On the Jupiter Value Equities team our goal is to provide good long-term investment returns for our clients. Stewardship is a crucial component of that process. ‘Stewardship’, as we see it, is an umbrella term that incorporates Environmental, Social and Governance (ESG) factors into our investment process and is part of our broader responsibility on behalf of our clients.

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 believe 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.

Engaging with companies has been an integral part of our investment process for over 20 years. In 2021, we put out a note highlighting our engagement and where we had managed to effect positive key changes within our investee companies, “Effecting change through ESG engagement”. This year we wanted to provide a summary of our engagement, and highlight 3 areas of particular interest:

  1. ESG Rating Agencies
  2. The ‘S’ in ESG
  3. Carbon Emissions Data

ESG metrics are often backward looking. Our focus is on engaging with companies to ensure they are improving.

Jupiter UK Value Strategy: Record of Engagement

2017 2018 2019 2020 2021
AGM/EGMS 41 45 41 39 592
Level of participation 100% 100% 100% 100% 100%
Voted against or abstained1 12 meetings (29%) 9 meetings (20%) 16 meetings (39%) 13 meetings (33%) 12 meetings (20%)

In Focus: ESG Rating Agencies

One of the choices that fund managers are required to make is should they choose to engage or not. One approach is to use the ratings agencies to screen out any companies that score badly and construct a portfolio using this approach. While we recognise the role of third-party datasets, we do not take this approach as we believe it could result in an incomplete assessment.

 

We look at each company on a case-by-case basis to assess the severity of the issues and crucially whether we think things can change for the better. For example, Bayer currently has a high overall exposure score to ESG risks (62/100 according to Sustainalytics, as at 31 December, 2021). This relates to the litigation around a weed killer that has an alleged carcinogenic ingredient. The very low valuation of the shares reflects these past problems and for us we think it is better to engage with the company to resolve the litigation and release a new formulation. We feel that the rating reflects the past issues not the change we see now. Below you will find a further example of our holding in Royal Mail. Our fundamental assessment and engagement with the company has confirmed material health and safety issues. However, the Sustainalytics overall exposure score of just 33.8/100 assumes the company is low risk. We could sell our shares over the health and safety issue, but instead we have chosen to engage and encourage a fundamental change in behaviour led by the board. We believe that this can lead to a better outcome for both the company and our clients to see a change in the company’s approach.

 

It is interesting to look in more detail at the problems that may come with depending on out-sourced ESG ratings. These ratings are often inconsistent across providers and tend to be properly re-evaluated only once a year, leading to stale scores. The table below highlights the correlations, or lack of, between ESG ratings. For example, column 9 (SA/MS) shows that the correlation between Sustainalytics (SA) and MSCI (MS) when it comes to governance is just 0.16.

Figure 1 Correlations between ESG ratings across Sustainalytics (SA), RobecoSAM (RS), Vigeo Eiris (VI), Asset4 (A4), KLD (KL), and MSCI (MS).

Correlations between ESG ratings across Sustainalytics (SA), RobecoSAM (RS), Vigeo Eiris (VI), Asset4 (A4), KLD (KL), and MSCI (MS)

Source: Berg et al., ‘Aggregate Confusion: The Divergence of ESG Ratings’ (2020), p.44.

It is our belief that the assessment of ESG risks and the overall stewardship of our investments should remain with the fund management team, as the investment decision makers. This ensures clear accountability to the client along with the other components of the investment process and philosophy. Outsourcing to third party providers is no panacea – in effect it is handing over investment and stewardship with no responsibility or accountability to the client.

In Focus: The ‘S’ in ESG

Royal Mail Group

We bought shares in Royal Mail, the UK postal service provider, in early 2021. In the 2020-2021 Annual Report, we were startled to see that they had recorded 31 fatalities, 7 in their UK operations and 24 at their smaller international subsidiary, GLS. This was the first time Royal Mail had disclosed fatalities for the GLS subsidiary, and we were shocked that the number was so high relative to the size of GLS and its industry. For us, 24 deaths would be considered high even for a very dangerous industrial business such as mining. To put this in context Anglo American, a large diversified global miner, had 40 deaths in 2007 but had reduced this to 2 in 2020. This followed a concerted effort by the company and by shareholders to push for change and greater linkage of safety to pay outcomes.

 

We engaged with the Chairman to understand why there were so many deaths and what Royal Mail plans to do to improve employee safety group-wide. Through our engagement we learned that although many peers only report direct employee fatalities, Royal Mail includes those of third parties. However, these ‘third-party’ deaths (29 of the 31) include contractors, which are widely used by GLS. In the latter half of 2021, alleged infringements of labour laws at GLS led to both a lawsuit and a police raid in Belgium.

 

The Chairman explained the company’s approach to internal and external reporting of health and safety incidents. The Company seeks to provide more transparency on these matters than its competitors. The Board believes that an open culture on health & safety is the best way for progression and this means eliminating a ‘blame culture’. The chairman’s view is that if a firm has a blame culture on health & safety, then this could mean incidents go unreported which has long-term ramifications.

 

The Chairman acknowledged the number of fatalities is unacceptably high and agreed this is a top issue for the Board. He explained that at Royal Mail’s UK operations the focus on health and safety is high and there is strong oversight. However, GLS, as a younger, fast-growing business operating in multiple markets, has lacked the same rigour in its processes. The Chairman assured us that he has created a separate board to oversee GLS to increase oversight and push GLS to implement similar safety protocols to the UK business. We discussed the need for accountability in the form of health and safety-linked remuneration of senior management.

 

Following our meeting with the Chairman we believe that the company takes their responsibility to provide safe conditions for employees and contractors seriously and is actively working to improve the culture of health and safety at GLS. Clearly this hasn’t been the primary focus for GLS in the past. We are continuing our engagement with a meeting of the Group Head of Safety, Health, Wellness, and Sustainability in February 2022. The Chairman has also committed to a future update on progress. We expect to see similar outcomes as in the mining industry when company and shareholders pushed for change.

South 32

South 32 is a multinational mining company and raw material refiner. Despite producing many metals needed for the “green transition” it is controversial due to the high level of emissions from the power it consumes for its Hillside aluminium smelter in South Africa. Like many businesses the company is under pressure to reduce emissions to meet its obligations to achieve net zero by 2050. For South 32 this is complicated by a co-dependent relationship with their operations, the national electricity grid and public policy. This has been a key topic for us.

Hillside is the largest smelter in the southern hemisphere and produces 55% of S32’s scope 1&2 emissions3. The smelter is the largest single private user of electricity in the South African electricity grid which is managed by the public utility, Eskom. This electricity is primarily generated by coal. Hillside also fulfils a key role in managing the base load and regulating the power system in partnership with Eskom to ensure supply is maintained across the country. Furthermore, there is a 1MW limit on self generation which represents <1% of their electricity consumption. The way to decarbonise is clearly a public policy issue and not a technical one. It requires Eskom to change their source of generation and South32 are reliant on this change. They have notified Eskom that they need to see significant progress in the next 5 years, and management are conscious of these conflicting priorities in their decarbonisation planning.

In Focus: Carbon Emissions Data

With the urgency of the climate crisis increasingly apparent, decarbonisation has become a key topic of discussion for us, both with the companies we invest in and with our clients. It has nevertheless been difficult for us to determine a ‘fair’ way to assess and present the emissions and improvement trajectory of our portfolios. In 2021, Jupiter Fund Management Plc announced its participation within the Net Zero Asset Manager’s Initiative and was named among the first tranche of asset managers to disclose a group level interim 2030 decarbonisation target.

As part of our Net Zero commitments, we will provide further portfolio level targets in Jupiter’s publicly available Stewardship Report to be published in April 2022. As part of this project, our Stewardship team is finalising its own methodology for assessing the alignment of our holdings to net zero by 2050, and we look forward to being able to share this with you by our next ESG review. In the meantime, we have prepared the following analysis to guide your understanding of the decarbonisation process for our holdings. Please note that carbon emissions data is updated with a lag and thus these statistics are for FY20 as compared with FY19.

Absolute Emissions and Carbon Intensity (Scope 1 and 2)4
As Value investors, a company’s direction of change matters more to us than its present status. The year-on-year changes for the UK strategy were as below5.
Average Total
Absolute -17%
The average reduction of absolute Scope 1 + 2 emissions for our holdings6
-12%
The reduction in total Scope 1+2 emissions for our holdings, equivalent to almost 26m tons
Intensity -17%
The average reduction in carbon intensity (Scope 1+2 emissions/$100m revenue) for our holdings
-6%
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 increase in total carbon intensity for the strategy was driven by increases at South32 and Shell. Although both companies had lower absolute emissions than the year prior, the drop in revenues from commodity price fluctuations was even more significant, thus increasing their intensity scores.

Portfolio Carbon Emissions Intensity (Scope 1 and 2 emissions relative to sales)

Jupiter UK Special Situations Morningstar UK Index8
Average carbon intensity by portfolio weight7 154.7 122.1
Average carbon intensity by equity ownership9 96.8 131

Data taken from Jupiter ESG Hub. Accurate as of 20/01/22.

In addition to showing the trajectory of change for our strategy companies, we have above included the carbon intensity for the strategy and the Morningstar UK index to provide a broader context. We have provided carbon intensity as calculated by portfolio weight and by the proportion of a company’s equity held by the strategy. While we do not have finer data on the differences between the statistics for our strategy and the Morningstar UK index, we believe our lower score for ‘average carbon intensity by equity ownership’ may be explained by our over-allocation in carbon-intensive companies like BP and Shell compared to the benchmark. These companies each have a market cap in excess of £100bn and hence our ownership as a percentage is very low, despite our weighting to them being above that of the index. This again highlights the need to be cautious about choosing metrics with which to represent our strategy – sliced one way we are 26% better than the benchmark, sliced the other we are 27% worse. We hope that by providing a variety of numbers and attempting to explain them we can provide the most honest summary for our Strategy.

 

Net Zero Plans: Proportion signed up to the Science-Based Targets Initiative (SBTi)

As we have shown, carbon emissions intensity and absolute reduction – while useful – can be misleading when it comes to whether companies are purposefully pursuing a reduction in their environmental impact or are merely undergoing a shift in demand or unrelated disposal. A more important indicator here is whether a company is Aligning or Aligned with the Paris Climate Agreement; we look to give more clarity on how well our portfolio meets these definitions with the finalisation of Jupiter’s own internal assessment framework. As a reference point for now, however, we include below the statistics for what proportion of the UK Value Strategy’s investments are 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.

Global Value: SBTi targets by weight

In Focus: Managing Emissions Reduction

Standard Chartered 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 commitment11.

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.

BP
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.

Conclusion

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 strategy. 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 portfolio. Throughout we have tried to balance subjective views on governance and sustainability with more objective measures such as emissions. Whilst the fund does not have an ESG ‘tag’ we hope it is clear that 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 portfolio 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. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars for the above mentioned funds are available from Jupiter on request.

1 As value investors, we believe the key determinant of future returns is whether the valuation paid for a security is high or low relative to its long-term history.
2 Voted against or abstained from voting at a minimum of one resolution at 12 meetings in 2021. For example, we voted against the remuneration report at Imperial Brands, M&G, GlaxoSmithkline and Smiths Group. We voted against the re-election of directors at Qinetiq and M&G. We also voted against the re-election of directors at Mitchells and Butlers due to insufficient board diversity.
3 Scope 1 emissions are 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.
4 Coverage of portfolio constituents: 93% (equal weighted)
5 MSCI data, calculations by Value Equities team, based on the Jupiter UK Special situations UT
6 Equal-weighted.
7 Portfolio weighted average of companies’ carbon intensity as measured by tons of CO2 scope 1 and 2 emissions per million USD of sales. Calculated as portfolio weight x issuer scope1+2 emissions / issuer sales in millions of USD.
8 In the absence of data for our normal performance benchmark, we have used the data for the Morningstar UK Index which is recorded in our internal ESG hub.
9 Emissions (scope 1 and 2 only) and sales are apportioned on equity ownership (% of market capitalisation). Calculated as (issuer emissions x value of our stake / issuer market cap) / (issuer sales x value of our stake/ issuer market cap). All monetary values are converted to USD for the purpose of this analysis.
10 Source: SBTi, as at 9 December 2021
11 As at 28 October 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.

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