What is our approach to stewardship?
It is UBS Asset Management's firm belief that engagement and proxy voting are intrinsic parts of the investment process across asset classes. That is why we have been reporting on our stewardship activities for over two decades, alongside our sustainable investing efforts.
UBS-AM makes a commitment to companies: through our engagements we share our expectations of corporate management and encourage best practice to enhance long-term value. We aim to build relationships with company management which foster a healthy two-way conversation and enhance performance across a variety of issues. We strongly believe that stewardship is not just about raising questions with management and providing feedback is essential.
We are committed to principles of good stewardship and are supportive of best practice codes such as:
- The International Corporate Governance Network (ICGN) Global Stewardship Principles
- UK Stewardship code
- The Japanese Stewardship code
- The Hong Kong SFC Principles for Responsible Ownership
- The investor led ISG Stewardship framework in the USA
- The Australian FSC Standard 23 on Principles of Internal Governance and Asset Stewardship
Stewardship and ESG integration are an intrinsic part of the investment decision making process in active strategies. Dialogues with corporate management are conducted around specific issues related to the business strategy, capital allocation, operational management and/or ESG risks and opportunities that might positively or substantially have impacted valuation models. The goal of these interactions is to collect more information and influence corporate practices in order to trigger better financial performance in the long term.
In the context of passive investments, as analysts or portfolio managers might not follow investee companies closely, the importance of proxy voting and engagement is even greater. We believe that in this context dialogue with companies is essential to raise awareness and influence corporate conduct on systemic risks such as bribery and corruption, climate change, inequality or human capital management. In the case of those passive strategies that track sustainability indexes or apply a rules-based approach, stewardship activities can also have further impacts. Dialogue can sometimes incentivize companies to improve in order to be included in selected ESG indexes and can also provide meaningful insights to enhance the methodologies applied in tilted approaches that consider ESG factors to inform underweights/overweights.
Thematic engagements are focused on specific themes considered material, analyzed by available research and aligned with the overall sustainability and sustainable investment strategy of UBS-AM.
The in-depth research supporting our thematic engagements is used to assess the performance of companies at the beginning and end of the engagement program. Our ongoing thematic engagements include climate change, gender and impact.
UBS-AM Stewardship program key highlights:
In 2019 UBS-AM:
- Conducted over 1,400 meetings with prospective or investee companies, of which 358 involved engagement i.e. a two-way dialogue where UBS-AM, as a shareholder, provided feedback to management of 231 companies across regions and sectors to influence their behaviour and increase financial performance.
- Voted on over 10,000 meetings and more than 100,000 resolutions of which we voted against management in 17% of cases.
- Supported 60% of 780 shareholder resolutions on ESG issues.
- 23% of our engagements have already shown progress against objectives after one year of tracking this information.
Third party assessments have confirmed our leadership in our Stewardship practices:
- Top investment manager for climate voting by ShareAction
- A leadership band for engagement and voting on climate by InfluenceMap
- A scoring by PRI in stewardship
The strength of our approach is linked to:
- The benefit of being both an active and passive investor. Active strategies can benefit from the increased exposure to companies generated by passive strategies. This in turn can lead to stronger corporate access and a greater ability to influence management.
- The application of a conservative and ambitious definition to engagement We believe in quality to drive change rather than quantity.
- A structured platform to define engagement objectives and milestones and track progress.
Collective engagement: speaking with one voice
Where we believe the effectiveness of engagement and the chance of success can be increased, we're willing to work both formally and informally with collective bodies, or to collaborate with other shareholders. By speaking to companies with a unified voice, investors can communicate their views more effectively and allow the companies to focus on a smaller and more coordinated number of requests from the financial community.
In 2019, we shared our expertise and worked within the following groups and collaborations:
- Climate Action 100+ (we are leading on 8 and participating in 21 coalitions within the initiative)
- FAIRR dialogue on ESG risks caused by intensive livestock production
- PRI working group on SDGs in active ownership
- IIGCC working group on scenario analysis for climate change
Throughout 2019, members of the SI team have been presenting on issues related to ESG and sustainable investing, participating in 62 industry and thematic events across regions.
Engagement and proxy voting: an overview
Engagements in 2019
Items related to business strategy and governance have been commonly raised in our meetings with companies. In addition, engagements have also focused on climate change action, human capital, remuneration and the impact of products and services.
We spoke with companies across regions and sectors.
More than 50% of our engagements have been with CEOs/CFOs or C-suite representatives and more than 30% with chairs or board members.
Location of companies engaged in 2019
The following chart displays the location of the companies in which we engaged with in 2019 including the Americas, Europe, the Middle-East and Africa and Asia-Pacific.
Sectors of companies engaged in 2019
The following chart displays the sectors of companies we engaged with in 2019 which includes: Communications Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate and Utilities.
Proxy Voting in 2019
We have been voting on a discretionary basis on behalf of our clients since 1995. We implemented our first internal voting policy in 1998. During 2019, we voted on over 10,000 meetings and more than 100,000 resolutions. Overall, we voted against management in 17% of the cases.
The most common reasons for voting against management were related to:
- The level of board independence falling below our policy's threshold
- Inadequate link between remuneration structure and financial performance
- Election of board's directors, including independence considerations
- Share issuance without pre-emptive rights
- Audit company tenure in excess of 20 years
- Independence of audit committee
- Lack of sufficient disclosure to allow for informed voting decisions
In 2019 we voted on over 780 shareholder resolutions which were focused on ESG issues, supporting 60% of them. More specifically, we supported 82% of shareholder resolutions focused on environmental issues. Generally, we have not supported resolutions that were too prescriptive in nature, didn't address material issues, or which asked companies to introduce policies and practices that had already been adequately addressed.
The following chart shows the locations of meetings voted including APAC, North America, Japan, Europe, Rest of world, UK and Australasia.
The report includes 23 case studies across sectors, issues and strategies with an outcome focused section.
Sector: Oil & Gas
Engagement matter: UBS-AM has been engaging with the company within Climate Action 100+. Dialogue has been focused on the company's strategy to transition to a low carbon economy.
Outcome: During the course of the dialogue, the company took significant steps to meet shareholders' requests on climate change. These included the development of an intensity reduction target, including scope 1,2 and 3 emissions, and the increase of climate change targets linked to executive pay. Management is expanding low carbon energy activities and intends to increase its market share in gas and electricity distribution in its home country. At the end of 2019, the company committed to undertake a global review of lobbying activities by Q3 2020 and pursue positive lobbying dialogue on climate change. The company has also committed to net zero emissions by 2050 in alignment with the Paris Agreement, becoming the first oil & gas company to do so. Future dialogue will focus on actions which can deliver on these positive ambitions and enhanced information on scenario analysis.
Engagement matter: The company was identified as a potentially interesting investment based on valuation but suffered from low external ESG ratings and a generally poor reputation amongst sustainability-focused investors. Having established that the three key ESG topics were ethical conduct, community relations and health & safety, the investment analysis identified that there was a link between all three in the form of the company's risk culture. The engagement has focused on this overarching topic as well as the individual issues.
Outcome: Change is clearly taking place in the company. In the last year we have seen new board appointments, a reorganization of the management team, a strengthening of environmental & social management and the compliance structure of the company. Going forward, we will encourage further developments on these fronts, as well as focusing on the need for improvements in health & safety.
Engagement matter: This transportation company had historic issues related to Board independence, lack of succession planning, problematic industrial relations and overall lack of responsiveness to investors' concern. The engagement with the company involved 1:1 calls with the management, meeting the Board together with other major UK institutional investors, and engaging with other stakeholders, such as trade unions. In 2019, after years of difficult conversations and little progress, the company showed some progress on governance standards, particularly in relation to Board independence and remuneration.
Outcome: The extensive engagement led to positive changes proposed at the 2019 AGM. These included a firm commitment to Board succession planning (both the long-tenured Chair and Senior Independent Director ('SID') will leave by the 2020 AGM), and an improved LTIP. Despite ongoing concerns over Board independence and, contrary to best practice, the participation of Non-Executive Directors in stock-based awards, we considered it wasn't in the interests of the company and its shareholders to have a wholesale exit of Board members. We therefore decided to support the election of the designated SID and other non-executives with the exception of the Board Chair, the current Senior Independent Director and the Chairs of the Remuneration and Audit committees.