Extending our ESG influence
In 2017, SKAGEN continued to build on our focus on environmental, social and corporate governance factors (ESG) in our investment process. We also went a step further and used our ESG stance to positively influence others and drive change.
During the year, SKAGEN launched five new fund-in-fund solutions, called SKAGEN Select, in the Norwegian market. These funds contain both internal and external funds and are subject to the same ESG policy that we apply to all our investments.
In the case of some of the external funds, however, we noted a few areas of concern and therefore engaged with the fund providers about their existing policies and holdings. As a result, through 2017 we saw several external fund managers adjusting their policies following our engagement. One example is a fund manager that implemented a more stringent approach to investing in gambling-related companies due to the many negative external factors within this industry.
As stated in our policy, SKAGEN will not invest in companies that breach basic human rights, harm the local population or the elected form of government, produce or sell weapons of mass destruction, land mines and cluster bombs or have a material part of their business within tobacco, pornography and gambling.
We have also taken advantage of our engagement with external managers to promote the UN supported Principles for Responsible Investing (PRI), where we have been a signatory since 2012. During the year, we also nominated Investment Director Alexandra Morris as a board member at the PRI. Although she did not win a seat on the board, we feel that these activities fulfil our pledge to the PRI that we will "be active owners, incorporate ESG issues into our ownership policies and practices", and "promote acceptance and implementation of the principles within the investment industry".
SKAGEN has incorporated ESG in the investment process for the past fifteen years. Amongst other things, this enables us to identify challenges before they escalate and consequently reduce the value of the funds' investments. In addition, sustainability and good governance can provide companies with competitive advantages and support value creation, which contributes to maximising returns over time to the benefit of our unit holders. We assess the sustainability of every holding in the same way that we assess other analysis material.
During the year, there were a total of 225 votable shareholder meetings in the companies in our portfolios, with a total of 2 663 votable items on the agenda.
SKAGEN voted at 217 of these meetings, and on 98% of the votable items. This is an increase from 93% in 2016. In the meetings where we voted, 6.7% of the votes were against the company's management on one or more items on the agenda. This is a slight increase from 6.1% at the end of 2016.
The votes were cast in many countries around the world. While the US and Norway were the two countries with the most meetings voted, India came in as number three and Brazil as number six. This reflects SKAGEN's global focus when picking stocks.
SKAGEN has, in line with our policy, typically voted against items related to:
- The issuance of equity without pre-emptive rights for existing shareholders
- Excessive management remuneration without links to results
- The election of board members who are not deemed sufficiently independent
All our voting records, including the reasons for voting against management, can be found on our website in the solution provided by Institutional Shareholder Services (ISS), which is one of the world's leading providers of corporate governance solutions. Our unit holders can drill down and find information on a company and ballot level.
SKAGEN believes in the importance of being active and responsible owners. We may therefore engage with companies based on our assessment of the significance of particular matters, risks imposed on a fund, size of holding, scope to effect change and opportunities to collaborate. SKAGEN believes that continuous dialogue ensures the best possible development, and thereby the best risk-adjusted returns to unit holders.
The dialogue with companies can be exercised by expressing SKAGEN's view, written or orally, to the company's management, advisers, and Board of directors.
Although we prefer to engage with companies in private, in our annual report we report on the number of engagements and particular instances that we deem of interest to our unit holders.
In 2017, SKAGEN was in direct contact with 16 companies about specific issues.
It is worth mentioning that during the year SKAGEN sent a delegation to South Korea. Our funds have large holdings in the country and we strive to keep abreast of developments and express our views to relevant stakeholders, particularly when it comes to the developments in the family-run conglomerates, known as chaebols.
The chaebols seem to slowly be moving in the right direction, though not without temporary setbacks. Still we expect to see positive governance-related developments in our long-term SKAGEN holdings such as Samsung Electronics and Hyundai Motors.
Our delegation met with both companies during their stay in the country. In addition, they met with external parties including Professor Youjae Yi, head of Hyundai's independent corporate governance committee. The dialogue was positive and we continue to speak to the companies about improvements in corporate governance.
During the year we also continued our dialogue with CMS Energy, a Michigan-based utility on the Norges Bank Investment Management watch list, about their transition to cleaner fuel. The company's overall coal exposure has fallen dramatically from approximately 40% in 2005 to 22% currently, after the recent retirement of 7 out of 12 coal plants. The coal exposure is set to decline to 15% in the next 5 years as CMS Energy retires more coal plants, switches to natural gas and adds a significant portion of wind assets to the portfolio. The concept is "Go green and go cheaper". The company has been in active dialogue with many shareholders to inform them of its plans.
At the end of 2017, we can therefore state that we are satisfied with the ESG developments in our portfolios. We are currently working on improving our policies and procedures further in order to meet the expectations of our unit holders going forward.