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    Invesco 2018 Investment Stewardship and Proxy Voting Annual Report Our commitment to responsible investing


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    03 Introduction from Invesco’s CEO 04 Responsible investment overview 06 Differentiated investor-driven approach 08 Democratized ESG approaches 10 Our leading ESG approaches 12 Equities – Global Core Equity (U.S.) – Asia ex-Japan – Japan – ASEAN strategy – Henley Investment Centre – Core Equity (Canada) – Growth (Summit Team U.S.) 24 Invesco Quantitative Strategies 26 Invesco Fixed Income 28 Banks Loans 30 Multi Sector 32 Invesco Real Estate 34 Unit Investment Trust 35 Exchange Traded Funds (ETFs) 36 ESG risk framework 38 Thematic investing 40 Governance & Proxy Voting 42 Good governance 44 Decentralized Proxy Voting 45 Invesco Proxy Voting 2018 46 Shareholder engagement 48 Case studies 50 Trusted partners 52 Our commitment to PRI 53 Advocacy 54 Sustainable development goals 56 Thought leadership 58 Responsible investment practices 60 Responsible investment resources 62 Invesco's 32-year journey


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    Introduction from Invesco’s CEO Dear Investor, For more than 30 years, Invesco has been associated with responsible investing. In this latest report, we share with you the latest practices and achievements across our global business. From the strategies we offer, to our company culture and purpose, Invesco has developed a distinctive approach to investing and corporate stewardship. It is rooted in the belief that as an industry-leading asset manager, we are a trusted partner for our clients and relied upon to deliver sustainable performance over the long-term, in a way that helps people get more out of life. “For the second consecutive year, Invesco earned A+ results in PRI’s To deliver this, we incorporate sound environmental, social and assessment for our overall approach governance practices into activities across our firm to ensure to responsible investment.” that we are doing what’s right for our clients, as well as our shareholders, employees and the communities we serve. Over the course of 2018, Invesco has strengthened its industry position in responsible investment stewardship in a number of impactful ways, including industry advocacy, leadership, innovation, and most importantly, authenticity. As a result of our dedication to responsible investment, Invesco was awarded “ESG Innovation Asset Manager of the Year” by CIO/Strategic Insight. In addition, the United Nations Principles of Responsible Investment (PRI) gave Invesco an A+ rating in “Strategy and Governance” for the second consecutive year. We’ve been a proud signatory of the PRI for six years, and have earned high ratings in each of the six Principles for incorporating ESG into our investment practices. Our Global Corporate Responsibility Committee (CRC), chaired by myself and comprising members of the executive leadership team, ensures comprehensive oversight of our stewardship activities and a focus on innovation to drive sustainability. Working with global workstreams across Invesco, the CRC provides direction to our investment and corporate stewardship leaders on core ESG topics, participation in industry advocacy and policy efforts, and support for charitable and community organizations to enhance the impact of our sustainability efforts globally. This report highlights our commitment to responsible investing and outlines our ESG practices. We invite you to learn more about Invesco’s dedication to meeting client needs through an integrated responsible investment approach. Sincerely, Martin L. Flanagan President and CEO, Invesco 03


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    Responsible investment overview Invesco believes that the ESG practices of company management Distribution of Invesco's ESG labeled may impact the long-term performance of a company’s stock. As funds by region (%)1 active, long-term investors, our aim is to encourage the companies EMEA 63 in which we invest to adopt best-in-class ESG practices. Americas 29 Asia Pacific 8 Invesco has demonstrated leadership and commitment to responsible investing with a variety of capabilities made available across the investment teams. Invesco is a signatory or member of: – PRI (Principals for Responsible Investment) – CDP (Carbon Disclosure Project) – UK Stewardship Code (Tier 1) – Japan Stewardship Code – UKSIF (UK Sustainable Investment & Finance Association) – Responsible Investment Association, Canada – Asian Corporate Governance Association, Asia – Global Real Estate Sustainability Benchmark – The Quoted Companies Alliance – Global ISO 14001, North America – The Carbon Trust Standard (UK) – UN Clean Seas Campaign Recognition – A+ Strategy & Governance: 2017, 20182 – 45% increase in aggregate PRI assessment score from 2015 – Winner of the CIO Industry Innovation Award for ESG in Institutional Asset Management for 20183 – Proxy platform – US patented – Outperformer – ESG rating4 – FTSE4 Good Index Series constituent5 – ESG-Friendly Asset Manager6 – Top 5 Most ESG-Friendly Fund Shop6 1 Total: US$18bn as of 31 December 2018. 2 2017 & 2018 Assessment Reports for Invesco Ltd., PRI. The investment categories are evaluated using 6 performance bands (A+, A, B, C, D, and E), where A+ distinguishes the top scoring signatories, representing a score of 95% or above and A distinguishes a score of 75% or above. 3 Source: ai-CIO.com, as of 13 December 2018. 4 Sustainalytics as of 30 September 2018. 5 Index helping investors identify organizations with good track records of corporate social responsibility. 6 Source: Ignites as of 28 November 2018. 04


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    Distribution of Invesco's ESG labeled Responsible investment – Invesco funds by asset class (%)1 in numbers Equity 50 Fixed Income 28 Alternatives 18 Balanced 4 99.96% of all shareholder meetings voted 12 Industry collaborations 9 Advocacy associations 05


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    Differentiated investor-driven approach Invesco has an authentic approach to responsible investment (RI) that is grassroots, investor-led and investor-driven. Environmental, social and governance (ESG) considerations are rooted in our investment strategies, products, proxy voting, active ownership, engagement and other oversight practices, to ensure the firm is meeting the highest levels of fiduciary and corporate responsibility. Invesco is committed to investing client assets in a responsible manner with a high degree of integrity while seeking to maximize returns for our clients. Our global ESG principles are implemented locally in a team-by-team approach to integrating ESG into the investment process, conducting ESG risk assessments, analysis, “Truly active managers view their roles as research and decision making. This practice allows Invesco to business owners, not just as shareholders. engage with clients more effectively and deliver a high-quality The very spirit of responsible investment investment experience – reflected in our A+ rating for Strategy & is the opportunity to engage, drive change Governance from PRI for the second year in a row together with and deliver strong investment returns recognition as an ESG leader.1 for clients in a sustainable manner.” Within this report, you will learn more about our ESG leading Bonnie Saynay strategies and view our global voting results. Invesco’s best-in- Global Head of Responsible Investment class operating model centers around the six US Sustainable Investment Forum (US SIF) guidelines: – board and senior level oversight – sources of ESG data – research and training – an ESG incorporation strategy – measuring and managing impact – participating in building the field 1 Source: 2017 & 2018 Assessment Reports for Invesco Ltd., PRI, as of 31 December 2018. Centralized support, decentralized decisions For illustrative purposes only. Global Local Global Responsible Centralised Global strategy, Local ESG De-centralised ESG engagement investment team support policy & practice resources decision making & voting decisions Thought Proprietary ESG leadership research Research Team by team led infrastructure ESG proprietary analysis Building Global Tailored ESG ESG Capabilities solutions Global Investors Council ESG Forum 06


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    Ama Dablam, in the Himalayas of Nepal, represents virtues Invesco embraces: strength, stability and longevity.


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    Democratized ESG approaches Invesco has been implementing ESG ESG data providers ESG approaches strategies for over 30 years, and today – Ethix delivers these through equities, fixed – Glass Lewis income, multi-asset, alternatives, real – ISS estate, ETFs and bespoke solutions. Each – ISS Climate Solutions investment center has a unique approach – IVIS defined in its investment process as well – MSCI as the respective asset class. – Morningstar – Nikko Research Centre Our democratic approach on ESG – Proxy Insight integration – where every investment – Sustainalytics centre defines their own holistic ESG – Vigeo Eiris approach – is we believe, key to achieving a robust ESG practice across all investment ESG labeled funds Broad based ESG integration centres. As a consequence, every analyst, – Exclusionary/negative whether credit or equities focused, also screening understands the ESG risks inherent to – Sector/values based a respective investment. ESG risks are screening generally evaluated and identified at the – Norms-based screening US$0.4bn security level and may impact portfolio – Positive/best-in-class performance. Material ESG considerations screening US$2.1bn may adversely impact the fundamentals of – Combined ESG strategies1 US$2.3bn the securities the portfolios hold, which in turn may impact shareholder value. ‘ESG labeled funds’ refers to US$5.2bn an investment portfolio that, Our active ownership policies and either by client mandate, practices include ongoing engagement strategy, or philosophy are with corporates, boards and advisory marketed, managed and US$8.2bn bodies, on-site due diligence and an distributed as ESG funds. internal governance committee as inputs into our investment and proxy voting decisions made at the portfolio level. Our investment teams manage ESG strategies using a diverse range of responsible US$48.9bn investment approaches and leverage multiple ESG data providers. 1 Combined ESG strategies: The combination of positive, best-in-class, norms-based, negative and/or exclusion criteria. 08


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    For illustrative purposes only. Strategies are not available in all jurisdictions. Source: Invesco as of 31 December 2018. Broad based ESG integration2 IGCE Global Smaller Companies Invesco Asset Management India Invesco Fixed Income Henley Investment Centre Combined ESG strategies1 Invesco Quantitative Strategies Thematic investing Invesco ETFs Sector/values based exclusion Invesco Quantitative Strategies Positive/best-in-class screening IFI Global Investment Grade Japanese Equity Invesco Unit Investment Trusts Invesco Quantitative Strategies Exclusionary/negative screening Global Asset Allocation IFE Growth – Large Cap Henley Asian Equities Ex Japan Henley Multi-Asset Invesco Canada Equity IFI Emerging Markets IFI Global Investment Grade IFI Multi-Sector IFI Senior Secured Bank Loans Asset based ESG integration3 IRE Europe Direct Properties IRE US Direct Properties IRE Asia Direct Properties 2 Broad based ESG integration: The systematic inclusion of ESG factors into the investment process. 3 Asset based ESG integration: The systematic inclusion of ESG factors into the acquisition and management of real assets. IFI = Invesco Fixed Income, IFE = Invesco Fundamental Equities, IGCE = Invesco Global Core Equity, IRE = Invesco Real Estate. 09


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    Our leading ESG approaches London, home to the PRI of which Invesco has been a signatory since 2013. © Getty Images.


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    Leading ESG labeled funds Not all strategies are available in all jurisdictions. AUM (Source: Invesco, Investment centres as of 31 December 2018) ESG capabilities Invesco Fixed Income US$6.9bn Emerging Markets, Global Investment Grade, Multi-Sector and Senior Secured Bank Loans Henley Investment Centre US$4.0bn Asian Equities Ex-Japan and Multi-Asset Invesco Quantitative Strategies US$2.8bn Global Quantitative, Global Small Company, European Enhanced, Global Passive, European Passive and Balanced Solutions Invesco ETFs US$2.1bn Clean Technology, Clean Energy, Water, Timber and Solar Invesco Fundamental Equities US$2.0bn US Growth Large Cap Equity Global Asset Allocation US$256.0m Active Balanced Solutions Invesco Canada Equity US$26.0m Global equity Invesco Japan US$18.0m Japan Growth Equities Invesco Unit Investment Trusts US$7.0m Equity Trust 11


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    Equities – Global Core Equity (U.S.) “Since our formal ESG integration in 2017, our process ESG pillars of Global Core Equity strategy has evolved into a more defined framework that focuses on material ESG issues in our fundamental research and Materiality investment analysis. These ESG pillars of materiality, – We analyze the magnitude of ESG risks impacting momentum, and engagement help guide our focus on stock a company’s financial integrity, brand/reputation, specific ESG risks that have material financial implications long term profitability and value creation and impact on a company’s long-term performance.” – As part of our ongoing portfolio monitoring and risk management, we look for ESG rating changes Erik Esselink to continuously assess changes to a company’s Portfolio Manager sustainability risk profile – Material ESG risks are considered alongside other risks and valuation drivers to help identify better managed companies who are well positioned to succeed in the long term Momentum – Momentum is a key indicator in directional change that we expect from management as well as helps us identify ‘at risk’ companies – In our fundamental investment research we analyze how a company is addressing its key ESG issues and assess incremental change – As part of our ongoing portfolio monitoring and risk management, we look to ESG rating changes to assess changes in the outlook of a company’s sustainability risk profile Engagement – We engage with management of all portfolio companies on material and controversial ESG issues that can impact their long-term performance. This engagement allows us to make a positive impact and contribute to improvements in our portfolio companies – Active engagement with management is key for us to better understand management’s views and strategy for ESG, and for us accurately assess the company’s sustainability risk profile. – We engage with companies through multiple touch points to be able to get a complete picture of a company’s sustainable risk profile. (Management, Investor Relations, Fund Manager, ESG integration process internal and external ESG expertise) For illustrative purposes only. This is crucial in our ESG integration evolution as ESG data is still noisy, inconsistent and non-standardized. Watchlist ESG flags This filter of unstructured data from external Provides focal points of ESG ratings to 2-3 key factors have improved our material ESG issues for assessment of a company’s ESG risks and helped us fundamental research make better, informed investment decisions. Our next step, once the Sustainability Accounting Standards Board (SASB) publish their materiality map for companies and investors in October, is to include Fundamental research ESG analysis their standardizing framework in our ESG integration Focuses on materiality, model. This will help translate our ESG concerns in the momentum and engagement context of financially material, standardized reported data, which will allow us to compare and differentiate companies better in terms of ESG risks. As data and tools continue to improve, our ultimate goal is to develop an internal ESG rating of companies. However, our current focus is on bridging the gap between data, knowledge and tools in ESG integration. Portfolio monitoring ESG risk management Quarterly ESG Portfolio Reviews 12


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    Case study 1 Case study 2 Board Independence Anti-competitive practices allegations As shareholders of a Belgian media company, we have We engaged with an Italian electric equipment long been aware that governance was not optimal. company to better understand their strategy in The company has >50% of the capital (56+%) and the addressing the anti-competitive practices allegations board lacked independence. In addition, there was and how that is being governed. We also wanted to some innovation and technology sharing between the learn more about management’s view on sustainability parent company and the issuer. Whilst not a perfect and their approach to mitigating ESG risks. Finally, we governance structure our view was we understood touched on their ESG score and tried to get an idea of the issue, “eyes wide open”, and that the risk was whether the company is going to improve. limited given our interests and the investee company were aligned. We also saw the industrial benefit of The company was very open to questions and sharing the collaboration being more of a benefit and the their views on sustainability. The topic is important excellent Belgian shareholder protection laws as some to them; they are aware of the increase in demand form of safeguard. That being the case, momentum and focus in this space and they don’t want to be changed for the worse with the release of FY17 behind the industry/best practices. Their focus on numbers in Feb 2018. Firstly, the company which ESG performance is on improving their score on has never had a regular dividend policy changed the Dow Jones Sustainability Index, which is tied to their balance sheet leverage targets. Their previous management compensation. targets were based on credit conditions as opposed to total debt; however, they updated their targets to The company was appreciative of our feedback in a more conservative approach. In isolation this was guiding them to pay attention to their ratings on ESG not a bad move, especially given it has been run with data providers such as Sustainalytics and MSCI, as high leverage historically and interest rates are largely we use these ratings as part of our ESG analysis of expected to increase from low levels. The new targets companies. We also made them aware that these (3.5-4.5x ND/EBITDA) still gave room for significant external ESG rating agencies primarily rely on publicly special dividend payments of up to 10% of market cap, disclosed data so it’s important that the company but the change did mean less potential shareholder disclose their programs, policies and initiatives so they returns and the decision was taken without warning. can be accurately rated. In addition, the management failed to announce an We learned that they do not have a team dedicated to anticipated special dividend, delaying the decision ESG/SRI reporting, the efforts are spread throughout pending US tax changes. We engaged with the the various departments at the firm – however, company to understand the rationale, which was having a dedicated ESG/SRI team is currently under somewhat vague but appeared due to Liberty Media/ discussion with top management. John Malone’s tax implications changing as a result of Trump’s US tax changes. Clearly this was an Since the allegations, which started in 2009, the unacceptable rationale and in our view raised the company has adopted many new policies to prevent magnitude of the issues with momentum obviously bribery and corruption – especially on the commercial negative. A decision to not pay a dividend purely on side. This is being governed by their compliance the basis of the company’s US tax exposure indicating department; they hired a new Head of Compliance that the firm’s leadership decisions are not being last year and a number of other people to improve made in the interest of minority shareholders. their compliance performance. Regarding the policies – they start with best practices and try to adopt the As a result, we upped our engagement. We had ones that best serve the interest of the group. a number of direct interactions with the investor team at the company to understand how long the Outcome: We pushed for more disclosure and dividend was delayed for and to fully understand the improvements on their score. It was a positive board rationale with minorities interests in mind. We dialogue as they were not aware of what type of addressed the issue of the hard leverage targets and ESG report investors look at and how they are being whether the board was liable under Belgian law for assessed. They said they will look into improving their not working in the interests of all shareholders. Our ranking on the research part as well as their score on feeling was the board and management realized the the Dow Jones index. We also feel more comfortable seriousness of the issue and that it was temporary. around their ESG risk management strategy as they have adopted best practice policies and hired new We also engaged with another minority shareholder people to oversee the implementation and compliance that has a history of activism. Our conclusion was of these programs to prevent bribery, corruption and whilst we agreed with a number of their grievances, anti-competitive practices. we also thought some of their findings and proposals went beyond the governance issues we held. 13


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    Equities – Asia ex-Japan Our investment process focuses on “Sustainability is a vital Case study identifying ‘quality growth’ companies ingredient for success in any Governance – Indian automobile company that display attributes which include business. It is our fiduciary An Indian automobile manufacturer with sustainability, good corporate governance responsibility to understand high domestic market share in its sector standards and internal controls, high quality those businesses which was planning to set up a new manufacturing products and services, good supply chain implement a framework that plant in India and had already acquired land management, efficient local sourcing, and prudently allocates capital for the said purpose. Despite sufficient cash demonstrate good ability to adapt to the to embed sustainability into on its books the Indian company proposed changing business environment. their business model.” the new manufacturing facility to be owned and funded by a 100% subsidiary Active engagement with company Shekhar Sambhshivan of its multinational parent, with an managements to understand their ESG Investment Director agreement to supply vehicles exclusively considerations therefore becomes an to the Indian company. integral part of our investment strategy, research, management discussions and While this proposal would have led investment process. to lower up-front capital expenditure incurred by the Indian company, it raised Our investment strategy integrates the concerns around the transfer pricing following key attributes: mechanism, future capex funding and – A focus on bottom-up stock uncertainties in case the agreement were fundamentals, using top-down analysis to be terminated. Furthermore, as the only as a macro framework manufacturing unit would not be under the – Using comprehensive qualitative complete control of the Indian company, and quantitative analysis to build our the proposal raised concerns related to proprietary earning models capital allocation, corporate governance – We look for ‘quality growth’ companies and related party transactions. These with robust business models, industry issues are of utmost importance in our leadership and competitive advantages investment strategy and process. that are able to deliver sustainable attractive earnings growth over Consequently, we raised our concerns business cycles (demonstrating good during one of the interactions with the ability to adapt to the changing business company management. Later on, the environment and technologies). company revised some of the key issues from the initial proposed agreement. Active engagement with company The new proposal did alleviate some management is an integral part of our key concerns but failed to allay all of our investment process. These discussions are concerns related to corporate governance important to understand management’s expectations. Hence, we decided to vote views and strategy for ESG, and also against the new proposal. We felt that the help us express our views on corporate Indian company had large cash reserves strategy, transparency, capital allocation and should retain complete control of a and other ESG aspects. major manufacturing unit, avoiding the potential conflict of interest and concerns During the last financial year ending March pertaining to related party transactions. 2018, we had over 400 engagements with our coverage companies including one-on- one meetings, investor conference calls, site visits and group meetings. 14


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    Detailed fundamental analysis: based on three main criteria For illustrative purposes only. Management/Franchise value Determine Liquidity and risk Portfolio – Business landscape fair value – Days to get in/out construction – Business and earnings model – Total turnover – Balance sheet – Risk assessment – Core competencies – Facilitates asset allocation – Qualitative analysis – ESG considerations Earnings growth – Earnings growth momentum – Sustainability and quality of earnings – Growth in market share – Growth derived organically, new projects or through asset injection Valuation – P/E (prospective), P/B, PCF – Premium or discount NAV – EV/EBITDA, Yield, ROE – Relative to historic, sector, market 15


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    Equities – Japan The Japanese Equities team seek a deep “ESG matters because Environmental, Milestones understanding of investee companies Social and Governance issues would Source: Invesco. and their business environment, and impact on long-term corporate value and contribute to the enhancement of its sustainability, which naturally affects July 2013 corporate value and sustainable growth risk and return of our investment. That’s Signed up to UNRPI of these companies through constructive why we, the Japanese equity team, have dialogue and purposeful engagement, with integrated ESG analysis – with particular August 2014 an aim to enhance the medium- to long- emphasis on corporate governance – into Published the Policy of term return on investment for our clients. our proprietary fundamental research Stewardship Responsibilities We believe that responsible proxy voting and analysis process. On top of that, as a and constructive dialogue with investee long-term investor we have dialogue with October 2014 companies are important components of corporate management discussing ESG Reorganized the Proxy Voting our stewardship activities. issues whenever we think necessary. We Committee into the Corporate strongly believe our holistic approach Governance Committee We position continuous assessment and to ESG can enhance our added-value to understanding of the underlying investee clients in the long-term.” April 2016 companies’ fundamentals from the medium- Revised the Proxy Voting to long-term perspective – and contribution Kaoru Kobu Guidelines to reflect the to sustainable growth of corporate value Research Analyst/Corporate Corporate Governance Code and through constructive dialogue with these Governance Officer the Japanese Stewardship Code companies – as important roles within our Policy of Stewardship Responsibilities. August 2016 Furthermore, we evaluate that we have Published the Overview of steadily implemented each principle as Stewardship Activities defined in the “Japan’s Stewardship Code”. November 2017 We also recognize ESG-related information Revised the Policy of as one of key factors in making investment Stewardship Responsibilities decisions. We have constructive dialogue to reflect the revised Japan’s with investee companies on so-called “E” Stewardship Code (environment) and “S” (social) issues other than corporate governance issues April 2018 as necessary. We made 3,135 contacts Established the Conflict of with companies in FY2017. They included Interest Committee various contacts such as individual interviews, financial results meetings, mid- May 2018 term management policy announcements Disclosed the individual proxy and on-site factory and store visits. voting results for FY2017 Responsible Investing – Japanese Equities For illustrative purposes only. Conflict of interest oversight Corporate Governance Committee Policy on Global Corporate committee (COI) Members: CIO, Head of Compliance, Governance and Proxy Voting Corporate Governance Officer, Portfolio Managers and Operations staff Policy of Stewardship Proxy Voting Provide Invesco's proxy Responsibilities Guideline voting guideline Japanese Equity Department Advice Investment professionals according to the guideline Constructive dialogue Proxy voting Investee companies Institutional shareholder services (ISS) Sustainable growth of corporate value Sustainable return enhancement 16


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    Case study 1 Our leading strategy with women in focus Business strategy Another of the Japanese Equities team’s best-in-class Based on the long-term strategy announced by strategies aims to invest in companies with business the company, we discussed a wide range of topics strategies reflecting women’s social advancement. By including new business development strategy, capital combining Invesco’s bottom-up fundamental research efficiency improvement and development strategy in capability and Nikko Research Center's “Women’s human resources. We pointed out the possibility that Power Score”, the team has built a strategy that cash flow might not be sufficiently generated as a invests in companies which achieve high growth by result of excessive capital investment at a low 'Return harnessing women’s power. on Invested Capital' division, and shared our concerns as an investor on consistency between the long-term Women’s Power scores evaluate three areas vision and capital allocation with the management. – Workplace: How much do companies emphasise women’s participation and promotion? Subsequent review: As a result of reviewing capital – Products and services: How much do companies allocation and business portfolio in line with the care about women as customers? long-term vision, we confirmed that the company – Philosophy: Does a company lay down a code of moved toward improvement in capital efficiency, conduct from honesty, perseverance, harmony including withdrawal from the investment that was and dedication perspectives? not expected to generate sufficient return. The management indicated that they would manage Bottom-up fundamental research scrutinizes their business portfolio using Key Performance – Management commitment to hiring and Indicators (KPIs) to implement investment necessary promoting women for sustainable growth and they would clarify the – Organisational support including child care, decision-making process through a separation of mentoring and training management oversight and business execution. – Actual achievements as well as potential to improve the sustainability and flexibility of a company in the mid to- long-term utilising Case study 2 women’s power Succession plan of the management We discussed with the President of the company in which President and Chairman would finish their term and the nomination committee would start succession planning. We also discussed the importance of Stock selection process succession planning for outside directors. For illustrative purposes only. Subsequent review: The President explained actual examples of nomination of candidates and All listed Japanese stocks with market capitalisation discussions with the nomination committee with over JPY 10bn respect to election of the president of a group company, and we recognized how the nomination committee works. We also learned about a profile of Investment universe (quantitative screening) a successor that the president himself expects, and – High earnings growth discussed about competence, insight and background – High operating margin required from a future top executive given the – High Return on Equity company's challenges. We highlighted that the company would have to consider succession planning of outside directors; as several years have passed since the introduction of outside directors and the Fundamental research with an emphasis on growth company would have to consider their replacements to keep the independence of the board. Profitability analysis Risk analysis – Growth rate – Business risk – Competitive – Financial leverage Case study 3 advantage period Structural business reform We had a dialogue about business portfolio, in which low-margin segment remains less competitive among Women’s social advancement analysis peers, while the company maintains competitive advantage of its core business, which brings much Screening for Women’s Fundamental research higher profitability and generates strong cash Power on Women Power flow. We shared our view on the most ideal capital “Women’s Power Score” – Management allocation strategy as an investor with the company – Workplace commitment and discussed the company's long-term view on the – Products and – Organisational optimal capital allocation strategy. Services support – Philosophy – Actual achievements Subsequent review: The company decided to and potential implement certain structural reforms including withdrawal from such less profitable business segment. We will continue discussing with the company about importance of capital allocation and continuously Product supporting women’s social advancement request the company for an opportunity to keep a constructive dialogue with the management. 17


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    Equities – ASEAN strategy The ASEAN Equities team is focused on achieving long-term Case study capital growth, with corporate governance of each investee Governance company a key consideration. The strategy invests in Association We had been investors in a company for of Southeast Asian Nations countries which includes Singapore, several years and noticed that its financial Malaysia, Thailand, Indonesia and the Philippines. performance has suffered although the leadership team installed was impressive. Using a pure bottom-up investment process and proprietary After several meetings we discovered that research, the team’s investment philosophy supports responsible the problem was at the Board level whose investing through: members were too involved in the day- – Adopting a buy-and-hold strategy with a long-term investment to-day decision making. In a fast-evolving horizon of 5 years and beyond industry like logistics there was a need – A focus on bottom-up stock picking for more dynamic Board representation – Knowing the company as if it were a partnership that was responsive to technological – Being benchmark aware, but not benchmark-driven change and understanding of the industry. – Relying on our own proprietary research: The team considers This was believed to be a factor slowing sell-side research as being very momentum-driven, which down decision making in the company. is different from their investment approach of riding through cycles. We met members of the Board individually to discuss our concerns. We also were in Focus on corporate governance touch with other institutional investors We will not invest in stocks without having met senior who had similar concerns. We then management. Areas of focus include management track record met the Board again (before AGM) and and the integrity and ability of the owner(s) to run the company disclosed that we and several other for minority shareholders – not themselves. shareholders felt the same way. This led to the Board members eventually resigning 1. Engagement – We meet at least twice a year with our ahead of the election, and a new Chairman investee companies, which can include Board members being installed. The Board now has greater to understand Board level discussion. We have a close representation from various industries relationship with C-level executives of our companies and and balanced from gender, skill and age similarly we try replicating that for the Board too. We perspectives. We continue doing these write to Boards and Management frequently to allay our similar engagements and keeping a close concerns, if any, and employ a diplomatic behind the scenes relationship with our like-minded peers discussion rather than out publicly at AGMs. Our investee in ensuring that our interests as minority companies know our approach clearly. shareholders are safeguarded. 2. Remuneration – We look closely at remuneration structures and how they are linked to executive performance. We like compensation that is deferred and paid in stock, aligning interests with minority shareholders like ourselves. 3. Voting – We actively vote at AGMs by combing every AGM resolution. Where possible we also aim to attend AGMs to observe how it’s being conducted and to meet members of the Board. We always vote against blanket resolutions that give companies power to issue new shares or undertake anything detrimental to minority shareholders’ interests. 4. Independent Directors – We look at the role of independent directors, and if they are exercising their independence? Board attendance too is also analysed to see if members may be stretched from undertaking their fiduciary roles. “We see investing into stocks as entering into partnership with investee companies. We inform company management of our style, philosophy and investment horizon. We make it clear we are investors, not traders.” Jalil Rasheed Investment Director, Asia Pacific 18


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    ASEAN strategy – our approach For illustrative purposes only. 01 02 03 04 05 Stock screening Company visit Fundamental research Portfolio construction Portfolio monitoring From 3,100 listed Instead of relying on We identify companies New holdings are We visit our existing stocks in the ASEAN sell-side research, we that can meet various introduced at 1%. The company holdings region, market cap visit the company’s quantitative criteria weight of the stock is a at least twice a year. and liquidity filters are management team. (e.g. earnings growth, reflection of the team’s Corporate results are applied to narrow the Around 150-300 margins, balance sheet, conviction level. Market/ monitored regularly. investable universe meetings are conducted cash flow generation and sector weightings are Sell triggers include: to 450. With their each year. valuations) as well as generally a by-product change in operating in-depth experience in qualitative factors (strong of stock selection. environment/core various local markets, brand, high barriers to business, change using their proprietary entry, pricing power, in management/ research, the team recurring revenue, ownership structure arrives at a monitored earnings visibility, and and fraud/dishonesty. list of 150 stocks. corporate governance). Detailed research reports are written on all companies visited. 19


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    Henley Investment Centre The core aspects to our ESG philosophy We take our responsibility as active owners We launched our Henley ESG Guiding include materiality, ESG momentum very seriously and see engagement as Framework which highlights the issues we and engagement: an opportunity to encourage continual find of key material focus. This framework Materiality refers to consideration of ESG improvement. Dialogue with investment had input from our ESG Investor Forum, issues on a risk-adjusted basis and in an companies is a core part of the investment heads of investment desks, our CIO and economic context. We do not view ESG process. We take large investment was presented at our Chief Investment aspects as constraints, aside from our non- stakes and are often one of the major Officer monthly insight meeting. As part investment policy in controversial weapons shareholders in a company (particularly of this framework we have established which is driven by legal obligations. in UK and Europe), and in many cases our proprietary ESG rating which is amongst the top minority shareholders based on sector level material issues. To The concept of ESG momentum, or in Asian companies. As such, we often establish this framework, our Head of ESG improving ESG performance over time, is participate in board-level dialogue and are facilitated more than ten workshops for all particularly interesting in our view. We find instrumental in giving shareholder views investors to give a perspective and input to that companies that are improving in terms on management, corporate strategy, our ESG approach. of their ESG practices may enjoy better transparency, and capital allocation as well financial performance in the longer term. as wider ESG aspects. An illustration of the ESG investment process for equities is highlighted below. The Henley Investment Centre took We leverage several sources (including an important strides to further our ESG external ESG rating provider) to highlight approach in 2017/2018. We established areas of focus for further engagement. our ESG Investor Forum which is chaired We supplement that with proprietary by the Head of ESG and is made up of research and engagement. All investment champions from each investment team. professionals monitor the extent to which The ESG champion is a representative of ESG is discussed in company meetings and the individual investment teams that has we have recorded discussing ESG at over responsibility for feeding into the overall 650 company meetings during Q1-Q3 ESG approach and areas of interest for 2018. The process includes continual further analysis. The role of this group is to monitoring at portfolio level to ensure we help facilitate dialogue and share insights regularly review these issues in a holistic from across asset classes and regions context. To bring our approach to life we within the Henley Investment Centre. The have outlined three examples of our ESG group meets quarterly. research and engagement activity this year. Equities – ESG investment process For illustrative purposes only. ESG flags highlight companies ESG flags Forms part of company for further analysis meetings, idea evaluation and fundamental research ESG research and engagement ESG research Forms part of fundamental dives deeper into the fundamental research and portfolio holdings issues and encourages change evaluation over time where appropriate including, exercising voting rights at the Annual General meeting Engagement AGM ESG review meeting: Portfolio Portfolio monitoring Forms part of post-investment level monitoring completes the monitoring process and serves as a continual reminder of ESG performance 20


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    Case study 1 Case study 2 Case study 3 Social – Asian Equities Environmental – European Equities Governance – UK Equities Indian logistics company; health and Norwegian energy company; UK industrial company; boardroom dispute safety practices energy transition This Indian logistics company was flagged The position in this Norwegian As the main and long-term shareholders in an Asian ESG review meeting as energy company was taken with full in this UK industrial company, we took being relatively high ESG risk. Our team consideration of ESG issues as part of action during a high profile boardroom produced a proprietary ESG rating and the investment decision. Incorporating fall out, to ensure that the principles of report which indicated that the health considerations of the energy transition good governance were upheld. A former and safety record was declining with and focus on reducing carbon emission Executive Director in the company, and a substantial incident at one of their reliance has been part of these minority shareholder, fell into dispute operational locations which impacted considerations. Our European Equities with the board Chairman over issues revenues in 2017. This incident was Analyst met with the CFO and CEO and of strategy, remuneration and certain exacerbated with the local community discussed carbon emissions reductions related party transactions involving entering the facility in anger and shutting as a competitive advantage. Our team the Director. This led to this Executive down the operations. At a meeting with attended an inaugural Sustainable Director declaring that he would vote management, the fund managers, our Responsible Investment (SRI) meeting against the Chairman’s re-election. Head of ESG and analysts, questions with the CEO and key management The Chairman was independent on were asked on how they were addressing and discussed technological risks and appointment and has substantial board contractor health and safety. This meeting opportunities. The company is on an level experience. Furthermore, the did not improve our view of the company improving trend with regard to these current board and company management and its ESG rating remained ‘high risk’. issues by purposely directing capital indicated that they would resign if the Subsequently, our Head of ESG had a expenditure to lower carbon technologies Chairman was ousted. The share price dedicated ESG call with management such as floating wind. Incorporated these fell as a result of uncertainty related to and they indicated that these incidents factors into continued strong conviction potential future management and board had increased focus on health and safety of the company, in meeting notes and changes. Several team members had management. Management claim they in direct conversations with the fund extensive engagement with both the have done a lot of training and education, managers in the European Equities team. Chairman and the board to address this and are rolling out ISO14001 which More generally, the issues we consider situation and prevent further share price should improve practice. In addition, particularly material in the energy sector falls. The vote was won and the interests the company put in place a much wider include corporate governance; carbon of shareholders protected. Furthermore, shareholder dialogue around these issues regulations; human capital and labour the team has encouraged subsequent and substantially improved their corporate relations; as well as internal integrity. steps to strengthen the board and responsibility report, with year on year improve its diversity, which has led to two changes in not only health and safety but new Directors being appointed and the also environmental indicators. While we announcement that the Chairman and recognise risks remain, we are encouraged Senior Non-Executive Director will look by these improvements and continue to for suitable replacements before the next monitor this company. Annual General Meeting in 2019. “As long term, valuation led, active investors, our investment process is aligned with ESG integration and active ownership. As investors in global equities, corporate and sovereign fixed income instruments as well as multi- asset strategies, we recognise the differences between asset classes and geographies. In general, ESG issues are considered as one input to the investment process, as part of evaluation of ideas, company dialogue and portfolio monitoring. As such, evaluation of ESG aspects will be incorporated into the wider investment process as part of a holistic consideration of the investment risk and opportunity.” Cathrine de Coninck-Lopez Head of ESG, Henley Investment Centre 21


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    Equities – Core Equity (Canada) “I have been managing money in the extractive Case study industries for over 20 years (oil and gas and mining) Environmental – European Equities and ESG has always formed part of my investment We engaged with a Canadian and NYSE listed stock. The company’s thesis and discipline. There are no other industries sole asset is its substantial working interest in a copper mine in like oil and gas and mining where the social license Mongolia. The government of Mongolia is the other significant to operate is a company’s most valuable asset. In owner of the mine. Once in full development from the underground being so valuable the ironic thing is that it appears deposit in 2023 the mine will be one of the largest copper mines nowhere on a company’s balance sheet but rather in the world. An Invesco specialist has had the opportunity to visit accrues to those operating teams that have a Mongolia three times to visit the mine site which has served to strong culture of putting safety, environment and underline the importance of this mine to the country. the local community first and foremost.” What makes this stock unique is how critical the mine is to the Norman MacDonald country and the people of Mongolia. It is the biggest tax generator VP, Portfolio Manager by far in the country and is being constructed by Rio Tinto. The current operations of the mine are focused on the open pit deposit and already the mine is employing a significant amount of local people. The trickle down economic effect of wage growth within the country is truly making life for Mongolians better. It was always mandated in the investment agreement between the government and the company that a certain percentage of employees be local Mongolians. Initially I viewed this as a potential negative for the investment in the company but after visiting the site I came away with the opposite view. The Mongolian people are proud and hardworking employees. They take an extreme amount of pride in their productivity record and more important their safety record. The level of education within the local work force has improved dramatically the last four years. More impressive than the local work force however is the importance of the mine with respect to the royalties and taxation that will be collected by the government in the 65 year life of mine plan. When the underground is in full production it will generate 20% of the country’s GDP. This mine alone will repay a lot of IMF borrowing and allow Mongolia to develop as a country at an unbelievable rate and propel itself into the next century with a vastly improved quality of life. Due to the importance of copper in the electricity grid it has also brought a change in attitude of their neighbours Russia and China. Once regarded as a second class citizen this quality deposit has forced both countries into proactive trade talks with Mongolia due to the need for copper in the conductivity of electricity. Copper mine in the Gobi Desert, Mongolia. © Getty Images. 22


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    Equities – Growth (Summit Team U.S.) With average 25 years of industry “As active owners rigorously Authentic Responsible Investing experience, the Invesco Summit Team focused on adding value for our We seek to achieve positive outcomes applies an active research and ownership investors, and with a fiduciary for our clients by combining social process recognising that responsible responsibility on their behalf, screening, active bottom-up research, social investing goes beyond screening we believe it’s vital to engage and active engagement with company out companies that have questionable with our companies across management teams. We believe it is vital social impacts. all aspects of their business, to engage with our companies across all to protect and create aspects of their business, to protect and The team combines exclusive screening shareholder value.” create shareholder value. Managers are (social, fundamental and valuation based) personally invested alongside our clients. with a research-intense bottom-up process Erik Voss to surround potential investment companies, CIO Growth Equities Screening understanding their opportunities and risks – Social screens exclude Tobacco, from as many angles as possible. And once Alcohol and Gambling stocks they invest – they invest for the long term, – Fundamental and valuation screens engaging with company management avoid bad actors who destroy value and actively voting proxies to encourage shareholder value creation. Active research – Experienced sector-experts surround companies, to understand all the risks and opportunities – Go deeper than company policies... evaluate company behaviour Active ownership and engagement – Beyond exclusionary approach – we work hard to uncover any potential risks to our investors' valued capital – Active dialogues with company management and proxy voting Our four step investment process For illustrative purposes only. Screen for ESG removing Build a mosaic Disciplined, company-level Securities with potential for – Alcohol – Review company 10Ks, conclusions including earnings or revenue growth – Tobacco 10Qs, transcripts – Outlook for company – Gaming – Company meetings and stock – Discussions with – Risk/reward assessment A holistic process competition, distributors, – Drivers of growth of evaluating suppliers, customers, etc. – Price target – Fundamentals – Forecast revenues, – Valuation margins, earnings – Timeliness – Valuation Result Result Result Identifies attractive candidates Confirms attractiveness and Articulates the basis captures deeper understanding for investing 23


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    Invesco Quantitative Strategies In the past decade, sustainability demands Holistic ESG approach We also help responsible investors to apply on financial assets – e.g. CO2 footprint, IQS offers a holistic ESG approach taking sustainability criteria to investments in corporate governance, regulatory and ESG criteria into consideration at various sovereign bonds. This is done with the demographic changes – have risen in the levels of our portfolio management so-called Country Sustainability Rating. To market and Invesco Quantitative Strategies process. Besides offering customized assess a country in terms of sustainability (IQS) has accommodated this and employs ESG solutions (pink circle), we explicitly criteria, a large number of indicators are a fully integrated ESG investment process. integrate ESG aspects into our portfolio used from the areas of politics, social This is built on long standing experience construction process (blue circles) via the issues and the environment which are in customized ESG solutions, active measures ESG Exposure Control, Adverse then combined into an overall rating. engagement with companies and the ESG Momentum and our long standing Three broad aspects of sustainability are Invesco Proxy Voting approach. Quality-Governance Linkage which focusses questioned when assessing countries: on high quality management. Our active – Environmental: Countries which limit ownership practices include engagement their use of finite resources, minimize and proxy voting which are integral parts of their negative impacts on the global our investment process as well. environment, and exercise stewardship over their natural environment are Key aspects of the framework are: more likely to be sustainable. – ESG Exposure Control: We ensure that – Social: Countries which cater for the portfolios are not heavily exposed to education, health, welfare and social the risk of scoring much worse from needs of their inhabitants, which an ESG perspective relative to their develop the skills of all citizens, and respective universes which have low levels of inequality are – Adverse ESG Momentum: As we are more likely to be sustainable. using proprietary risk models we were – Governance: Well-governed, always interested in the question non-corrupt countries, which are whether integrating ESG scores responsive to their inhabitants, treat in the risk models could be expected to them equally, and respect their improve risk forecasts. civil liberties, are more likely to be – Customized ESG Solutions: For sustainable. over twenty years the IQS team has managed accounts for clients that Enhanced Management: IQS’s required inclusion or exclusion of engagement strategy has typically focused companies based on certain ESG upon five key Environmental, Social and criteria by using the Eiris Portfolio Governance themes including: Bribery Manager (EPM) where companies are Reporting; Climate Change; Human Rights analyzed on the basis of 250 different Management Systems; Supply Chain criteria for all relevant ESG fields. Labour Policy and Water Scarcity. Holistic ESG Approach For illustrative purposes only. ESG exposure control Customised Adverse ESG ESG momentum “Having incorporated proprietary Integrated aspects of governance for many years, ESG approach we have enhanced risk management by introducing a dedicated ESG Exposure Control for all portfolios as well as an Adverse ESG Momentum measure to Quality restrict certain companies. We are Engagement factor confident that these steps, combined with a continuous dialogue with clients and companies, will make us well Proxy prepared for future challenges with voting regard to ESG investing.” Manuela von Ditfurth Senior Portfolio Manager 24


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    To develop these themes, Vigeo Eiris provides IQS baseline Case study 1 assessments for each company in the theme selected. This is Engagement on bribery and corruption – based upon a long established and rigorous methodology and Swiss biotech company involves assessing the level of risk that a company is exposed to Engagement with the company was in any one area and then analyzing how the company mitigates launched in June 2017 and sought these risks. This is done via an examination of a variety of to encourage the company to achieve indicators across three key areas: an overall grade of ‘intermediate’ or above in its management of bribery and 1. The extent of a company’s policy; corruption. Specific objectives were set 2. The strength of the management systems put in place to for this target to be met and included enforce this policy; requesting the company to report details 3. The level of public reporting on corporate performance of assurance, audits, monitoring and/or board reports regarding its compliance If a company is exposed to a high level of risk and has demonstrated with bribery and corruption policies. The no evidence or only limited evidence of incorporating policies, company proved to be very reactive to management systems and reporting, then it may be identified as engagement requests and several letters a ‘laggard’ with regards to its sector peers and recommended for were exchanged throughout the year, engagement. The objective for each company is to improve their culminating in a conference call conducted performance across all three areas sufficiently. with the company on behalf of IQS. During this call and following a subsequent exchange of emails, the company provided evidence of its board reports relating to this matter as well as training programmes that it undertakes and its raft of internal policies on the issue. As a result, this engagement was bought to a successful conclusion. This engagement lasted for a total of seven months and is an example of a responsive company being willing to engage directly with its stakeholders and quickly come to a solution that is acceptable to both parties. Case study 2 Engagement on human rights – Japanese automobile company Engagement with the company began in May 2017 and focussed on encouraging them to improve their overall approach to managing human rights in their global operations. Specifically, the company was Engagement – direct dialogue with companies asked to demonstrate two of the following: For illustrative purposes only. – Training all employees on the human rights policy – Consulting independent local Theme-based Controversy-led stakeholders on human rights issues engagement engagement – Monitoring and procedures to remedy non-compliance – Identified major human rights challenges and integrated human rights into risk assessment procedures The company was sent a total of five letters and responded with four formal communications. Within this same period, a number of emails were also exchanged in order to clarify certain issues and reassure the company about – Water Encourage companies to the process. After a nine-month period – Climate change fully address allegations of of engagement, the company was able – Bribery and corruption corporate breaches of global to demonstrate that it had met all of its – Supply chain labour norms and conventions outstanding objectives and engagement standards was bought to a successful conclusion. – Human rights 25


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    Invesco Fixed Income “Invesco Fixed Income believes At Invesco Fixed Income (IFI), we believe that ESG- Engagement the analysis of environmental, oriented investments can lead to better long-term IFI utilizes peer analysis and social and governance risks risk-adjusted returns. We have fully integrated ESG risk key issue relevance to prioritize are critical components to factors into our fundamental credit research process engagement opportunities. In fundamental credit analysis. – helping to guide portfolio investment decisions and other words, our engagement As such, we have integrated issuer engagement practices. We believe, over time, strategy is directed by the ESG analysis into our credit investments in companies with stronger financial relevance and level of ESG research process using a and ESG policies are likely to be rewarded in the risk factors. Lower-risk items proprietary framework that marketplace with better risk-adjusted returns driven by can be handled via written is consistent across all asset improved profitability and lower asset price volatility. communication with investor classes. We believe that relations. Higher risk factors ESG-oriented investments The key elements of IFI’s ESG integration framework provide opportunities for can lead to better long-term are data collection, analysis and engagement. ESG direct contact with senior risk adjusted returns.” integration continues to influence our fundamental management. IFI uses its credit opinions. As such, after years of integrating technology to record issuer- Paul J English ESG into our fundamental credit research process, level ESG commentary and Senior Analyst – Head we have recently established a proprietary ESG rating engagement history, as US IG Research process. This process brings together both quantitative client interest in engagement and qualitative factors, ensuring alignment with our reporting is increasing. We existing fundamental credit research process. This recognize that industry also highlights how issuer-level ESG risk factors and engagement practices are in fundamental credit views are often interwoven. the early stages and we are committed to finding practical IFI continues to promote the integration of ESG ways to promote ESG awareness capabilities across multiple asset classes to help with management teams. clients meet these objectives and as we seek to deliver on our dual goals – maximizing risk-adjusted returns and contributing to a more sustainable future. Proprietary ESG rating process For illustrative purposes only. Invesco's proprietary ESG ratings process is rooted in data collection, historical and peer analysis, issuer engagement and awareness of external resources, providing meaningful insights into ESG factor risks. Data Analysis Resources – Bloomberg Everest MSCI/Sustainalytics – Sustainability report – Sector ranking – Identify key issues – MSCI Pillar scores – Historical trend – Controversies – Disclosure – Business involvement – Leading/lagging screens – Policy review – Methodologies – Engagement prioritization – Index eligibility ESG scorecards E, S & G factor scores 1 2 3 4 5 Overall ESG score A B C D E 26


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    Case study 1 Case study 2 Case study 3 Consideration of ESG Direct engagement Vendor due diligence The company we engaged with has an At a credit update meeting with the We raised concerns over poor MSCI entire sustainability section on their investee company’s Head of Corporate ESG ratings at a US consumer products website laying out their commitments, Finance in November 2018, we asked company in 2015. It was evident that policies, sustainability performance, if the company would consider issuing management had no awareness of the etc. along with current and historical a green bond to finance its “more ratings. In addition, management was sustainability reports (going all the way than €7bn” investments in ‘green’ unaware of the growing pools of ESG back to 2001); a climate change report technologies. The CFO questioned if investment mandates that could not buy that will be published for the 1st time there would be appetite from investors their securities in best-in-class portfolios. this summer (so the company remains in a green bond from an Automotive Since, we have witnessed improving keenly aware of their environmental OEM. Given the growth in the green labor practices, rising ESG scores and impact and making this information public bond market across industry sectors, management awareness of ESG risk to all stakeholders); and a report on the we outlined our view that there would factors in investor’s minds. indigenous rights and relationships in thebe demand, a view supported by North American Energy infrastructure, etc.other European buy side institutions in attendance. We continue to support Compare this highly visible awareness development of ESG practices at issuers and commitment to sustainability with the while encouraging the utilization of green company’s website section on “safety” financing mechanisms. which includes four different phone numbers to report suspicious activities at their pipelines, and some talking points around pipeline leaks / emergency preparedness etc. However, you have to dig to find anything sustainability / ESG related. There is one page titled “responsible energy” simply stating that the business is part of the Council for Responsible Energy, and that’s about it. 27


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    Bank Loans “ESG continues to plays a critical role in Invesco Access to issuer management teams (private side election) Senior Secured Management’s (ISSM) credit Prior to investing in a company and throughout the ownership underwriting process and is a key discussion of the company’s debt, ISSM will engage with company factor in our credit evaluation of potential management on a number of issues – including ESG. These investment opportunities. ISSM not only has had discussions are designed to enhance ISSM’s understanding of active dialog with clients regarding our approach, the long-term economic value of the company which includes but more specifically particular credits in our a thoughtful process and approach to determining whether to portfolios and/or broad sector concerns. ISSM invest in a company. Each credit analyst spends a great deal of provides regular commentary on issuers clients time getting to know borrowers, borrowers’ management teams, have flagged for discussion.” sponsors, key suppliers and customers etc. These company meetings give investment teams a better understanding of the Kevin T Egan long-term nature of the business, its key drivers, competitive Senior Portfolio Manager, ISSM position and the achievability of management goals. Proactive approach ISSM's (private side) insight, communication and exposure, provides the team with an intimate look at the company’s underlying activities which allows for an opportunity to incorporate elements of ESG into ISSM’s investment process. Additionally, given our presence and influence in the global loan market, ISSM employs a proactive approach as a debt investor. ISSM has the ability to address concerns about a particular issuer up-front with company management, the private equity sponsor and arranger before a new transaction is brought to market. In addition to the discussion on ESG issues, ISSM currently utilizes MSCI watch list with links to research for CCC-rated assets as well as the full access to the broader MSCI ESG research universe. This resource helps facilitate Credit Analyst and Investment Committee discussion around ESG concerns. ISSM is currently managing two unique ESG segregated accounts. As part of the Investment Management Agreement (IMA), both ESG mandates are managed using exclusionary lists. For these two ESG portfolios, ISSM regularly identifies credits outside of the exclusion lists for proactive dialogue. Integrating ESG in ISSM's credit evaluation process For illustrative purposes only. Key credit considerations Risk ratings Returns – Management Internal default rating Spread to average – Cash flow analysis – The default rating is on a scale of 1 to 10, with 1 being the lowest life (STAL) – ESG considerations and 10 being the highest probability of default – Industry position and – Two quantitative models are used to support the basis of the internal – dynamics default rating, with a qualitative overlay Rock bottom – Sponsors and arrangers spread (RBS) – Capital structure = 1 10 RBS premium New investment grade Default – Capital structure Internal recovery rating in the event of default – Asset coverage, – The recovery rating is on a scale of A to E, with 'A' being the highest enterprise value and 'E' being the lowest level of recovery in the event default – Insolvency, restructuring regime A E 100% 0% 28


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    Case study 1 Case study 2 Case study 3 ESG into investment decision ESG into investment decision ESG into investment decision Engaged with a large manufacturer and Interacted with a large scale gun We engaged with a specialty distributor of sodium cyanide exclusively manufacturer and seller with $330MM pharmaceutical company focusing on for use in gold and silver mining through in Term Loans (TLB) and $250mm in developing and commercializing products a process known as leaching, gold mining Secured Notes. The company manufactures in niche therapeutic areas; $575m companies place mined ore in contact guns and ammunition sold to the public. of Incremental Senior Secured Credit with a dilute solution of sodium cyanide Gun related violence in America has Facilities was the deal size. which causes gold to slowly separate from been growing concern for many years. A the mined ore. In use since the 1880’s, proliferation of mass shootings in recent The company's leading product (generating and the dominant extraction technology years has further heightened this concern. >50% of revenues) was a drug used as for several decades, cyanide leaching is a treatment for narcolepsy. At the time considered much safer than liquid mercury, Outcome: ISSM ultimately declined this drug was the only US Food & Drug which at one time was the primary gold investing in the loans due to several factors: Administration (FDA) product approved to extraction technique. Because cyanide is – Regulatory and product liability concerns treat the two major indications associated toxic in large doses, its use is regulated in – Volatile supply/demand dynamics with narcolepsy: excessive daytime most jurisdictions, including Nevada where – Decision not to support the business sleepiness and cataplexy (sudden loss the majority of the company’s customers under current laws of muscle tone). are operating. Despite its high toxicity, – Troubling gun related violence in there have been no documented human the US The company's leading drug was derived deaths in North American mining from from sodium oxybate and was essentially cyanide poisoning in the last 100 years. a medical form of GHB, better known as The more salient environment concern the date-rape drug. The manufacturing is cyanide leakage from mining sites into and distribution of this drug was heavily surface waters, as it is toxic to wildlife. regulated due to the potential threat for For this reason, the industry is regulated illicit use in social settings, and Invesco by numerous state and federal agencies was concerned about risks associated in the US including DOT and EPA, and with a breakdown in the pharmaceutical has adopted the International Cyanide company’s supply chain controls. Management Code as a set of standards designed to ensure safe manufacturing, Outcome: ISSM ultimately declined transportation, and use of sodium cyanide. investing in the pharmaceutical Note that the company has a strong health company’s loans due to the headline and safety record. risk associated with its leading product (as discussed above), the risk of generic Outcome: ISSM ultimately approved competition for the leading product (with investing in the company due to the three generic competitors challenging company’s strong market share, high the company’s IP at the time of the deal), barriers to entry, and contracts that and the significant revenue concentration provide good visibility to future revenues. in two products (accounting for >85% of Mindful of ESG concerns, ISSM determined total revenues on a combined basis). that cyanide leaching is an accepted and regulated practice, and also that the company is committed to upholding its health and safety responsibilities. 29


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    Multi Sector The Belt and Road portfolio management “The Belt and Road portfolio Case study (part of Invesco Fixed Income), has fully management team believes Investment decision – Indian natural integrated ESG risk factors into their that incorporating sound resource company fundamental credit research process. In environmental, social This company had an improving addition, when the team makes country and governance (ESG) fundamental outlook and attractive allocation decisions, they also take into responsibilities into fund relative valuation based on our credit consideration sovereign Environmental, investment process can analysis. At the time when the investment Social and Governance (ESG) factors positively impact the value team was considering this bond, it still qualitatively and quantitatively in the it provides to clients and provided +100bps excess value and thus portfolio construction process. The team mitigate risks faced by was a good buying opportunity. However, endeavour to avoid the worst-in-class investing into China’s Belt the ESG MSCI rating of this issuer is at ESG sovereign and corporate bond and Road region.” “CCC”, as governance concerns and issuers for the portfolio. numerous controversial incidents may Ken Hu attest. IFI’s internal ESG view was even The team looks into the ESG factors of CIO, Fixed Income, more negative than MSCI's, underlined a country with a time horizon of 3 to 5 Asia Pacific by the recent 13 deaths and more years to be in sync with its domestic cycle than 50 injured by riot police during an of elections/senior government officer environmental protest last May at one appointments. Against the backdrop of a of the company’s facilities. One of its country’s domestic politics and geopolitical subsidiaries had begun construction of a relationships, its ESG risks are weighed new smelter on the edge of a residential against its sovereign credit risk premiums town, almost doubling their capacity, but that are being priced in by the market. residents argued the existing smelter had The team underweights those countries continuously polluted their water and air whose ESG risks are underestimated by since it was established. Residents claimed the market. it had led to respiratory and skin problems, fainting and other illness, especially Opposite are the typical quantitative and among children, and that its waste was qualitative variables that are used to being released into an area of coral reefs gauge ESG factors of a country. and mangrove forests. As the investment team endeavour to avoid the worst-in-class ESG sovereign and corporate bond issuers, the team decided to pass on the bond despite the attractive short-term relative value. The team truly believes that ESG consideration will achieve better long-term risk adjusted returns. Old Silk Route between China and India. © Shutterstock. 30


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    Domestic and geopolitical analysis For illustrative purposes only. Macroeconomics, Environmental – Yale Environment Performance Index financial factors – Notre Dame Global Adaptability Index – Pollution – Climate change – Energy reliance – Ecosystem quality – Repletion of natural resources Social – United Nations' Human Development Index – Notre Dame Social Readiness Index – Education – IT infrastructure and innovation – Social safety nets – Health and safety – Gender inequality – Income inequality Governance – Corruption Perception Index by Transparency International – The World Bank's six Worldwide Governance Indicators – Our engagements with government officials, political consultants, journalists credit rating agencies and MSCI-ESG 31


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    Real Estate Real Estate’s ever-growing environmental relevance “ESG is increasingly being Case study 1 is summarized in numerous sustainability metrics, integrated into real estate Hotel sustainability in action benchmarks and certifications. Such measurement and investment decisions. Given Invesco Real Estate acquired the QO Hotel monitoring have helped foster strategies that reflect the enormous contribution in Amsterdam, part of the Intercontinental a building’s complete lifecycle, with many investments that buildings can make to Hotels and Resorts stable, which represent considering environmental concerns during every both augmenting and tackling a new breed of properties that are being phase from acquisition, construction/ development, climate change, a genuinely built with sustainability in mind: 80 percent ongoing management/operations and disposal in a holistic and authentic of the 288- room property’s lighting is bid to generate benefits throughout the process. approach is needed, one that sourced from natural daylight and it includes champions the importance of sustainable materials for all construction For investment managers it is important to establish wide-ranging engagement and and day-to-day operations such as a green precisely what these instruments, tools and initiatives recognizes that outcomes are roof, energy and water efficiency, and lower offer in terms of genuine insight. We believe they as important as outputs.” waste and carbon emissions. should foster proactive engagement on material ESG issues in which dialogue, transparency and the Michael C Kirby potential for change can be considered. For example, MD Asset Management Case study 2 to purchase a property that scores well on a number The value of tenant engagement of environmental measures, as opposed to one that An authentic approach to ESG requires falls somewhat short of a required or recommended engagement with tenants and occupants, standard, success or failure has been determined since how they use a building space entirely by headline environmental data, which can goes a long way towards determining its happen if outputs are prized over outcomes. performance. Engagement can take many forms and it is essential to educate them Sustainability has also become part of the agenda on, for example, how a property makes use for our European hotel investments, by following of green technology. In Warsaw, Poland, a top-down and bottom-up sustainable strategy our office asset engages with tenants and tracking of industry benchmarks. We pursue through its tenant satisfaction survey, nationally recognized sustainable building ratings, thus actively listening to the needs of its adopt physically responsible green building practices occupiers. The outcome is that a successful and reviews, and implement initiatives applicable to tenant wellbeing and educational program each property. It is also a consideration within our has been put in place. investment process and is already part of our due diligence process. It is vital that ESG does not become a box-ticking exercise. It is not enough merely to be seen as green and accumulate actionable data and then decide to take meaningful action. What is required is a holistic view, underpinned by the willingness to act and a capacity to effect positive change. This is where investment managers, a determination to engage and the power of active ownership can make an enormous difference. 32


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    The QO Hotel exterior features a series of fully responsive thermal panels that help control the temperature inside.


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    Unit Investment Trust Finding opportunities in the ESG space “The UIT team sees investors integrating The Invesco Unit Investment Trusts (UIT) team has a ESG in a myriad of ways, including dedicated ESG strategy that provides an opportunity investing with values, impact investing to access a growing market segment that allows and using ESG to help manage risk.” investors to invest beyond profit and returns, with the goal of long-term value creation aligned with Nathan Miller environmental, social and corporate responsibility. Equity Portfolio Manager, UIT The strategy seeks to provide the potential for capital appreciation and current income by investing in a portfolio of US listed companies demonstrating highly favourable ESG characteristics and practices. To achieve this, two common ESG investment methods are incorporated within the process: – Best-in-class: Our best-in-class approach helps define our selectable universe. However, rather than just including companies that are “above average” from an overall ESG rating/score, the strategy seeks companies that are consistent leaders across environmental, social and corporate governance factors. The strategy seeks to identify leaders who are increasing their level of ESG engagement, rather than companies that excel at one or two things while ignoring other areas that could leave them open to controversy. – ESG integration: The UIT team also believes in the value of ESG integration within the fundamental investment framework. We use this method to build the final portfolio by incorporating ESG data with fundamental financial analysis. We believe that combining these approaches allows for a diversified portfolio with broader sector representation. ESG selection process For illustrative purposes only. Fundamental ESG analysis/ Evaluate a company’s ESG profile primarily through Selectable universe examination of the company’s environmental impact, social values and governance practices to focus on companies demonstrating highly favourable ESG practices Fundamental financial Identify companies exhibiting attractive valuations, analysis history for above average growth, generating attractive operating and free cash flows, history of maintaining a strong balance sheet as well as making disciplined capital management decisions, and a history of above average returns on invested capital ESG commitment From the selected companies, focus on companies analysis with generally stable or increasing levels of commitment towards their ESG practices 34


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    Exchange Traded Funds (ETFs) Invesco is one of the world's largest ETF providers, Investing in water managing US$190bn1 in assets. ESG is an integral – According to United Nations Global Environment part of our ETF strategies, with leading examples Outlook by 2030 global demand for water could including ETFs focused on clean energy, timber, exceed supplies by 40%. As the world population water, solar and clean technology. grows, the demand for clean water also grows. Water is one of the most basic human rights and Clean energy investments the global water crisis is taking shape. – Energy prices are volatile and hard to predict: – According to NASDAQ, infrastructure is outdated Energy prices fluctuate so knowing when to lock and will require and estimated $1 trillion over the in the best price, and for how long, is a perennial next 25 years for maintenance and expansion of challenge for businesses. Unless, that is, you are the drinking water system in the US alone. considering signing a long-term Power Purchase – Innovation in water conservation is taking Agreement with an energy provider that specializes water digital. The impact of digital solutions is in predictable renewable energy – or install your substantial, particularly for capital constrained own clean energy infrastructure. Both options water utilities that currently lose billions of gallons will help businesses avoid that energy price of water around the globe every day. roller-coaster and save money over time. – Innovation will drive the water conservation – Energy choices, competition go hand-in-hand: efforts and the companies that foster this Knowing how to maximize the benefits of your innovation will be critical to bring the solutions energy choice requires a thorough analysis of your to a huge market. As global demand increases, energy needs and appetite for risk. conservation modernization will be critical to – Business needs and policies must be aligned: provide the supply to meet the demand. Thirty-one states in the US don’t offer state tax credits for solar panels, and seven states have yet Solar energy to let companies sell power back to the grid – to – Demand for solar energy is growing. Corporations highlight a few barriers. are realizing the benefit of purchasing clean energy. In 2018 corporations doubled the amount Investing in timber of clean power purchased through long-term – Timber offers an uncorrelated, high-returning asset contraction, more than doubling 2017’s total. class for diversification and long-term income. – Once thought for the developed world, solar – Unlike other agricultural commodities, where is now tapping into emerging market growth the crop is ripe just once and then you have to potential. African businesses are utilizing solar harvest it, you don’t have to harvest timberland power to help provide a reliable energy source. every year. In a bad year, say, when timber prices – Globally many countries are eager to meet their are low, you can always “bank it on the stump.” carbon-reductions targets under the Paris COP21 In fact, older trees provide higher-quality wood. global climate agreement. While timber companies will see inventories increase during bad times, the value of their Clean technology inventory will steadily increase in value – Global demand for clean technology in agriculture, – Increasing demand and shrinking supply means air purification, energy, transportation, water rising prices: The world’s supply of timber is purification and recovering and recycling decreasing as governments ban the logging of old materials is increasing. The developments in growth forests and logged forests are converted technology in these industries will drive the future to agricultural land or pasture. At the same for cleaner productions and more sustainable time, developing countries are increasing their approaches to utilizing resources. consumption of raw lumber. Chinese tropical log – Agriculture: With the growing population and imports alone grew 35% between 2009-2010. the effect that large-scale farming has on the Plantation timber can help meet this growing environment, advances in this industry will drive the demand while easing the pressure on biodiverse future to more efficient and eco-friendly farming old growth forests. – Energy-related: As the world lives in a digital world, many developments in efficient grid management and related software is critical to monitoring power quality and outages – Transportation: More efficient forms of transportation, Crescent Dunes solar energy project, Tonopah, Nevada. not just electric vehicles, but ride sharing, public © Getty Images. transportation and logistics technologies 1 As of 31 December 2018. 35


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    ESG risk framework ESG investing offers a holistic framework ESG risk framework for risk assessment which is becoming an For illustrative purposes only. ever-more important theme in investment management. There is broad acceptance of the need to take such criteria into account, as evidenced by, the widespread adoption of the PRI’s six Principles for responsible investment. 04 01 Engage Assess Active ownership Qualitative inputs – Proxy Voting – Industry/Region level/Global – Democratized ESG trends – Decentralized – Company level ESG risks/ – Engagement opportunities – Direct – Controversies – Collaborative – Quality of management – Letter writing – Sources: Company ESG – Lobbying disclosure/Third-party ESG – Litigation research – Onsite visit 03 02 Integrate Evaluate Investment decision Quantitative impacts – Investment Committee/ – Integrated financial Fund Manager forecasting of – Buy/increase weighting – Revenue – Hold/maintain weighting – Op cost/margins – Sell/decrease weighting – Asset book value – Don’t invest – Capex – Portfolio ESG attribution – Discount rate: Cash flows – Continuous portfolio – Fixed Income monitoring – Default probability – Credit quality evaluation Looking ahead, ESG investing may – Liquidity be capable of mitigating the risks of adverse outcomes. 36


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    Viewing investments using an ESG risk framework. © Getty Images.


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    Thematic investing As responsible investment is continuously gaining Climate Change in importance, the macro thematic landscape on This represents an urgent and irreversible threat to environmental, social, and governance topics is human society, such as the heatwave in northern evolving. Change is driven by numerous stakeholders: Europe during the summer of 2018. The financial regulators, institutional asset owners, retail sector plays a pivotal role in combatting climate change client demand, data vendors, non-governmental by demanding increased transparency. Environmental organizations (NGOs), initiatives and advocacy impact reduction strategies have been developed by networks such as the PRI. almost half of corporate issuers worldwide.1 The macro themes can become a blueprint for how Water Scarcity asset managers determine their focused responsible Water is not only essential for human health – it’s investment (RI) strategy. Invesco has identified 15 key also a crucial resource for agricultural production, themes that will continue to drive efforts in RI space energy generation, industry and manufacturing. In and will shift how the capital markets respond. Europe, water policy aims to manage household water use, degradation of coastlines, marine life, pollution, A number of investment themes are based on ESG drought and flooding. issues, including clean tech, green energy and sustainable forestry and agriculture. Thematic Plastics investing is not, of course, confined to ESG issues. There are obvious benefits of using plastic: durability, safety, hygiene, and packaging weight. Unfortunately, one consequence of our “disposable” lifestyle is that single-use plastic comprises 50% of marine litter. In 2018, the European Commission adopted a strategy for a new plastics economy.2 Inclusive Growth This aims to reduce poverty and address income inequality. Europe is well represented in the World Economic Forum’s Inclusive Development Index (IDI) with 9 of the top 10 most inclusive advanced economies and 6 of the top 10 most inclusive emerging economies, but the degree of success varies widely.3 Human Capital Development Human Capital is an important long-term investment Top: Glacier tongue, Kyrgyzstan: Global warming has of public money for the future of a country’s led to c25-35% surface loss in the country's glaciers. population and economy. Europe is not a leading © Getty Images. region among developed countries in mathematics, sciences, or reading.4 While unemployment has been Bottom: Data privacy – billions of us rely on robust decreasing recently, it remains higher among low information technology. © Getty Images. educated workers and young adults. Gender Diversity A contributing factor to the gender pay gap is the lack of women in senior positions within companies. On average, women in the European Union earn 16% less than men.5 One attempt to combat this issue in the UK is the Equality Act 2010’s requirement of companies to annually disclose their gender pay gap, effective April 2018. Data Privacy Data breaches are soaring in volume and complexity and institutional investors have started taking stronger interest in this area of data privacy risk. The EU Parliament’s General Data Protection Regulation6 to better protect the rights of its citizens came into force in 2018. Technology & Artificial Intelligence (AI) AI is expected to impact nearly all industries and geographies over the next few decades. The EU has more than 400,000 openings for Information Communication Technology Specialists, but there is a lack of digital skills.7 The European Commission has partnered with European industry to form the world’s largest civilian-funded robotics innovation programme.8 38


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    Transparency, Disclosure & Regulatory Requirements Corporations around the world are reporting with heightened Transparency to meet increased regulation and demand from shareholders regarding ESG activities. There are more than 400 sustainability reporting requirements in place globally.9 In Europe, 16 countries have both pension fund regulations related to ESG and government-imposed corporate ESG disclosures in place or in progress.10 Board Accessibility and Accountability Europe was the location of 20% of activism activity globally during the 2018 proxy season.11 Shareholders can hold directors accountable by elections. However, German companies have five-year terms; on the other end of the spectrum is Switzerland, which has a legal Fearless Girl, Wall Street – highlighting workplace limit of one year.12 and boardroom gender diversity. © Getty Images. Corporate Governance Diversity Europe leads the global regions with 22.6% of board seats held by women. This can be attributed to various forms of gender quotas in place across 14 countries in Europe.13 Emerging Markets Despite relatively higher risk exposure to ESG issues, the lack of high-quality corporate disclosures has led to exaggeratedly low ESG scores and has so far restricted rigorous application of ESG to Emerging Markets portfolios. This is expected to improve with regulatory momentum and accurate corporate disclosures. 1 Source: HSBC Sustainable Financing Survey, Fixed Income Sustainability Investing global survey of issuers, investors, and NGOs ESG credentials have a high positive correlation with conducted in 4Q2016 across 20+ countries credit quality of fixed income instruments worldwide, conducted by East & Partners. studies suggest. Invesco Fixed Income’s research shows 2 Source: European Commission A European that, compared to the general emerging markets debt Strategy for Plastics in a Circular Economy 2018. index, the ESG subset performed comparably in up 3 Source: World Economic Forum The Inclusive markets and outperformed in down markets.14 Development Index 2018. 4 Source: European Commission Assessing the Demographic Shifts Efficiency of Public Spending on Education Asset owners around the world are demanding more November 2017. 5 RI options. This is especially true in Europe with Source: European Commission 2018 Report on 82%15 of institutional asset managers and owners Equality between Women and Men in the EU. 6 incorporating ESG into their investment decision- European Union GDPR (https://eugdpr.org/) making process and 75%15 of retail investors saying 7 Source: European Commission Digital Skills and that sustainable investing is more important today Jobs Coalition: In a nutshell 2018. 8 than five years ago. Source: https://www.eu-robotics.net/sparc/ about/index.html as of 13 September 2018. 9 Shift to the Social Source: PRI responsible investment regulation Macroeconomic themes underscore the increasing database as of 27 August 2018. 10 importance of the “S” factor in RI. In 2017, 77% of Source: PRI MSCI Global Guide to Responsible the largest companies in each European country Investment Regulation August 2016 10 JP issued Corporate Social Responsibility reports.16 While Morgan Proxy Season 2018. 11 demand continues to grow for exclusionary portfolios Source: JP Morgan Proxy Season 2018. 12 based on social values, asset managers must also Source: State Street Global Advisors Board demonstrate increasingly sophisticated approaches to Accountability in Europe: A Review of Director RI combined with active ownership.17 Election Practices Across the Region May 2018. 13 Source: Deloitte Women in the boardroom: A global perspective 5th Edition 2017. 14 Source: Invesco Global Sovereign Asset Management Study 2017. 15 Source: BNP Paribas Great Expectations for ESG: What’s Next for Asset Owners and Managers 2017, a global survey of institutional asset managers and owners. 16 Source: Schroders Global investor survey; Global perspectives on sustainable investing 2017, a global survey of retail investors. 17 Source: KPMG The road ahead: The KPMG Survey of Corporate Responsibility Reporting 2017. 39


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    Governance & Proxy Voting Chicago City Hall rooftop garden – improving air quality and reducing urban heat. Chicago became the first city treasury in the world to sign onto the PRI in 2018. © Getty Images.


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    LE au Pa


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    Good governance The importance of good corporate governance does not rely on Active ownership means that we take a empirical evidence for support, in Invesco's view. Good corporate long-term, high quality, high conviction governance (strong and accountable boards, high performance investment approach. This involves cultures, strong risk frameworks, diverse boards, etc.) leads, we purposeful engagement with corporates believe, to strong financial results. and proxy voting. The key inputs to this process include our ongoing engagement As an institutional investor, our first mandate is to generate strong with corporates, their boards and advisory returns for clients. This is achieved by investing in high quality firms; our on-site due diligence and our corporate issuers that demonstrate good corporate governance. own internal governance committees. As stewards of good governance, our fund management teams frequently engage with and visit portfolio companies, challenge boards, and drive for change where and when it is appropriate. Invesco’s corporate stewardship programs focus on human capital development and our responsibility to help sustain a healthy, clean environment for future generations. We are committed to fostering greater transparency and continuous improvement with regard to responsible investment and corporate stewardship within our business. Invesco’s Corporate Responsibility Committee (CRC) includes executive management sponsorship and representation, oversees and drives the company’s global corporate and investment stewardship programs and policy. The committee, working in coordination with global work streams, drives the strategy, oversight and governance of our internal programs and demonstrates Invesco’s broad executive leadership commitment to responsible investment. The CRC provides direction to Invesco’s investment and corporate stewardship leaders on core ESG topics, participation in industry advocacy and policy efforts and participation in charitable and community organizations to enhance our impact in sustainable global efforts. Invesco Corporate Responsibility Committee (“CRC”) For illustrative purposes only. Martin L. Flanagan Chief Executive Officer Loren Starr Greg McGreevey Andrew Schlossberg Sponsor SMD, CFO Sponsor SMD, Investments Sponsor SMD, Head of Americas Investment and Corporate Stewardship Bonnie Saynay/Denise Harrison Co-Chairs Corporate Responsibility Committee Global Investment Council Investment Corporate Social Financial Messaging/ Product Legal and Stewardship Responsibility Disclosures/ Distribution Strategy Compliance Executive Sponsor Executive Sponsor Accounting Strategy Executive Sponsor Executive Sponsor Executive Sponsor Executive Sponsor 42


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    Global Invesco Proxy Advisory Committee Dedicated ESG focused groups Guided by our philosophy that investment Broadly governed by the CRC, Invesco teams should manage proxy voting, Invesco has focused ESG groups at various has created the Global Invesco Proxy Advisory sectors of the organization to ensure Committee (“Global IPAC”). The Global IPAC there is a purposeful, holistic and is a global investments-driven committee impactful approach and integration comprised of representatives from various towards responsible investing. investment management teams and Invesco’s Global Head of Responsible Investment. The Global IPAC provides a forum for investment teams to monitor, understand and discuss key proxy issues and voting trends within the Invesco complex. Absent a conflict of interest, the Global IPAC representatives, in consultation with the respective investment team, are responsible for voting proxies for the securities the team manages (unless such responsibility is explicitly delegated to the portfolio managers of the securities in question). In addition to the Global IPAC, for some clients, third parties (e.g., U.S. mutual fund boards) provide oversight of the proxy process. The Global IPAC and Invesco’s proxy administration and governance team, compliance and legal teams regularly communicate and review this Global Proxy Policy and the operating guidelines and procedures of each regional investment center to ensure that they remain consistent with clients’ best interests, regulatory requirements, governance trends and industry best practices. Given this Policy and the operating guidelines and procedures of each regional investment center (which are pre-determined and crafted to be in the best economic interest of clients), applying them to vote client proxies should adequately resolve any potential conflict of interest in most instances. As Dedicated ESG focused groups an additional safeguard, persons from For illustrative purposes only. Invesco’s marketing, distribution and other customer-facing functions may not serve on the Global IPAC. Corporate Invesco Real Estate Sustainability Focus Responsibility Group Committee Invesco Fixed Income ESG Focus Group Global Investments Sub-Committee on Council Responsible Investment Cross Border Cross Border Controversial Weapons Responsible Investment Implementation Group Implementation Group Product Strategy ESG Focus Group 43


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    Decentralized Proxy Voting A dedicated proxy voting policy is in Invesco believes the voting of proxies Invesco Proxy Voting 20181 place that sets forth the framework for should be managed with the same care our corporate governance approach, as all other elements of the investment broad philosophy and guiding principles process. The proxy voting process at that inform the proxy voting practices of Invesco’s investment teams around the world. Invesco, which is driven by investment professionals, focuses on maximizing long-term value for our clients, protecting 99.96% clients’ rights and promoting governance Meetings voted structures and practices that reinforce the accountability of corporate management and boards of directors to shareholders. Invesco has an investor-led, investor- driven approach to proxy voting. We 74 believe that aligning the investment Markets decision with the proxy voting decision results in robust voting outcomes for our clients. One of the most important foundations of Invesco's ESG efforts is a highly flexible proprietary proxy voting platform actively used in the US for over 4 18,500 years and rolled out globally in early 2017. Meetings This enables fund managers to vote in an efficient manner, increase transparency, share knowledge and effectively influence corporate practices and behaviors. The Invesco fund manager portal was 100% granted a US Patent by the USPTO and Support of proxy access is awaiting patent in India. We recently proposals integrated third party ESG research and ratings into the platform enabling our fund managers to make well-informed, thoughtful and independent proxy investment decisions. 14.7% In line with Invesco’s investor-led, investor- Increase in support of board driven approach to ESG and responsible diversity proposals investment, we wanted our managers to make their own decisions in AGM votes, so that their votes reflect their own opinions. Most importantly, we wanted to create a global knowledge-share platform that could be leveraged by fund managers to build the 9.7% institutional base of knowledge on corporate Increase in overall support of issuers. This is our differentiating shareholder proposals democratic approach to proxy voting. 21% Supported 2 degree change scenario proposals 1 Voting from 1 July 2017 to 30 June 2018. 2 Voting from 1 July 2016 to 3 30 June 2017. Voting from 1 January 2016 to 31 December 2016 50% 4 Votes that are not cast as FOR Supported all activist campaigns may be “Against”, “Do Not Vote” with 8% increase since last year or “Abstain”. Invesco built its own proprietary proxy 5 Frequency on advisory vote to voting platform marking a fundamental approve the compensation of change in how we think of voting and 6 executives (Say on Pay). Invesco Unit Investment Trusts; Invesco Senior Secured Management. governance. The Invesco fund manager portal differentiates our firm by putting the proxy voting decision in the hands of 30% fund managers which ultimately leads to Supported data security Stats excludes exceptions such as informed, timely, and robust proxy voting and privacy proposals share-blocking, etc. outcomes for our clients. 44


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    Invesco Proxy Voting 2018 By voting location % Meetings 20181 Management Support – Regional % Meetings 20172 % Support in-line with mgmt. 20181 % Support in-line with mgmt. 20172 Americas UK and Continental Asia Pacific Others6 Europe 88 88 Global 67 11 16 6 90 90 Americas 89 83 UK and Continental Europe 65 11 16 8 90 86 Asia Pacific Environmental and social shareholder proposals voted FOR (%)4 20181 2018 Voting instruction 20172 (numbers of proposals and %)1 59 Environmental 0.7 Abstain Proposals 1,408 59 53 Political 7.2 Against Lobbying 14,680 53 46 Board 87.7 For Diversity 179,979 31 46 GHG 0.6 One year5 Emissions 1,130 48 21 Climate 2.5 Do not vote Change 5,197 43 11 Labour 1.3 Withhold Issues 2,757 8 Key shareholder proposals voted FOR (%)4 20181 Management proposals 20181 20172 voted AGAINST (%) 20172 20163 100 Proxy Access 14 Say on Pay 84 81 81 Corporate 22 Governance 66 71 53 Separate Chair/ 6 Director CEO Related 56 57 56 Compensation 15 43 60 45


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    Shareholder engagement One of Invesco’s key priorities is ensuring Industry approach on engagement (general market trends, %) robust outreach and engagement with Source: Morrow Sodai's 3rd Annual Institutional Survey 2018. shareholders and the owners of the company. For illustrative purposes only. We do this in order to: When voting for directors 51% place – Understand governance practices and high importance on the quality of compensation programs engagement with shareholders – Determine which issues are important to our shareholders and share our views on those issues – Identify emerging issues that may impact our business and influence our practices Invesco leadership in asset ownership When engaging with companies 59% strategies is intensifying and developing say that board skills and experience toward collaborative approach as we is an important factor continue to engage with companies to understand and support their management of sustainability risks and opportunities. Invesco’s work with corporates is aimed not only at advocating for clarity and transparency, but also at promoting ambitious social and environmental 73% subscribe to ESG research targets globally, in line with the growing vendors interest and accountability in sustainability- focused proxy voting policies and direct engagements, supported by investor organisations like the PRI, Stewardship Codes, regulations such as the EU’s Shareholder Rights Directive and initiatives like The Task Force on Climate-related Disclosure’s (TCFD) recommendations. When engaging with companies 54% say that climate risk disclosure is an important factor When engaging with companies 27% say that board diversity is an important factor 60% will pursue engagement with companies that do not allow direct communication between directors and shareholders 12% are willing to collaborate with other shareholders on initiatives Truly active managers view their roles as business owners, not just as shareholders. The very spirit of responsible investment is the opportunity to engage, drive change and deliver strong investment returns for clients in a sustainable manner. 46


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    How we engage Our practical guide to active ownership in listed equity 1. Investor relations – Portfolio managers actively involved in engagement and 2. Shareholder proxy voting decisions 3. CEO or Board of directors – Investment teams actively joining engagement meetings 4. Proxy Solicitors and roadshows 5. Activists – Decentralized engagement platforms and frameworks 6. Service providers – Investor's discretion to influence portfolio holdings based on interaction, outcomes and voting Our fund managers driving engagement in 2018 – Considering active ownership as a mechanism to assess – Direct corporate issuer engagement potential future investments – Letter writing campaign – Engagement services vendor – The implementation of ESG objectives into direct property management – Support Sustainability Reporting proposals – Collaboration with activist campaign Shareholder engagement 2018 (%) Source: Invesco, as of December 2018. 89 Of engagements took place to discuss executive compensation topics (the most common topic) 78 Of times the company reach out to us directly 51 Of engagements took place to discuss environmental/sustainability topics 47 Of engagements took place to discuss corporate goverance topics 30 Offered CEO/Chairman and Directors to speak to our portfolio managers, analysts and governance team 23 Of engagements took place to discuss social related topics 22 Increase in engagement requests received 13 Of engagements occurred by proxy solicitor firms 6 Of engagements conducted by activists 47


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    Case studies Proxy Voting case study 1 Proxy Voting case study 2 Proxy Voting case study 3 Company Company Company Energy/Oil, Gas and Consumable Fuels Energy/Oil, Gas and Consumable Fuels Consumer Staples/Food Processing Country Country Country Australia USA USA ESG consideration ESG consideration ESG consideration Environmental Environmental Environmental – Climate change and advocacy. – Climate change and advocacy. – Climate change and advocacy. Method/Research Method/Research Method/Research – Annual meeting in 4th Quarter 2018. – Annual meeting in 2nd Quarter 2018. – Annual meeting in 1st Quarter 2018. – Invesco was a <1% holder and not a – Invesco was a Top 20 ranked holder – Invesco was a <1% holder and not a rank holder. with 1-2%. rank holder. Proxy Voting Proxy Voting Proxy Voting – Proxy Proposal – Approve Contingent – Proxy Proposal – Shareholder – Proxy Proposal – Shareholder Resolution: Public Policy Advocacy Proposal re Report on Methane Proposal to Implement a Water on Climate Change and Energy by Emissions Management and Quality Stewardship Policy. Relevant Industry Associations. Reduction Targets – Shareholder proposal regarding climate – Shareholder proposal regarding climate – Shareholder proposal regarding climate change and energy advocacy report. change and energy advocacy report change and energy advocacy report. – All Invesco locations voted AGAINST – All Invesco locations voted AGAINST – All Invesco locations voted AGAINST management. management. management. – ISS and GL recommended AGAINST – Inquisitional Shareholder Services (IIS) – ISS and GL recommended AGAINST management. and Glass Lewis (GL) recommended management. – ISS: The company does not AGAINST management. – ISS: A vote FOR this resolution is disclose the policies, initiatives, or – ISS: A recommendation FOR this warranted, as comprehensive disclosure management mechanisms it has proposal is warranted, as additional of the company's methane reduction implemented to address runoff and information regarding the company's policies, including performance other water quality issues from public policy advocacy on climate metrics and oversight mechanisms, company-owned operations and change and energy policy could be would enable shareholders to better contract farms. Also, there has beneficial for shareholders. understand how the company is been litigation as well as a number – GL: The requested disclosure could managing its methane emissions of controversies regarding water help the company mitigate potential and assess the effectiveness of the contamination from company-owned reputational risks. company's related efforts. and contracted facilities. – GL: Shareholders would benefit from – GL: Adoption of this proposal would enhanced disclosure of the company's ensure that the company was policies, actions, and plans related to mitigating significant risks to long- methane emissions management. term shareholder value. Outcome Outcome Outcome Proxy Proposal – Approve Contingent Proxy Proposal – Shareholder Proposal Proxy Proposal – Shareholder Proposal Resolution – Public Policy Advocacy on re Report on Methane Emissions to Implement a Water Quality Climate Change and Energy by Relevant Management and Reduction Targets. Stewardship Policy. Industry Associations. 46.32% 48.62% 15.83% FOR (AGAINST management) = Rejected. FOR (AGAINST management) = Rejected. FOR (AGAINST management) = Rejected. Invesco supported the shareholder proposal. Invesco supported the shareholder proposal. Invesco supported the shareholder proposal. 48


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    Proxy Voting case study 4 Proxy Voting case study 5 Proxy Voting case study 6 Company Company Company Information Technology/Software Consumer Staples/Food and Consumer Discretionary/ Internet and Staples Retailing Direct Marketing Retail Country USA Country Country Canada USA ESG consideration Social ESG consideration ESG consideration – Gender Pay Equity. Social Governance – Gender Pay Equity. – Separate Chair and CEO. Method/Research – Annual meeting in 4th Quarter 2017. Method/Research Method/Research – Invesco was a <1% holder and not a – Annual meeting in 3rd Quarter 2017. – Annual meeting in 2nd Quarter 2018. rank holder. – Invesco was a <1% holder and not a – Invesco was a Top 20 ranked holder. rank holder. Proxy Voting Proxy Voting Proxy Voting – Proxy Proposal – Report on Gender – Proxy Proposal – Adopt Policy as – Proxy Proposal – Require an Pay Equity. well as Objectives with Respect to Independent Board Chairman. – Shareholder Proposal Regarding the Representation of Women on the – Shareholder Proposal to Require Report on Gender Pay Equity. Board and in Management Positions. Independent Board Chairman. – ISS and GL recommended AGAINST – Shareholder Proposal Regarding – All Invesco locations voted AGAINST management. Report on Gender Pay Equity. management. – ISS: A vote FOR this resolution is – ISS and GL recommended AGAINST – ISS and GL recommended AGAINST warranted, as the company lags management. management. its peers in addressing gender pay – ISS: A vote FOR this resolution is – ISS: A vote FOR this proposal is disparity at the company. By not warranted, as shareholders would warranted as the lead director keeping pace with its peers, the benefit from additional information role does not present a sufficient company is put at a competitive about how the company is ensuring counterbalance to a combined CEO/ disadvantage in the recruitment and that female candidates are included chairman position. Specifically, the retention of employees. among prospective board nominees lead director's role lacks approval – GL: Increased disclosure would allow and executive officer appointments. authority over meeting agendas, shareholders to fully understand the – GL: Adoption of this proposal would schedules and materials sent to steps the Company is taking to ensure ensure the board is considering the the board and it is not disclosed if equitable compensation. widest possible pool of candidates. the lead director would be available to engage with shareholders upon request. Further, the proposal is non- binding and it does not necessarily require an immediate change in the board leadership structure. – GL: An independent chair is better able to oversee the executives of a company and set a pro-shareholder agenda. Outcome Outcome Outcome Proxy Proposal – Report on Gender Proxy Proposal – Adopt Policy as well Proxy Proposal – Require an Independent Pay Equity. as Objectives with Respect to the Board Chairman. Representation of Women on the Board and in Management Positions. 37.44% 10.19% 25.83% FOR (AGAINST management) = Rejected. FOR (AGAINST management) = Rejected. FOR (AGAINST management) = Rejected. Invesco supported the shareholder proposal. Invesco supported the shareholder proposal. Invesco supported the shareholder proposal. 49


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    Trusted partners New York, home to the United Nations' division for Sustainable Development Goals. © Getty Images.

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