WHAT ESG REPORTING BRINGS TO THE TABLE? David Graham Chief - - PowerPoint PPT Presentation

WHAT ESG REPORTING BRINGS TO THE TABLE?

David Graham Chief Regulatory Officer and Head of Listing 23 September 2016

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SEHK as a Regulator

Facilitates communication between issuers and investors

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Promotes good corporate governance Ensures regulatory framework up to date

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Our duties include ensuring “an orderly, informed and fair market” (s.21 of SFO) Financial information Non-financial information

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Strengthen risk management Attract investors Attract and retain talent Enhance share valuation and financing Enhance reputation Capitalise a new business

• pportunity

Save costs

Benefits of ESG Reporting to Listed Issuers

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Positive correlation between ESG reporting and stronger financial performance due to greater transparency, better responsiveness to change and better understanding

• f the company’s long-term strategic issues and how to manage them

What’s more …

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Investors’ Growing Interest in ESG Information

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More investors taking ESG disclosure into account Growth of the responsible investment market

• Between 2014 and 2015, the number of investors that considered

ESG reports “essential” or “important” when making investment decisions increased by 24%1

• Global responsible investment market grew by 61% from

2012 to 20142

• Strong development of responsible investment initiatives, e.g. PRI,

CDP and Carbon Action together represent investors with US$100+ trillion in assets

1 – Tomorrow’s Investment Rules 2.0: emerging risk and stranded assets have investors looking for more from nonfinancial reporting, October 2015, published by Ernst & Young 2 – Global Sustainable Investment Review 2014, February 2015, published by the Global Sustainable Investment Association

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Competitiveness enhanced

Hong Kong as an International Financial Centre

Capital Listings An ESG disclosure culture can:

Attract capital from the growing pool of investors committed to responsible investment practices Attract listings by like-minded companies

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Final Thoughts

The Exchange

• Shares the stakeholders’ views on the benefits of ESG reporting
• Conducts training on ESG reporting
• Provides various resources and toolkits on a dedicated ESG webpage

http://www.hkex.com.hk/eng/rulesreg/listrules/listsptop/esg/ Ultimate Goal Develop a corporate culture in which ESG practices and reporting are fully integrated into daily business operations

Listed companies’ “buy-in”

Final Thoughts

External Stakeholders and Corporate Governance: It’s neighbourly to make the right noises?

Cas Sydorowitz CEO September 23, 2016

Investors who voted against the most resolutions in HK

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# of Resolutions voted AGAINST in Since Jan 1 2015 Investor Number of resolutions which were voted against 1 Dimensional Fund Advisors, Inc. 13,024 2 BlackRock 6,047 3 SSgA Funds Management, Inc. (State Street) 3,337 4 Florida State Board of Administration 2,661 5 Ohio Public Employees Retirement System (OPERS) 2,652 6 Northern Trust Investments 2,630 7 AllianceBernstein LP 2,518 8 Vanguard Group, Inc. 1,758 9 Fidelity Management & Research Co. 1,738 10 MN 1,425 11 California Public Employees’ Retirement System (CalPERS) 1,422 12 California State Teachers' Retirement System (CalSTRS) 1,415 13 BNY Mellon 1,371 14 TIAA-CREF Asset Management LLC 1,347 15 Teacher Retirement System of Texas 1,296 16 Invesco PowerShares Capital Management LLC 1,186 17 Goldman Sachs Asset Management LP 1,162 18 WisdomTree Asset Management, Inc. 1,143 19 Mercer Australia 1,093 20 Hermes Equity Ownership Services 1,066

Source: www.proxyinsight.com

Resolutions types that received the most frequent

• pposition

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Director Re/Elections Capital Increase Capital Change Equity Based Plans Auditors Articles/By Laws Director Remuneration Financial Statements & Reports

Source: www.proxyinsight.com Capital Change – Refers to Authorise Reissuance of Repurchased Shares Capital Increase - Approve Issuance WITHOUT Pre-emptive Rights

Understanding Shareholder Rationale for voting against Director (re)elections

Overboarded /Too many other time commitments Vote against due to lack of disclosure. Attended less than the required amount of board meetings to warrant his/her commitment to the board and/or the company. Audit committee met an insufficient number of times We are holding members of the Nomination Committee accountable for failing to ensure that all key board committees are fully independent. Nominee is a non-independent director on a board that lacks independence relative to typical market standards.

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Top Investor Dissent for Director Elections in Hong Kong

Source: www.proxyinsight.com

Investor

Hong Kong

Jul 15-Jun 16 Jul 14-Jun 15 Jul 13-Jun 14 Fidelity Mgmt & Res 71.50% 63.10% 68.40% Goldman Sachs 72.20% 77.10% 78.90% T Rowe Price 74.30% 64.10% 70.10% BNY Mellon 79.40% 70.40% 71.00% Northern Trust 80.10% 75.70% 78.40% State Street 85.80% 83.30% 82.20% Norges 86.30% 83.90% 69.80% Vanguard 87.30% 83.70% 83.50% BlackRock 88.10% 86.70% 89.60% Fidelity Worldwide 100.00% 99.60% 97.90%

How does the market look at your Equity Story?

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Why is this important?

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Manage Shareholder Engagement Don’t leave it to chance

Investor Decision Making Process

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Governance & Proxy Voting

Governance Teams

Investment Decisions

PMs / Analysts

Pension Funds Other critical shareholders Proxy Advisors ISS Glass Lewis Issuers but only during the AGM Corporates (BOD / IR) Research providers Investor Community Press

External Influencers External Influencers

Institutional voting decisions are made by groups who have limited exposure to BOD / IRO’s at the issuer

Who are the Proxy Advisors?

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› Over 1,200 clients › More than 360 staff › Covers 20,000 meetings per year › Acquired IVOX in Jan 2016 – German based Proxy Advisor › Acquired Meetyl in June 2015 › Owned by Ontario Teachers’ Pension Plan, and 20% AIMCO › Over 1,600 investor clients › More than 800 employees › 15 offices in 10 countries › Covers 38,000 meetings per year › Acquired iiWisdom in 2016 › Owned by Vestar Capital Partners (PE)

Activism

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“SHAREHOLDER ACTIVISM IS NOT A PRIVILEGE - IT IS A RIGHT AND A

• RESPONSIBILITY. WHEN WE INVEST IN A

COMPANY, WE OWN PART OF THAT COMPANY AND WE ARE PARTLY RESPONSIBLE FOR HOW THAT COMPANY PROGRESSES. IF WE BELIEVE THERE IS SOMETHING GOING WRONG WITH THE COMPANY, THEN WE, AS SHAREHOLDERS, MUST BECOME ACTIVE AND VOCAL.” MARK MOBIUS TEMPLETON EMERGING MARKETS GROUP

Active Investors or Investor Activist?

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$4.7Trill Aum Proxy Fight against G-Resources Group Ltd in HK Mar 2016 Stop the sale of the sole gold mine and changing the corporate direction $388 Bill Aum Proxy Fight against CPP Group in UK May 2016 Overhaul the Board

Drivers of growth in Shareholder Activism

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Goals of Shareholder Activism

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Activist campaigns

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No longer known as “corporate raiders” but “defenders of shareholder value”

• Underperformance: The target has under performed relative to peers or

the broader market.

• Capital allocation: The target is under-levered or has excess liquidity.
• Corporate clarity: The target should divest or spin-off one or more

divisions or assets

• Corporate control: The target should put itself up for sale, seek a higher

premium for a proposed sale or abandon a proposed acquisition

• Governance: The target has meaningful corporate governance issues.

Companies targeted each year by an activist campaign - globally

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100 200 300 400 500 600 700 2010 2011 2012 2013 2014 2015 YTD 2016 185 218 345 469 526 609 323

Data provided by Activist Insight

To June 30 2016

Success rate of activist campaign

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0% 10% 20% 30% 40% 50% 60% 70% 2013 2014 2015 YTD 2016 57.19% 56.16% 56.94% 65.54%

YTD 2016 is higher as not all campaigns have concluded

Data provided by Activist Insight

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What should companies be aware of?

They will speak to:

• Customers
• Suppliers
• Current and X employees/directors
• Regulators
• Shareholders
• Proxy advisors
• Retail shareholder associations
• Potential bidders

They will conduct site visits, meetings with board members and management

Activists spend a considerable amount of time preparing and researching the target companies (1-2 man years of research)

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Activists retain professional service providers

• Financial Advisors
• Lawyers
• PR Firms
• Proxy Solicitors
• Private Investigators
• Executive Recruiters
• Management Consultants

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Lessons learnt?

• 1. Activists are shareholders, so you should not avoid them;
• 2. They have very focussed portfolios and probably knows as much about

the company as the board, if not more;

• 3. Keep detailed notes of your engagement with the activist including

when they took place, who was involved and what was discussed;

• 4. Ask what the source of the activist information is, to understand how

they are deriving their assumptions;

• 5. Ask for time to consider their thesis and their specific asks, before

summarily dismissing their demands;

• 6. Take inventory of your other investors and when you last spoke to them;
• 7. Bring in the experts to help you with the communications, shareholder

engagement, and the proxy advisor outreach.

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How can an Company Secretary be better prepared?

• Proactive shareholder engagement throughout the year
• Face to face and teleconferences
• Clear description of strategy and time frame
• Measurable KPIs
• What are the earnings forecast spread amongst the analysts?
• Know your shareholders
• Do shareholders regularly ask questions about your structure or strategic

direction

• What is your company’s performance relative to peers?
• What are the key financial metrics for your company, and is that also true for

your peers? If not, why not?

• Understand who votes and does not vote at your shareholder meeting

Focus good companies where stock price doesn’t reflect full value By pulling various levers they can unlock that value over time – 2-3 years The return expected is often above 30%

Developments in the UK

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Proposing to Prime Minister, Theresa May,

• 1. Publication of the pay Ratio of the

average employee and the CEO be disclosed

• 2. Binding annual vote on pay
• 3. Mandatory Shareholder committee

with

• a. Which would replace the

nomination committee of the board

• b. Approve the pay policy

Developments in the UK – Investor Forum

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“Investor Forum bridges gap between shareholders and corporates” “Chairman Simon Fraser says the organisation aims to foster dialogue and focus on long-term issues” FT MARCH 15, 2015 “Sports Direct investors press for review of its practices” “The Investor Forum, which has £14.5 trillion of investments, says the company should conduct a thorough independent review.” BBC News - 25 August 2016 “Big investment groups flex muscles in boardroom” “Forty groups including BlackRock, Wellcome Trust and Allianz Global Investors join forces” FT – 28 AUGUST 2016

Contacts

www.georgeson.com

Cas Sydorowitz CEO Georgeson Corporate Advisory Europe 3rd Floor Moor House 120 London Wall London EC2Y 5ET Phone: +44 (0)207 019 7002 Mobile: +44 (0)7810 750 442 Email: cas.sydorowitz@georgeson.com

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