TRP ESG Annual Report_TO PUBLISH
We have an obligation to understand the sustainability of the companies in which we invest. Find out more by viewing our ESG Annual Report highlights.
ESG Report 2019 - highlights
Issued in 2020
<i>For investment professionals only. Not for further distribution</i>
ESG: 2019 in review
Take a look into the work we have done over the past year to implement our ESG programme across integration, engagement and proxy voting guidelines - aimed at improving investor outcomes for the long term.
<i>For investment professionals only. Not for further distribution</i>
Rob Sharps
Head of Investments and Group Chief Investment Officer
We have long held the belief that proactive and systematic environmental, social and governance (ESG) integration can help investors more clearly identify long-term trends and how companies or issuers are positioned against these. It also helps us identify companies that generate profits at the expense of other stakeholders.
Overcoming data challenges
However, we also know that the environmental and social dataset come with a unique challenge, in being underdeveloped. It is partly quantitative, partly qualitative and not uniformly reported, and with the tendency to get confused with ethically-based investment philosophies.
In response to this significant challenge, we have been focused on building a research function to help our investors gain better insights on the securities in which they invest. For investors, this means that our research platform stretches beyond traditional analysis, to include our proprietary Responsible Investing Indicator Model (RIIM). It has helped us create a better filter of the environmental and social datasets we consider for investors’ portfolios.
More ESG in investment offering
Over the past year, we have found heightened ESG interest impacting our client, investee company and regulator interactions. Clients increasingly want to add some level of ‘ESG’ to their portfolios – be it integration or reflecting specific values in their portfolios.
Therefore, we will continue to incorporate ESG factors across our suite of investments, by using ESG factors to make better investment decisions. This will also be reflected in the solutions we provide. Alongside this, we plan to launch more products aimed clients who want to express specific values in their investment decisions.
We anticipate that corporate disclosure will remain a prominent theme, as we have found many of our investee companies looking for guidance on ESG reporting. This is a positive indication of progress towards improving the dataset. We believe all market participants can benefit from the implementation of more globally consistent and standardised environmental and social disclosure. To this end, we have established a seminar for investor relations professionals on the topic.
We have developed a clear structure through the Board of Directors’ Nominating and Governance Committee, to oversee the firm’s ESG activity and receive annual updates.
Maria Elena Drew
Director of Research, Responsible Investing
Over the course of last year, the responsible investing team continued to grow, to the extent that we now have dedicated ESG specialists in Baltimore, London and Hong Kong. In keeping with our culture of rigorous research, we also continued our focus on building ESG tools that enable our investment team to understand entities better from an environmental, social and ethical perspective.
Improved data rigour
On this front, a major development saw the creation of an interface to our Responsible Investing Indicator Model (RIIM) on all investment professionals’ desktops. This allows the entire team to access the RIIM profile of approximately 14,000 securities, to see what drives a company’s score on everything from supply chains and employee treatment to business ethics.
In 2019 we also enabled automated RIIM portfolio analysis, making it much more efficient to analyse how the equity and credit portfolios we manage on our clients’ behalf compare with their benchmarks.
Crucially, we created a RIIM tool for sovereign issuers to analyse the core social and governance factors, alongside environmental factors for the first time. This pillar had been considered qualitatively in the past, but more on a case-by-case basis.
Responsible investing in a pandemic
As I write this letter, I am working from home practicing social distancing, and it is hard to ignore the coronavirus pandemic and the impact it is having on markets. There are many ESG-related investment themes that emanate from the pandemic, but the one dominating many of our discussions with companies is treatment of employees during this turbulent and uncertain time. As our analysts adjust their financial models, target prices, and investment thesis on individual securities, they do have a significant advantage — thinking about how companies treat their employees is not new to them. Our RIIM analysis has a category devoted to employee treatment. The data points captured in this category will vary by the subindustry of that company, but includes items like employee turnover, training, health and safety certifications, and controversies/incidents.
Looking ahead, we expect to continue to deepen the ESG research capabilities across our investment research platform. Using technology to make ESG data more accessible and user-friendly for our investment professionals will remain a priority. Also, we will continue to work to improve ESG transparency for our clients.
Donna F. Anderson
Head of Corporate Governance
As we reflect on our ESG highlights from 2019, global markets are in the midst of extreme uncertainty related to the coronavirus pandemic. It is too early to draw conclusions about the long-term effect this virus will have on companies and economies, but what is clear at this stage is that the culture and values of corporate issuers around the world are being tested like never before.
Stakeholder treatment in the spotlight
Investors and stakeholders will assess companies’ previous statements about their management of human capital, health and safety, community involvement, and the overall importance of stakeholders in a whole new context. We predict these topics will quickly become central to the engagement that takes place between investors and businesses. Over the course of the year, we continued to strengthen our governance and stewardship foundation, adding more specialists to our ESG capability. Thanks to this, we were able to do more and higher quality engagement meetings with the companies in our clients’ portfolios.
In this report, we share more detail around these meetings, and the research process we conduct to determine an entity’s ESG challenges and how they respond to these. This has enhanced our overall understanding of the key risks and attributes of our investments, as we analyse them through multiple lenses.
A focus on advocacy
We are concerned about a weakening of important shareholder rights and investor protections in key global markets. Through direct advocacy and participation in governance-oriented investor associations, we have worked to persuade regulators that stronger disclosure requirements and basic investor protections are essential for fair, liquid and resilient capital markets.
As a recovery takes shape following the peak of the coronavirus crisis, we will focus on the many governance-related ramifications of this period. We believe these issues are likely to include:
- compensation (for executives and employees),
- the effects of the crisis on stakeholders,
- the effectiveness of “virtual” shareholder meetings,
- government relations and lobbying,
- share buybacks,
- operational resilience, and
- postcrisis regulatory reform.
While the virus-related upheaval adds a new dimension to our governance efforts, we are confident that we have the resources and processes in place to address these issues in 2020.
ESG in action
RIIM, our proprietary research model designed specifically for responsible investing analysis, helps ensure robust and consistent analysis of ESG data.
This section includes:
• Philosophy and Process
• Fundamental Research
• ESG Case Studies
<i>For investment professionals only. Not for further distribution</i>
Our ESG philosophy is based on three principles:
-
We integrate ESG data into the investment process
-
Investment analysts and portfolio managers collaborate with our team of ESG specialists
-
We apply materiality, which helps us focus on the most relevant ESG issues for each entity’s business model
We value the specialist expertise – covering responsible investing, governance and regulatory research – of ESG-dedicated investment personnel. This helps our investors identify, analyse and integrate the factors most likely to impact long-term investment performance.
Fundamental research
Our proprietary Responsible Investing Indicator Model (RIIM) helps us to conduct consistent, deep, fundamental research. Using data not traditionally used in mainstream investing – such as non-financial data and incident history – it builds an environmental, social and ethical or governance profile for companies and sovereign entities. It also allows portfolio managers to assess concentrated ESG factor risks in each portfolio.
Explore our work in the real world with these ESG case studies
Engagement underpins investment thesis
|
Who
|
Bayer AG: German conglomerate comprised of pharmaceuticals, crop science, consumer health and animal health
|
Investment case
|
Generated a healthy free cash flow yield, allocating capital efficiently, but litigation risk prompted selling among investors
|
ESG analysis
|
Our engagement on ESG topics, such as board oversight, product sustainability, lobbying practices and ESG accountability helped us gain confidence that the company was working to resolve these issues.
|
Case study in-depth
|
Health Care : Bayer AG
|
Improving environment and governance quality
|
Who
|
Georgia: situated at the intersection of Europe and Asia, gained independence from Soviet Union in 1991; saw a peaceful change of power in 2003
|
Investment case
|
Supported by robust fundamentals, with attractive U.S. dollar bonds relative to peers
|
ESG analysis
|
Georgia has shown significant improvement in governance standards over the past two decades, boasting a strong track record of prudent policies and structural reforms.
|
Case study in-depth
|
Governance : Georgia
|
Explore our work in the real world with these ESG case studies
Industry-Leading Environmental Management
|
Who
|
Taiwan Semiconductor Manufacturing Company: one of the world’s largest pure-play semiconductor foundries producing custom-built chips for a broad consumer base, from smartphones to medical devices and fighter jets
|
Investment case
|
A global leader in leading-edge chip production, well placed to capture growing market share
|
ESG analysis
|
As a large-scale foundry, they have a distinct environmental footprint, but manage this carefully through structured, robust environmental strategies.
|
Case study in-depth
|
Technology : TSMC
|
Focus on responsible investment reduces potential exposure to risks
|
Who
|
AIA: life insurer operating in Southeast Asia, mainly active in Hong Kong, Thailand, Singapore, growing rapidly in China, Malaysia and Indonesia
|
Investment case
|
Has an un-replicable footprint across Southeast Asia, with strong management team and track record of successful execution
|
ESG analysis
|
AIA's strong focus on responsible investing reduces exposure to potential risks. It actively addresses sustainability challenges in many of its markets.
|
Case study in-depth
|
Insurance : AIA
|
GLOBAL FRAMEWORK ALIGNMENT
Our research is closely aligned with global ESG frameworks, as measured in our Responsible Investing Indicator Model (RIIM)
- United Nations Sustainable Development Goals – a tool for countries to implement sustainability regulations and a framework for companies’ ESG measurement
- United Nations Global Compact – measuring key factors in relation to human rights and labour standards, the environment and anticorruption
Read more in the full report.
ESG themes
Climate change, income inequality and the way we engage with public versus privately-owned companies were some of the major themes we encountered over the past year. We share our insight about the impact these themes have on investment analysis and portfolio management.
This section includes:
• Climate Change
• Income Inequality
• Public vs Private Company Engagement
<i>For investment professionals only. Not for further distribution</i>
ESG THEMES: CLIMATE CHANGE
Climate change: markets not yet factoring in risks
Maria Elena Drew
Director of Research, Responsible investing
In 2019, there was a dramatic increase in concern over climate change, from an investment perspective as well. However, aside from select sectors facing extremely elevated transition risk – e.g. fossil fuel producers – there has not been significant impact on company valuations to date. In our view this is because climate change has not particularly impacted the near-term cash flows for the broader market.
The science behind climate change
For the world to have a chance of at least minimizing the impact of climate change, it is necessary to keep global temperatures to within +1.5°C from preindustrial levels. To experience less severe impacts from climate change, global temperatures need to stay within +2.0°C.
Viewing Our Investments Through a 1.5°C and 2.0°C Lens
We believe it’s highly likely that our investments will need to be capable of adapting to either of these temperature scenarios. Even keeping global warming within these parameters means there will be climate change impacts that will affect the investment landscape, such as rising sea levels, increased storm frequency, hotter and more frequent heat waves, and shifts in growing seasons.
Climate Change in Our Investment Analysis
We believe almost the entire investment universe will feel some impacts of climate change. Creating economic value with a low or zero carbon footprint will enhance a company’s positioning against their peers, in a world of rising environmental regulation. Fundamental analysis, alongside our Responsible Investing Indicator Model’s (RIIM) evaluation, is crucial to help us compare how entities stack up against each other on a range of climate-related issues. RIIM portfolio analysis enables portfolio managers to quantify the amount of climate-related risk they’re taking across the portfolio.
In addition to our RIIM analysis, the responsible investing team works closely with our sector analysts in evaluating climate change factors. This collaboration helps the team with work on company-specific climate analysis, to more thematic work, such as creating a carbon tool to aid rigorous research.
The gap between science, policy and corporate reporting
As we pointed out in our previous ESG annual report, there is a profound disparity between science and policy regarding climate change. While climate change became more topical for society over 2019, there has only been varying levels of commitment from governments on combating rising temperatures.
Various climate change-oriented regulatory measures that have been passed are aimed at financial markets. While moving policy in the direction of science is a positive, the fact that regulation on financial markets have moved faster than that on corporations creates a problem with the quality of ESG reporting we can provide to our clients. This is an area of continuous development, which should lead to better outcomes for ESG integration in investments.
ESG THEMES: INCOME INEQUALITY
The social and economic impact of rising income inequality
Roy Adkins
Sovereign Analyst
Income inequality is one of the defining socioeconomic issues of our time. The Gini coefficient, which measures income distribution and inequality, suggests that, globally, the average person has lived in a country where income disparities are widening.
If this continues, it will likely lead to increased indebtedness, steeper yield curves, inflation, higher corporate taxes, and tighter trade restrictions. It will also create sectoral opportunities as consumption patterns change and the demand for cheaper goods and services grows.
This is mainly due to lower distribution of taxes and transfers, more concentrated industries and changes in labour markets.
Wage Disparities Fuel Populism
It has significant implications for investors, by constricting growth and creating inequality of opportunity when lower-paid people are denied the chance to invest in their health and education.
Crucially, income disparities lead to struggles over government resources, which creates political volatility that can fuel the rise of populist causes – alongside higher public spending – and deepen social divisions. Blue-collar workers who feel that they have not benefitted from globalisation increasingly support closed economies.
Changing Consumption Will Create Sectoral Opportunities
Income inequality will likely negatively affect luxury good manufacturers, but it will create opportunities elsewhere, e.g. affordable leisure and accommodation. It should also encourage innovation to provide affordable education and healthcare, as well as accessible financial services.
How Income Inequality Influences Our Investment Decisions
Our ESG specialists support the sovereign investment teams throughout the investment process. Income inequality is a key consideration in the social component of ESG, which has a strong influence on our sovereign debt investment decisions, through the use of our Responsible Investing Indicator Model.
We anticipate further policy changes as governments continue to respond to demands for wider access to affordable services and better protection for workers. As companies respond to these changes, sector-based opportunities will continue to arise. We will continue to monitor income inequality around the world and incorporate it into our analysis in striving to maximize investment performance for our clients.
ESG THEMES: INCOME INEQUALITY
Income inequality is a key consideration in the social component of ESG, which has a strong influence on our sovereign debt investment decisions, through the use of our Responsible Investing Indicator Model.
Public vs
private company
engagement
ESG THEMES: PUBLIC VS PRIVATE COMPANY ENGAGEMENT
Governance – public versus private company engagement
Donna Anderson
Head of Corporate Governance
We have specific investment processes for privately held companies, versus those that are publicly owned. Here we give some insight into the main principles.
Why Does T. Rowe Price Invest in Private Companies?
When we consider private company investments, we aim to identify innovative businesses that can compound wealth as they transition from fledgling to durable growth companies. It offers insights into potential industry disrupters, as well as the opportunity to assess companies before they go public. However, these investments are always challenging, as the securities are more illiquid and carry greater risk than investments in more established, public companies with longer track records.
Private Investment Stewardship
Private company investments have some unique aspects that require a slight change in our approach to stewardship activity and oversight. For example, while privately held and focused mainly on operational matters, companies’ boards often comprise a few key investors and business partners. However, as they move closer to listing publicly, boards have a fiduciary duty to many more stakeholders, including more attention and oversight. This requires independent director representation, free of any ties to the company.
ESG THEMES: PUBLIC VS PRIVATE COMPANY ENGAGEMENT
Proxy Voting for Private Companies
Instead of annual general meetings and proxy voting, private companies use written consent to seek shareholder approval for corporate matters, e.g. director elections. Unlike with public shareholder meetings – which involve appropriate meeting notice, upfront information about voting items and the chance to express a view publicly – private companies simply ask for consent from certain investors, one by one, until they reach the 50% needed for approval. Written consent enables companies to get efficient stockholder approval, but reduces transparency.
As responsible stewards, we apply the same governance standards to private and public companies, but written consent limits our ability to effect change at private companies.
A Potential Turning Point
After a long period where private companies had their pick of investors, leaving little room for capital providers to negotiate better shareholder rights, there are signs this imbalance is shifting. Investors are demanding more stringent requirements from companies seeking funding and recent market volatility has only accelerated this trend. If our prediction is correct, we should see a healthier and more balanced dynamic emerge in the market for private, growth-oriented, companies.
Investors are demanding more stringent requirements from companies seeking funding and recent market volatility has only accelerated this trend.
Read more in the full report.
Engagement
and voting
A key part of our investment process is ongoing engagement and using the voting rights we have on behalf of investors to enact change for a more sustainable future.
This section includes:
• Engagement Overview
• Proxy Voting
• Industry Collaboration
<i>For investment professionals only. Not for further distribution</i>
ENGAGEMENT AND VOTING: ENGAGEMENT OVERVIEW
The power of scale and active
We manage approximately $1.2 trillion* of assets on behalf of our clients, which gives us a powerful position compared to our peers for ESG engagements. Our scale affords us better access to companies and influence.
As a manager of mainly active portfolios, we also have the option not to invest where we see an impediment to reaching investment goals for our clients. Index tracking funds typically do not have this option.
ENGAGEMENT AND VOTING: ENGAGEMENT OVERVIEW As of December 31, 2019
Improving disclosure on environmental topics
Investors are increasingly seeking greater transparency about the climate impact of companies in their portfolio.
38%
The share of our ESG engagements that featured environmental disclosure
There is limited regulation mitigating climate change, but we anticipate this to broaden and intensify in the coming years. Subsequently, we see corporate disclosure of environmental data as essential in our ability to measure how a company is placed to respond to changing regulations.
We have sought to nurture steady improvements in ESG disclosure, to help companies understand how to report environmental data, how we use ESG data in our analysis, and how clients use this data to evaluate their portfolios.
ENGAGEMENT AND VOTING: PROXY VOTING As of December 31, 2019
Proxy voting
Proxy voting is a crucial part of our stewardship responsibilities in managing assets on behalf of our clients. It offers a powerful opportunity to cast votes that would aid long-term, sustainable success for the company and its investors, and works alongside our engagement strategy.
What we did in 2019
This summarises our voting record for management-sponsored proposals, where a vote ‘for’ is one that aligns with the board’s recommendation.
ENGAGEMENT AND VOTING: PROXY VOTING As of December 31, 2019
Shareholder proposals
In a few markets around the world, shareholders may present items to be voted on at the annual general meeting.
How we voted in 2019
A vote ‘for’ in shareholder-sponsored proposals, is generally a vote contrary to the board’s recommendation.
ENGAGEMENT AND VOTING: PROXY VOTING
Environmental and social voting
While environmental and social items represented just one‑half of 1% of all proposals we voted on, we see keen interest in our approach to voting on such resolutions, given mounting investor concern in this area. We do not have a standing voting policy on any matters of a social or environmental nature – we review each voting decision on a case-by-case basis.
ENGAGEMENT AND VOTING: INDUSTRY COLLABORATION
We selectively collaborate on industry initiatives where we can help bring the most viable and impactful change, to supplement our core engagement programme. One of the more recent initiatives where we have been a founding member is the Japan Stewardship Initiative.
Japan Stewardship Initiative
We were one of the original organisations and individuals to sign up to the Japan Stewardship Initiative in November 2019. It is encouraging that the importance of ESG has been embraced so quickly in the Japanese market, but there is much work to do in terms of gaining meaningful insights from ESG data.
Principles for Responsible Investment
We have been a signatory of the Principles for Responsible Investment (PRI) since 2010, reporting annually to the organisation, to aid better disclosure worldwide about important sustainability issues.Our latest scores, released in July 2020, reflect the progress we've made on ESG integration.
Read more in the full report.
ESG team
Meet our trusted team.
<i>For investment professionals only. Not for further distribution</i>
As at October 2020 there were two additional members of the ESG Team:
Ashley Hogan | Associate Analyst (London), Natalie McGowen | Associate Analyst (London)
Important information
<i>For investment professionals only. Not for further distribution</i>
Important Information
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia.
Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority.
EEA ex-UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier.
Hong Kong—Issued by T. Rowe Price Hong Kong Limited, 6/F, Chater House, 8 Connaught Road Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission.
Korea—This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy or an offer to sell, a security, or any other productor service, to any person in the Republic of Korea.
New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.
Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #102 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore.
Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorized and regulated by the UK Financial Conduct Authority.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.
