Global ESG Research update — Looking inward on our diversity practices

We share our path forward on enhancing diversity and inclusion at our firm, in our communities, and with companies we invest in. We also provide an update on our ESG engagement and proxy voting activity in the quarter.

Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only. Your capital may be at risk.

The most recent instances of racial inequity and injustice across the US have compelled us to turn the ESG lens on ourselves and our mission to be diverse, inclusive, equitable, and humanistic. We are reexamining our diversity practices, aiming to raise the bar for our firm and the companies we invest in on behalf of clients. We expect lessons learned from introspection and engagement will change how we hold portfolio companies accountable, including via our proxy-voting policies. We will be focusing on the following areas:

Enhance leadership and accountability. We will strengthen our focus on hiring, developing, and promoting underrepresented talent. We are improving our accountability frameworks to include strategic goal setting, diversity-focused talent reviews, employee feedback on manager effectiveness and inclusion, tracking of key metrics, and an annual firmwide progress update.

Become better educated. We will expand diversity and inclusion training for our managers and leaders. We will launch programs that foster open conversations, help educate employees and partners about the realities our Black colleagues face, and work to create a more inclusive environment.

Develop our Black and diverse talent. We will invest in more skills-based training for early-career diverse professionals, starting with the launch of our Groundbreakers program this July. We will expand our mentorship/ally program for diverse professionals and implement new forms of apprenticeship through committee and project work.

Make a bigger difference in our communities. The Wellington Management Foundation supports programs and organizations that improve educational opportunities for youth from traditionally underserved and economically challenged communities. While the Foundation has already made a difference, there is more we can do, including committing more funding for community efforts and extending our involvement with community leaders.
Foster practice sharing. We will use company engagements to better understand their response to racial inequity. This dialogue will form the basis of a practice-sharing document that we will draft and share broadly. We are also planning a consumer-sector-focused diversity panel that will feature company executives and serve as a pilot for similar panels tailored for other sectors. Through these efforts, we expect to gain deeper knowledge of the companies we invest in on behalf of our clients, enhance our diversity approach by learning from others, and facilitate practice sharing across a wide swath of companies.

2Q20 Firmwide proxy-voting results

Proxy voting can be a powerful tool that we leverage when engaging with company management teams. Our team examines each proxy proposal and votes against issues that we believe would have a negative effect on shareholder rights or on the current or future market value of the company’s securities. Figure 1 shows the breakdown of the past quarter’s global proxy voting.

Figure 1

Wellington Management’s 2Q20 proxy-voting results

2Q20 ESG engagement activity

In the second quarter of 2020, our team engaged with 139 portfolio companies in 21 countries (Figure 2) on ESG topics ranging from board composition and executive compensation to climate resiliency and disclosure. See the list of our engagement discussions for the quarter below.

Figure 2

Company engagements by Wellington Management’s ESG Team in 2Q20

2Q20 ESG engagement activity by company

Company
E
S
G
Communication services

Activision Blizzard

Alphabet

Cellnex Telecom

Comcast

Facebook

Masmovil Ibercom

Nintendo

TEGNA

Verizon Communications

Company
E
S
G
Consumer discretionary

Amazon.com

Expedia Group

General Motors

Gentherm

Home Depot

Maisons du Monde

McDonald’s

Sanyo Shokai

Company
E
S
G
Consumer staples

Colgate-Palmolive

Lamb Weston

PepsiCo

Company
E
S
G
Energy

Chevron

DMC Global

Ecopetrol

Eni

ExxonMobil

Galp Energia

Gazprom

Hess

Noble Energy

Phillips 66

Total SA

YPF

Company
E
S
G
Financials

BlackRock

BNP Paribas

Cerved

Goldman Sachs

JPMorgan Chase

Prudential

Sony Financial

Truist Financial

UBS

Company
E
S
G
Health care

Abbott Laboratories

AstraZeneca

Baxter International

Bio-Techne

BioArctic

Centene

CSPC Pharmaceutical

Elanco Animal Health

Eli Lilly and Company

Genmab

Globus Medical

ImmunoGen

Incyte

Innovent Biologics

Ionis Pharmaceutical

Koninklijke Philips

Laboratorios Farmace

Masimo

Merck

Merus

Mylan

NanoString Technologies

Novartis

Pfizer

ProQR Therapeutics

Prothena

Qiagen

Reata Pharmaceuticals

Takeda Pharmaceuticals

Tandem Diabetes Care

UroGen Pharma

Company
E
S
G
Industrials

AGCO

Caterpillar

CSX

General Dynamics

Hazama Ando

Honeywell

Intertek

JGC

Kingspan

Northrop Grumman

nVent Electric

PACCAR

Raytheon Technologies

Uber Technologies

Union Pacific

United Parcel Service

Vinci

Company
E
S
G
Information technology

2U

Advanced Micro Devices

Apple

BE Semiconductor

Cardtronics

Ceridian HCM

Coherent

FleetCor Technologies

GoDaddy

Intel

Monolithic Power Systems

SAP

Totvs

VeriSign

Company
E
S
G
Materials

Ball

Element Solutions

Freeport-McMoRan

Fuchs Petrolub

Sika

Tokyo Ohka Kogyo

Company
E
S
G
Real estate

Boston Properties

Columbia Property Trust

Equinix

Goodman

JBG SMITH Properties

Kennedy-Wilson

Life Storage

Nexity

RPT Realty

Company
E
S
G
Utilities

Avangrid

Black Hills

Dominion Energy

Duke Energy

E.ON

Exelon

NextEra Energy

PG&E

Pinnacle West

Southern Company

Veolia Environment

E = environmental, S = social, and G = corporate governance discussions. The companies shown comprise a complete list of all engagement meetings in which Wellington Management’s ESG Team participated in 2Q20. These companies are not representative of all of the securities purchased, sold, or recommended for clients. It should not be assumed that an investment in the companies listed has or will be profitable. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold any or all of the companies shown. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities.

2Q20 ESG engagement examples

Financial services company

Overview
We spoke with the lead director of a large, diversified, financial services company about board oversight, executive compensation, and the board’s recent pledge to align the company with stakeholder interests.

Key discussion topics
Board oversight
The call reinforced the importance of engaging directly with boards as a means of assessing their overall effectiveness and how well they are discharging fiduciary responsibilities on behalf of shareholders. During this engagement, we were seeking to gain confidence in the board’s ability to oversee management. We exited the meeting less than satisfied, because the lead director was not as immersed in the details of recent events as we would have liked.

Executive compensation
We inquired about recent board debates regarding executive pay increases in light of the current public health and economic crisis. The board gave the CEO a meaningful pay raise in 2019, and we wanted to better understand whether they were concerned that the magnitude and optics of the raise could create reputational risk given the economy’s struggles in 2020. We cautioned that sustaining this increase could invite scrutiny, as many boards and executives have demonstrated solidarity with their workforces and the broader public by freezing bonuses, reducing salaries, or donating a portion of their compensation to organizations working to improve the situation.

Alignment with stakeholders
This company signed a recent Business Roundtable letter redefining the purpose of a corporation as serving all stakeholders — not just shareholders. In light of that pledge, we asked the board how the company planned to approach this shift and encouraged them to share this information publicly. We expressed our view that this goodwill would benefit the company longer term. In our view, companies that demonstrate consideration of all stakeholders during the current crisis may be market leaders in coming years. Our suggestion was met with resistance, which we believe is a missed opportunity for the company.

Conclusion/follow-up
We left the meeting with an unfavorable view of the company’s governance and social profile. We have seen improvement in this company’s ESG efforts in recent years, but this engagement suggested that a strong management team rather than an engaged, proactive board is the reason.

CHEMICAL COMPANY

Overview
We spoke with a board director of a Japanese chemical company ahead of the company’s annual general meeting to better understand how the company thinks about board composition, executive compensation, capital allocation, and workforce diversity.

Key discussion topics
Board composition
In comparison to most Japanese corporates, this company’s board is relatively independent, with 46% independence when considering directors and statutory auditors. One female director sits on the board, but there are no foreign directors. We encouraged the company to bring international perspectives to the boardroom with future refreshment opportunities, given that 80% of the company’s sales are outside of Japan.

Capital allocation
Cash reserves remain high amid the company’s plans for research and development and capital investments. However, the board is currently discussing the appropriate level of cash, as there seems to be scope for improvements to the company’s shareholder-return policy. We provided feedback to encourage greater emphasis on returning cash to shareholders during future capital-allocation discussions.

Product safety
The company’s stringent auditing measures include pursuing an IATA Operational Safety Audit (IOSA) certification (rare among low-cost carriers in Europe) and conducting audits of airport safety standards, such as lighting and air-traffic control before entering a new market. The company understands that ensuring an environment where crewmembers are not afraid to report issues is an important means of maintaining a strong safety record.

Workforce diversity
We also engaged on the company’s efforts to improve the diversity of its workforce. The company has made some progress in hiring non-Japanese employees in recent years, and it has adopted a company-wide diversity-and-inclusion strategy. Like many of its peers, however, there is still room for improvement in female representation in senior- and middle-management roles.

Conclusion/follow-up
We felt the tone of the meeting was constructive and appreciated that the company was receptive to our feedback. We view improvements in board composition and executive compensation favorably. We will be watching future announcements related to the company’s shareholder-return policy and will continue to engage on this topic.

ENERGY COMPANY

Overview
We spoke with the legal and sustainability teams of this US-based downstream energy company ahead of its annual general meeting to discuss a shareholder proposal on the ballot seeking improved disclosures on the company’s approach to physical climate risks.

Key discussion topics
Climate-risk disclosure

We have had an ongoing engagement with this company to encourage improvement of its climate disclosure and adoption of the Task Force on Climate-related Financial Disclosures (TCFD) framework, which helps companies hone and communicate their approach to climate risks. We relayed that we have been pleased with the company’s progress but that there was still room for improvement. We would like the company to better assess and manage the risks of physical climate impacts on its infrastructure and operations, including, for example, the likelihood of stronger hurricanes.

Drawing on data from our collaboration with Woods Hole Research Center studying the effects of physical climate risks on capital markets, we explained the case for addressing this risk, given the company’s areas of operation along the Gulf of Mexico. We also explained that we planned to support the shareholder proposal because we believe improved disclosure will help investors understand whether the company is managing climate risks appropriately. The company reiterated its commitment to improving its climate disclosures, and we agreed to provide additional feedback as it continues to do so.

Conclusion/follow-up
We supported the shareholder proposal, which received majority support at the company’s annual general meeting. We also shared our Physical Risks of Climate Change (P-ROCC) framework to help the company integrate climate science-based scenarios into its strategic planning and disclosures. We have had subsequent discussions with key teams and plan to share additional insights from our climate research to help inform the company’s future efforts to address the shareholder resolution.

Please see the important disclosure page for more information.

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