The July edition excerpts 3/31/2019 and 4/30/2019 annual reports filed in June and July by VanEck Vectors Green Bond ETF, iShares MSCI KLD 400 Social ETF and Boston Common ESG Impact Funds, both US and International.
The commentary appearing in this document offers excerpts taken from recently posted annual reports published by sustainable mutual funds and exchange-traded funds (ETFs) that cover green bond developments, ESG investing trends and shareholder engagement initiatives.
The intention of the Sustainable Funds Reporting Roundup more generally is to highlight relevant commentary offered by funds that pursue sustainable strategies across varying sectors and asset classes to better understand sustainable investing trends and developments, how such strategies are being implemented, the results achieved and how they may be affecting performance outcomes during the covered reporting periods.
Interested readers should consult the referenced fund’s annual and semi-annual reports for the complete text of management’s discussions of investment results, fund positioning, fund performance and outlook.
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VanEck Vectors Green Bond ETF, Annual Report 4/30/2019, filed July 12, 2019
Green bonds are issued to finance projects with a positive environmental impact, and in the vast majority of cases, are backed by the issuer’s full balance sheet (rather than the projects financed). The green bond market has grown tremendously since 2013, and has also become more diverse as new types of issuers have entered the market.
Overall, the VanEck Vectors Green Bond ETF had a negative return of 1.25% for the year, due primarily to negative currency returns. Bonds denominated in U.S. dollars contributed the most positively to total return during the period and bonds denominated in euros detracted the most from performance. From a country of risk perspective, U.S., Brazilian, and Indian issuers contributed most to total return, while bonds issued by German, French, and Dutch issuers were the largest detractors from performance. Government-, technology-, and basic materials-related bonds made the greatest positive contributions to returns, while financial, utilities, and industrial bonds detracted the most from performance.
iShares® MSCI KLD 400 Social ETF, Annual Report 4/30/2019, filed July 5, 2019
U.S. stocks with positive environmental, social, and governance (“ESG”) characteristics advanced strongly for the reporting period. Investor demand for detailed ESG reporting increased, as shareholders sought material nonfinancial information about potential environmental and societal risks facing companies. Governance issues remained important for ESG-oriented investors, with an emphasis on diversity and accountability to shareholders. Regulatory changes also put focus on ESG issues, with state and local governments in particular leading the way. During the reporting period, legislation was enacted in California promoting gender diversity on corporate boards, and New York City passed a law to cut greenhouse gas emissions from buildings.
The information technology sector was the largest contributor to the Index’s return, rebounding strongly following a sharp decline late in 2018. Although information technology companies faced a number of challenges, including trade tensions, regulatory pressure, and market volatility, strong demand and product innovations led to solid returns for the sector. Software companies were leading sources of strength, benefiting from the continued growth of software as a service. The move toward subscription-based software drove profitability by providing consistent revenues while reducing training costs.
Brisk growth in consumer spending helped the consumer discretionary sector, another significant contributor to the Index’s return. Growing wages and rebounding consumer confidence drove increased spending even as inflation remained muted. Consumer staples stocks also bolstered the Index’s performance, as cost-cutting measures, along with innovations to capitalize on consumer trends and expand product offerings, helped household products companies weather a difficult and competitive landscape. Industrials stocks performed well, supported by machinery companies that benefited from rising customer orders.
In terms of relative performance, the Index outperformed the broader market, as represented by the MSCI USA IMI Index. Relative to the broader market, the ESG selection process leads to relatively minor overweight and underweight positions in stocks with higher or lower ESG characteristics, respectively. For the reporting period, the Index held underweight positions in the financials and healthcare sectors and overweight positions in the communication services and information technology sectors. These overweight positions were the primary contributors to relative performance.
In terms of relative performance, the Index underperformed the broader market, as represented by the MSCI USA Index. Relative to the broader market, the ESG selection process leads to relatively minor overweight and underweight positions in stocks with higher or lower ESG characteristics, respectively. For the reporting period, the primary detractors from relative performance were underweight positions in financial services and consumer cyclical stocks. An overweight position in basic materials was the largest contributor to the Index’s relative return.
Boston Common ESG Impact Funds: ESG Impact US Fund and ESG Impact International Fund, Annual Report 3/31/2019, filed June 10, 2019
We remain long-term oriented investors, seeking to add value through varied market environments, through our portfolio choices and our active shareowner engagement. Our integrated Environmental, Social and Governance (“ESG”) and Financial approach helps us remain cognizant of risks, as we work to create diversified portfolios of high-quality companies operating sustainably in growing end markets. By urging companies to improve their products, policies, and practices, we create ESG momentum that we believe will improve company fundamentals, thus making them better investments.
The world faces many daunting environmental and social challenges today, making it more important than ever that companies rise to these challenges. As an active shareowner, we use our voice to engage portfolio companies in dialogue, asking for transparency, accountability and a focus on building long-term sustainable profitability. We identify areas of material risk and opportunity in our engagements and underline the importance of Board level responsibility on issues like climate change, diversity, and human rights. While climate-related concerns remain in the forefront, we are also engaging companies to promote diversity and work on their products, services, practices and policies, to achieve the United Nations’ Sustainable Development Goals. Please see the next section for further information.
We released our second Impact report last Fall and 2018’s results should be published by early this summer. These reports help document and explain the impact we seek in the public equity markets as we use shareowner leverage to influence corporate and industry practices globally. We have ambitious plans for engaging companies around the world this year, and we are committed to reporting on our continued impact.
Fund Shareowner Engagement
Below, we showcase examples of how our shareowner voice can add value through targeted company and industry engagement and dialogue efforts.
Flagship Initiatives
Over the last six months, we presented progress on our Eco-Efficiency work, advanced our Banking on a Low Carbon Future initiative and made a new commitment to address plastic waste.
NEW REPORT: Improving Efficiency, Unlocking Returns: Transforming Corporate Resource Management. We are excited to share our first progress report on our ambitious initiative to engage companies on Eco-Efficiency, our call to action to corporations to increase their resource productivity and cut resource use – namely energy, emissions, water, and waste. We wanted to challenge and inspire companies to re-imagine products, re-conceptualize strategy, and redesign processes. We began this multi-year initiative with companies in 2015, supported by an investor coalition of $1 trillion in assets under management. Our aim: to create a narrative around Eco-Efficiency within companies that helps embed the concept of Eco-Efficiency at a management and corporate governance level. The goal: doing more with less is a consideration for every business decision.
In total twenty-five, companies were benchmarked against this framework which will inform our engagement focus in 2019. This included many companies in the Boston Common ESG Impact Funds including: 3M, Air Liquide, Apache, BMW, Covestro, Cummins, Ecolab, EOG Resources, Equinor, Johnson & Johnson, Kansas City Southern, Origin Energy, Panasonic, PPG Industries, Repsol, Schneider Electric and Taiwan Semiconductor. A few examples of portfolio companies with best practices include: Air Liquide (committing to new energy efficiency goals and global water risk assessment) and Schneider Electric and 3M (both companies doubled their rate of energy productivity improvements in U.S. facilities that used 50001 energy management framework).
ONGOING WORK: Under our Banking on a Low Carbon Future initiative we provided feedback to Citigroup and Standard Chartered on their Taskforce for Climate-related Financial Disclosures (“TCFD”) reports. Both companies put Governance structures in place in 2018 to address TCFD and climate risk. Standard Chartered created a group level Climate Change Working Group chaired by the Global Head of Enterprise Risk Management and a Sustainable Finance team focused on creating a Bank-wide strategy. Citigroup established an Environmental and Social Advisory Council that has senior level oversight for Citi’s Sustainable Progress Strategy. Both banks also implemented new coal financing restrictions with Standard Chartered ending direct financing of new coal-fired power plants while Citigroup has established a new sector restriction on coal and coal-fired power plant financing. We will ask both banks to consider signing the Principles for Responsible Banking following the leadership of twenty-eight other banks including ING GROEP.
NEW INITIATIVE: Boston Common Asset Management (“Boston Common”) became a signatory of the New Plastics Economy Global Commitment – which envisions a circular economy for plastic, where plastics never become waste. The commitment aims “to create ’a new normal’ for plastic packaging. They will review targets every 18 months and become increasingly ambitious over the coming years. Businesses that sign the commitment will publish annual data on their progress to help drive momentum and ensure transparency.”
2019 U.S. Proxy Season Preview
Shareholder resolutions are one of the key tools we use in the U.S. to achieve impact in public equities. These engagements may be shorter-term in nature and tend to focus on a specific “ask” of companies. Boston Common filed a diverse number of shareholder resolutions as laid out in the table below for the 2019 season:
During the first quarter of 2019, we withdrew three shareholder resolution proposals after successful negotiations with each of the companies below:
• Verizon (Lobbying Disclosure) We withdrew our proposal on Lobbying Disclosure after the company increased its disclosure in its recent Political Engagement Report January-December 2018, including: management decision-making and board level oversight (annual review), and disclosure of significant trade association memberships. Verizon has also agreed to continue the dialogue and discuss potential next steps in 2019.
• The Home Depot (Carbon Emissions). We withdrew our resolution on greenhouse gas (“GHG”) emission reductions after the company committed to a Science Based Target for Scope 1 and Scope 2 GHG emissions with reduction goals for its own operations. Home Depot is aiming for a 40% reduction in carbon emissions by 2030 and a 50% reduction by 2035. It has made significant investments in wind and solar for 2019 to source 135 megawatts of energy from alternative sources by the end of 2020.
• Mohawk Industries (Board Diversity) Mohawk Industries publicly augmented its Board Diversity search criteria, and as a result Boston Common also withdrew our board diversity resolution with Mohawk. The company agreed to include additional language in its board diversity search criteria and share it publicly on its website.
Advancing Engagement on Social Issues
Forced labor in manufacturing is a material risk for the Information and Communications Technology (“ICT”) sector. Risks include: the potential use of migrant workers paying high recruitment fees, the retention of identification documents, and the use of forced or child labor. We joined Interfaith Center on Corporate Responsibility in backing the findings of the KnowTheChain’s 2018 Benchmarking Report on Forced Labor in the ICT sector, which rated 40 companies on their approach to reducing exploitation and protecting the rights of workers in its supply chain. Boston Common led inquiries with Analog Devices, Hoya, Infineon, Keyence, & Nintendo.
We engaged CME under our Women Empowerment Principles Initiative. The company expanded its board, added one woman in 2017, and has adopted a ’Rooney Rule’ regarding including women and diverse candidates in every board director search. CME is in the process of creating a Diversity and Inclusion Council and senior leadership aims to align all activities across the organization and identify gaps.
After a year-long collaborative engagement with management, JPMorgan Chase has discontinued its relationship with the private-prison industry given the business risks and the need for enhanced human rights due diligence. Our joint investor group withdrew the lobbying disclosure shareholder resolution after JPMorgan agreed to improve its disclosure.
