|Name||EOS at Federated Hermes|
|Signatory type||Service provider and asset manager|
|Region of operation||Global|
|Assets under management||US$1.64trn (as of 31 December 2021)|
|COVERED IN THIS CASE STUDY|
|Asset class and strategy||Listed equity|
|ESG issues||Social issues: human capital; corporate governance issues|
Why we do Stewardship?
EOS at Federated Hermes is a leading stewardship service provider. Our engagement activities enable long-term institutional investors to be more active owners of their assets, through dialogue with companies on environmental, social and governance (ESG) issues. We believe this is essential to build a global financial system that delivers improved long-term returns for investors, as well as better, more sustainable outcomes for society.
How we do it?
We have been engaging with Chinese companies for over a decade and the number of Chinese companies we engage with has gradually increased. We engage with Chinese companies in Mandarin and English and, in general, the momentum of our indicators of engagement progress are in line with other markets. Our engagements involve well-researched and informed dialogue with company representatives and investor relations teams as well as subject matter experts, senior executives and board members. We also typically carry out site visits or trips to meet board members, such as a visit we made to meet the CFO, investor relations and sustainability teams of a dairy company based in Beijing and to visit one of its production sites. However, these visits have not been possible during the pandemic.
We engage with companies both unilaterally and collaboratively with other investors and, at times, we may escalate meetings using letters to the chair and board of directors, or through meetings with independent directors.
Proxy voting recommendations are another way to engage with companies in China. Over the many years in which we have been undertaking engagement, we have developed comprehensive corporate governance principles based on our expert knowledge of specific markets and with input from effective collaboration with groups such as the Asia Corporate Governance Association (ACGA) and Institutional Shareholder Services, a proxy advisory firm. We send these principles for China (in English and Chinese) to all relevant companies in our clients’ holdings (including our own in-house funds, we represent a total of US$1.64trn in assets under advice). We then make recommendations based on these principles, seeking to engage with companies during a vote.
Shareholder resolutions are also a way of escalating engagement with companies, although they are still relatively rare in China. When providing proxy voting recommendations, we consider each resolution individually and seek dialogue with the company before we make a recommendation.
Another key aspect of stewardship is work on public policy priorities. As mentioned, we liaise with key stakeholders such as the ACGA, and seek to build networks such as with the Asset Management Association of China (AMAC). We have provided AMAC with ESG training and hope to continue dialogue in future on encouraging and enhancing local stewardship. We support incorporating ESG into listing requirements and have responded to public consultations, requesting more stringent ESG disclosure requirements to enhance the social aspects of ESG as well as the ‘E’ and the ‘G’.
Engaging with companies to improve their performance on managing human capital
We have been engaging with one of China’s largest online retailers. Since the company’s initial public offering, it had not issued a standalone ESG report or held an annual shareholder meeting. We were concerned about a lack of diversity on its board and limited ESG disclosure. In response to public concerns about the risk of a ‘996’ culture – whereby employees work 9am to 9pm six days a week – we recommended the company provide an explanation of how human capital management, diversity and inclusion are linked to its core values and culture. We shared best-practice examples of disclosure focused on governance, culture and employee wellbeing.
The company published its first ESG report in 2021, covering topics discussed in our engagement. We welcomed its disclosure on corporate governance structure, data privacy and cybersecurity management, and its commitment to decarbonisation. The company also confirmed its arrangements for a first annual general meeting in 2021, in line with our request. In addition, we welcomed the appointment of its first female director to the board this year. We will continue to encourage further disclosure on ESG topics including plastic recycling, climate change, human capital management, diversity and inclusion, and its dual share structure.
Another example is our engagement with one of China’s largest companies. Since the abrupt departure of its then COO and other senior executives in 2018, in addition to a wider outflow of talent from its workforce, EOS used various means to voice concerns and provided suggestions on human capital management. We sent a letter to the board to ask for more disclosure of workforce information, and we encouraged a stronger narrative and context around the human capital metrics chosen and made recommendations based on our human capital management reporting framework.
This year, the company issued a special human capital report, taking on board many of our suggestions. The report is a new attempt to deliver the commitments in the human rights policy established in 2020. It incorporated feedback from an employee survey run in July 2020 to shape the behavioural expressions of its seven principles of corporate culture. The company provided good disclosure of its human capital management framework and performance indicators. Accompanied by targets and a pathway, the talent management initiative is to be reviewed each quarter and at the end of the year. Keeping top talent is one of the CEO’s key performance indicators and his top priority for 2021. We will encourage the company to disclose these figures annually so that improvements year on year can be demonstrated.
Challenges and solutions
We find that engagement on environmental and governance concerns is more straightforward than engagement on social matters, although companies are becoming more willing to discuss issues around human capital management. We are keen to make progress on the ‘S’ pillar and continue to raise these issues, with cultural sensitivities in mind. Public policy relationships across all ESG themes, and especially those linked to social ones such as the Mekong Club (a modern slavery NGO), will continue to be important. We encourage policy makers to expand disclosure to move beyond philanthropy and corporate social responsibility towards core business impacts on employee wellbeing, inclusion and diversity, health and safety, modern slavery and human trafficking, and digital rights (such as ethical artificial intelligence and data privacy), all of which are vital to the long-term sustainable value of companies and society.
As a representative of long-term investors, we believe that it’s our mission to help companies deliver better, more sustainable outcomes. We are optimistic and ambitious about opportunities for continued engagement success with Chinese companies and regulators, recognising Chinese companies’ significant influence both domestically and internationally.