TSE companies that endorse TCFD is approximated as the total number of Japanese companies endorsing TCFD as a % of all companies listed on the Tokyo Stock Exchange (3788, as of August 2021). ‘Quantified interim targets’ refer to company specific, nearer-term targets; in Japan, the government has made it the task of all companies to be carbon neutral by 2050. Averages for uptake of paid leave and the proportion of management roles occupied by women are based on the 5 companies (out of 8) that disclose this data. Our count for independent directors and female board members includes only the company’s main board, for which appointments are put to shareholder vote. We exclude any separate audit or supervisory boards. TSE data is taken from the Tokyo Stock Exchange 2021 White Paper on Corporate Governance.
7 Coverage of portfolio constituents: 86% (equal-weighted).
8 MSCI data, calculations by Value Equities team, based on UK domiciled Unit Trust fund
10 Sources: Global Value statistics taken from Jupiter ESG Hub with data accurate as of 12 January 2022. MSCI ACWI weighted average carbon intensity provided by MSCI and accurate as of October 29, 2021, and published at https://www.msci.com/index-carbon-footprint-metrics. Based on UK domiciled Unit Trust fund.
11Source: SBTi as of 9 December 2021
12 As of October 28, 2021.
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.