The investment team at BNY Mellon met the head of sustainability and investor relations team at multinational beverage company Diageo. They discussed water as a material environmental risk. The team found Diageo’s approach to be thoughtful and demonstrative of its leadership in dealing with water-related dependencies. With water being a key material source, it’s a top priority for the company.
Diageo was among the first to develop an integrated water stewardship strategy in 2011, covering its use in supply chains, operations and communities. Globally, the company is aiming to achieve 30% water-use efficiency by 2030, with a higher target of 40% set for water-stressed regions like India, Latin America, Indonesia and sub-Saharan Africa. Working with smallholder farmers, the focus has been on improving overall productivity and not just water management.
The team at Franklin Templeton spoke to leading UK food producer Cranswick about the company’s commitment to investing in technology and modern production techniques in an industry where others have refrained from spending money. Cranswick has demonstrated the highest level of animal welfare standards and was awarded a tier 1 rating in the recent Business Benchmark on Farm Animal Welfare (BBFAW) report, demonstrating that animal welfare is integral to business strategy. The company explained its sustainability strategy, and how the principles are ingrained in the group’s main commercial strategy, seeking to address environmental and sustainability issues in the way it operates. ESG considerations underpin the case for investing in Cranswick. The increasing importance of food provenance and higher standards of animal welfare are all raising the bar for companies, thereby increasing capital requirements to operate efficiently in the market, as well as acting as strong barriers to entry for new players.
Volution is a UK-based international designer and manufacturer of energy-efficient indoor air-quality solutions for health. The company focuses on sustainability and offers products that help improve air quality and reduce energy usage in residential buildings. The investment team at Franklin Templeton were impressed with Volution’s attractive fundamentals and long-term growth prospects, as more countries adopt higher standards to building construction to reduce carbon emissions. They believe the company has growth potential, offering a compelling investment opportunity. Their in-depth research, based on financial and ESG measures, including climate transition analysis, helped the investment thesis and its growth potential. Following its examination of Volution, the team has increased the size of its investment, favouring exposure to the structurally growing demand for residential ventilation to reduce carbon emissions.
Fulcrum Asset Management believes using its shareholder voice is an important part of managing ESG risks and issues. The adoption of the Glass Lewis Climate Overlay service has been an important development in strengthening its voting position and holding companies accountable for their sustainability strategy. The fund manager has joined investor networks focused on climate change, such as the Institutional Investor Group on Climate Change, CDP and Climate Action 100+, to engage with corporate issuers, governments and other investors. The team is seeking to strengthen its ESG engagement policy, with further details to be made public during 2022. Fulcrum recognises the importance of innovation in the ESG data space. Working with partners at Arvella Investments, they have contributed to the launch of an innovative new tool, ESGforInvestors.com, offering free-to-use ESG applications for professional investors that aim to boost impact and risk-adjusted returns.
The investment team at Hermes engaged with Alcoa, a major global producer of aluminium. Alcoa has approximately 14,000 employees in 15 countries and has access to bauxite reserves at seven mines in Australia, Brazil, Guinea and Saudi Arabia, and operates seven alumina refineries. Hermes has engaged with Alcoa since 2019 on its climate action strategy, driven by its objective for the company to set a science-based target. Insight gained from subsequent engagements gave the team confidence that Alcoa is heading in the right direction. They were pleased by the company’s increasing ambition since starting the conversation in 2019. Alcoa continues to engage on the next milestone for its objective, which is validation of the scientific basis for a 1.5 degree-aligned emissions reduction pathway in the targets being set. Phasing out coal-driven production assets will continue to be a key point in future engagement.
The team at Jupiter engaged with BP, which is Jupiter’s largest holding in the oil and gas sector. Given the size of multinational oil companies like BP, they have found that it can be difficult for shareholders to exert influence via engagement on an individual basis. Concerned about the company’s management of climate risk, Jupiter acted collectively with other institutions to co-file a shareholder resolution calling on the company to set out how its strategy is consistent with the Paris Agreement. BP’s management had previously given their support to the resolution, highlighting an openness to constructive dialogue and integration into the group’s strategy. The resolution was approved almost unanimously by shareholders, and recommendations are being incorporated into the company strategy. For all new projects, BP will disclose its carbon emissions and climate impact, as well as how these are considered consistent with the goals of the Paris Agreement.
The investment team at Somerset became a signatory to the FAIRR initiative in 2021. This global investor network is conducting the first collaborative engagement encouraging the world’s largest food companies to diversify their protein sources away from animal proteins and tackle the use of antibiotics in their products. The team met with YUM China and China Mengniu Dairy to encourage measuring their environmental impact and discuss their climate adaptation and mitigation strategies.
At the moment, both companies are in the early stages of measuring their full environmental impact, displaying the effectiveness of the team's suggestions. They are also thinking about their longer-term strategy to decarbonise. The investment team is encouraged by YUM China’s progress, including signing the Business Ambition for a 1.5-degree commitment. They will continue to monitor how they develop a strategy to reduce emissions with their suppliers.
The team at Western Asset engaged with an oil and gas company that has been slower than its peers in providing tangible targets, only setting two goals for emissions – reducing methane emissions and flaring from 2016 levels. Management acknowledged it had made progress in reducing greenhouse gas emissions through optimisation and efficiency and is on track to achieve this target where the focus has been on carbon capture technology.
Nonetheless, the lack of other targets is a concern and one that has the Board of Directors’ attention, and a strategy is likely to be developed. At the time of engagement, there appeared to be no change in strategy towards renewables like others in the peer group. Western Asset encouraged a strategy of increased transparency and goal setting and, following the company’s engagement with third-party ESG agencies, will continue to monitor its progress towards meeting its targets.
