Download Advisory Board Deposit Fund Counterparties - 13 March 2017

CCLA INVESTMENT MANAGEMENT LIMITED
PSDF(17)P07
The Public Sector Deposit Fund Advisory Board
Noting
*
For
Public Sector Deposit Fund Counterparty ESG Check 2016
Context: CCLA’s Ethical and Responsible Investment Team monitor
existing and potential CBF and COIF Deposit Fund and PSDF Money
Market Fund counterparties’ management of environmental, social,
and governance (ESG) risk on an annual basis. Further action is
taken when appropriate. Two potential counterparties, OCBC and
Landesbank Berlin, remain restricted for all Deposit and Money
Market funds managed by CCLA.
2016 ESG Analysis: There have been no changes to the methodology
used by CCLA for the review. However, an update of MSCI
Governance Metrics methodology, to incorporate an additional 20
home markets in their analysis of corporate governance standards,
has impacted upon the scoring. This amendment has served to
stabilise the MSCI Rating and bring it more into line with our own
house views on best practice corporate governance. It follows a
significant period of discussion with MSCI.
Due to supplier data coverage different methodologies have been
adopted for listed and unlisted counterparties as follows.
Methodology - Listed Counterparties:
Level 1 (score 0 to 3, weighting 60%); CCLA's in house ESG
integration criteria, as based upon data provided by FTSE ESG and
MSCI Governance Metrics. This includes counterparties' approach
to supply chain management, environmental management, climate
change risk, corporate governance factors and accounting risk.
Level 2 (score 0 to 3, weighting 30%); Corporate governance factors
that are considered to be the most material. This includes: the
separation of the roles of CEO/Chairman, the independence of the
audit committee, and the bank's approach to avoiding bribery and
corruption. It acts as a supplement to the corporate governance
factors included within Level 1.
Level 3 (score 0 to 3, weighting 10%); social and environmental
factors based upon CCLA client priorities. This includes each
counterparties' approach to, providing finance to communities and
SMEs, controlling environmental risk within lending, the living
1
wage (UK only, as based upon the engagement prioritised by the
Ethical Fund Advisory Committee) and the UN Global Compact1.
As in previous years each counterparty's approach has been scored
on a scale of 0 to 3 for each factor. All scores are then weighted
(with more material issues in level 1 given a high weighting and
less material in level 3 a low weighting). The final 'Total Score'
represents the percentage achieved of the maximum possible score.
Counterparties were then ranked in accordance with their standard
deviation scores (SD) as follows: Red: between 2 and 3 SDs below
mean; Amber: Between 1 and 2 SDs below mean; Yellow: Less than
one SD below mean; Light blue: Less than one SD above mean;
Light Green: Between 1 and 2 SDs above mean; Green: 2 or more
SDs above mean.
Methodology - Unlisted Counterparties: Given the lack of supplier
data for unlisted counterparties the number of criteria included
within level one analysis has been expanded. This now includes key
factors considered within MSCI’s Ratings and FTSE's methodologies
including: counterparties' environmental policy, approach to
countering bribery, the separation of the roles of CEO/Chairman,
the composition of key board committees, and assessing compliance
against local market corporate governance norms. Level two
criteria include many of the client priorities included within level
three of the listed counterparty analysis, as discussed above.
Given the size of the sample, it is not possible to perform a
meaningful statistical analysis. Therefore a simple ranking exercise
has been undertaken.
2016 Score Overview: There has been a general uplift in the scores
for all listed entities and no listed entity has a score of more than
two standard deviations below the sample mean.
Five listed entities score between one and two standard deviations
below the mean. Of these two were identified for engagement in
the previous review (JPMorgan Chase and HSBC Holdings).
2016 Engagement outcomes and recommendations:
1
The UN Global Compact is a strategic policy initiative for businesses that are committed to
aligning their operations and strategies with ten universally accepted principles in the areas of
human rights, labour, environment and anti-corruption. By doing so, business, as a primary
driver of globalization, can help ensure that markets, commerce, technology and finance
advance in ways that benefit economies and societies everywhere.
2
Three companies were identified in 2014 and 2015 for full
engagement.
JP Morgan Chase Bank: We are approaching the end of the two year
engagement cycle. The company has responded positively to
engagement with a conference call held on the 22nd November.
During the call the company were open to appointing a genuinely
‘independent’ Lead Director, once the current incumbent retires
from the board. He is 77 and offers his resignation on an annual
basis. Whilst we should not expect this instantly there is an obvious
refreshment cycle on the board.
Op-Pohjola Group: We began a two year engagement cycle with the
company in order to improve its score and better understand the
revisions to its governance structure. The company has responded
positively to engagement and provided additional policy
documents. These set out the company’s governance arrangement,
which are similar to those found in co-operatives. Given its unusual
structure we should continue to monitor the company.
Landesbank Berlin: The Company has not responded to engagement.
Given their approach to ESG factors, should they return to the UK
market, we would suggest that they continue to be considered an
ineligible counterparty subject to further engagement.
Five companies were identified for ‘light touch’ engagement in
2015.
Commerzbank: Responded positively to engagement and provided
additional information with respect to their process and
procedures. The company are striving for inclusion in the 2017
FTSE4Good Index (this requires consistently high FTSE ESG Ratings
across 14 ESG themes).
HSBC: The Company has responded well to engagement. A meeting
was held with the Company Secretary and covered HSBC’s plans to
appoint an independent chairman and continue the ongoing process
of board refreshment. The meeting also discussed the remit of the
Culture and Values Committee, the Banking Standards Board
Assessment process and the visibility into non-UK subsidiaries.
Deutsche Bank: responded to engagement which is ongoing.
Engagement focused on the steps the Company has taken to
3
understand shareholder concerns (as expressed in the level of
dissent votes) with respect to the discharge of directors. In
response to shareholder requests, Deutsche Bank has commissioned
an independent external audit by BDO of its risk management
systems. This is due to be published around the time of the 2017
Annual Meeting.
CitiBank: did not respond to engagement but improved their score
in the 2016 analysis.
Bank of New York Mellon: The Company responded positively to
engagement the focus has been Board and Committee Structure.
After a number of years with limited refreshment the board has
begun a succession planning process for all non-executives with the
aim of increasing the proportion of directors with between four and
nine years’ experience, thus reducing risks associated with long
standing directors retiring having reached retirement age. A
similar process is also being applied to committee membership.
Since the start of the engagement process an independent Lead
Director has been appointed.
2017 Engagement: Due to the uplift in scores no existing
counterparties have been identified for full engagement. We would
propose light touch engagement with: Sumitomo Mitsui Financial
Group, HSBC Holdings, BNP Paribas, United Overseas Bank, and JP
Morgan Chase. In addition, we should continue our conversations
with Deutsche Bank following the publication of the Independent
Auditors Report.
Actions: The Board is are invited to note the 2016 ESG
counterparty analysis, engagement progress and the 2017
engagement priorities.
4
Appendix 1: 2016 Environment, Social and Governance Check PSDF
Listed Counterparties
Level 1
NATIONAL AUSTRALIA BANK LTD
60.00
AUSTRALIA AND NEW ZEALAND BANKING GROUP 60.00
SWEDBANK AB
55.00
DNB ASA
55.00
ING GROEP NV
52.50
COMMONWEALTH BANK OF AUSTRALIA
52.50
SOCIETE GENERALE SA
53.33
NORDEA BANK AB
50.00
DBS Bank Ltd
40.00
BANQUE DE MONTREAL
45.00
BARCLAYS PLC
50.00
NATIONAL BANK OF CANADA
40.00
WESTPAC BANKING CORP
42.50
DANSKE BANK A/S
40.00
UBS GROUP AG
37.50
CIBC London
40.00
Mizuho Bank
42.50
SANTANDER UK
40.00
CREDIT AGRICOLE CIB
37.50
Bank of Scotland
37.50
LLOYDS BANKING GROUP PLC
37.50
SVENSKA HANDELSBANKEN A
40.00
ROYAL BANK OF CANADA
40.00
BANK OF NEW YORK MELLON CORP
40.00
Bank of Tokyo Mitsubishi UFJ
37.50
STANDARD CHARTERED PLC
32.50
TORONTO-DOMINION BANK
35.00
SKANDINAVISKA ENSKILDA BANKEN AB
32.50
BANK OF NOVA SCOTIA
32.50
BANK OF AMERICA CORP
35.00
DEUTSCHE BANK
35.00
CITIBANK
30.00
Sumitomo Mitsui Banking Corporation Europe
32.50
HSBC HOLDINGS PLC
32.50
BNP PARIBAS SA
32.50
UNITED OVERSEAS BANK
20.00
JPMORGAN CHASE & CO.
33.33
ABN AMRO LONDON
32.50
Level 2
28.29
24.64
27.21
26.14
27.21
26.14
24.64
20.79
30.00
24.64
19.29
28.93
25.29
27.21
28.93
25.07
23.57
24.00
25.07
24.64
24.64
20.79
20.36
18.64
20.36
24.64
22.07
24.00
23.57
20.36
20.36
24.64
21.86
20.36
19.29
30.00
16.07
12.86
Level 3
1.00
0.78
0.67
0.78
0.89
1.00
0.89
0.78
0.33
0.67
0.67
0.11
1.00
0.56
0.67
0.67
0.44
1.00
0.89
0.67
0.67
0.56
0.56
0.00
0.56
1.00
0.56
0.89
1.00
0.67
0.67
0.89
0.67
0.89
0.89
0.00
0.56
0.89
Total Score
89.29
85.42
82.88
81.92
80.60
79.64
78.87
71.56
70.33
70.31
69.95
69.04
68.79
67.77
67.10
65.74
66.52
65.00
63.46
62.81
62.81
61.34
60.91
58.64
58.41
58.14
57.63
57.39
57.07
56.02
56.02
55.53
55.02
53.75
52.67
50.00
49.96
46.25
Source data provided by FTSE, MSCI, GMI Ratings ISS publically available information and information
received through company engagement - correct as of 31st Dec 2016
5
Appendix 2: 2016 Environment, Social and Governance Check PSDF
Un-Listed Counterparties
Nationwide
Rabobank
Leeds BS
Coventry Building Society
Bayerische Landesbank
Bank Nederlandse Gemeeten
Zürcher Kantonalbank
Landesbank Baden-Wuerttemberg
Credit Industriel et Commercial (CIC)
Deutsche Zentral-Genossenschaftsbank
Op-Pohjola Group
Landesbank Hessen-Thueringen Girozentrale
Landesbank Berlin AG
Level 1
90.00
90.00
77.14
68.57
68.57
55.71
55.71
55.71
55.71
47.14
42.86
34.29
8.57
Level 2
5.00
5.00
0.00
3.33
3.33
2.78
2.78
2.78
2.78
2.78
3.33
3.33
1.67
Total
95.00
95.00
77.14
71.90
71.90
58.49
58.49
58.49
58.49
49.92
46.19
37.62
10.24
6