Sustainability is an integral part of both our investment process and our team values.
ESG (Environmental, Social and Governance) considerations play a central role in Harbour’s investment philosophy.
Harbour is a market leader for integrating ESG research into our investment process.
ESG considerations are important for two reasons:
As a responsible corporate citizen, with a fiduciary duty to our clients, we have an obligation to consider all types of risk. This includes the environmental, social and governance risks associated with the companies we invest in.
As active investors, we believe that ESG risks and opportunities are often not fully reflected in the market price for securities. We are able to use this knowledge to invest to achieve better outcomes for our clients.
Key responsible investing documents:
At Harbour, we employ a strategy of integration and company engagement. This means our team researches companies we invest in and actively checks for any environmental, social or governance (ESG) risks that may apply to them. It helps our Portfolio Managers develop an understanding of each company, and influences not only whether we invest in companies, but also how much. It helps us to unearth companies which may be great opportunities for long term growth, as well as companies with potentially hidden risks.
We are able to use our role as a shareholder to engage with company leadership, highlight any concerns we may have and use our influence to encourage better behaviour.
We also apply a baseline of exclusions to the funds which employ our ESG strategy, to remove companies whose business activities may lead to significant harm in society. Exclusions cover areas such as tobacco, nuclear explosives, cluster munitions, anti-personnel mines, pornography and controversial firearms. We explain how these exclusions are applied in our Environmental, Social and Governance Policy, available above.
Our annual Corporate Behaviour Survey researches how companies rate on issues like:
Environmental policies and risk management
Health and safety
Executive remuneration and incentives
Harbour Asset Management was the winner of the Most Ethical Retail Investment provider. The judges were particularly impressed by Harbour’s strong research capability and analysis of Australian and New Zealand companies. They have demonstrated in-depth engagement with companies, with examples of how they have helped to improve social, environmental and governance performance.
Harbour’s engagement program not only focuses on constructively working with companies in our investment universe, but also contributing to public policy/regulatory consultations to positively influence policy settings relating to ESG considerations.
|Date||Link to submission||Submitted to|
|May 2022||External Reporting Board (XRB) Submission||External Reporting Board|
|Mar 2021||Submission on the Climate Change Commission’s Draft Advice||Climate Change Commission|
|Dec 2019||Climate change-related financial disclosure submission||Ministry for the Environment & Ministry for Business, Innovation and Employment|
|Oct 2019||Submission on green bonds and other responsible investment products||Financial Markets Authority|
|Aug 2019||Clean Car Standard & Clean Car Discount submission||Ministry of Transport|
|Jul 2018||Zero Carbon Bill Submission||Ministry for the Environment|
|Jun 2018||Response to NZX Listing Rules Review, second round||NZX|
|Nov 2017||Response to NZX Listing Rules Review||NZX|
|Oct 2016||Submission to NZX Corporate Governance Code Review||NZX|
We demonstrate our responsible investing philosophy and fiduciary duty by keeping active in our investments through our extensive engagement programme and proxy voting process.
A summary of proxy voting activity for the 12 months to 31st December 2022 is provided through the charts below.
The most prevalent voting resolutions that were contentious over the year related to executive remuneration followed by amending governance documents like constitutions or board committee charters. The election of directors continued to be controversial in some circumstances and there were a growing number of shareholder resolutions related to climate change, particularly in Australia.
On executive remuneration, an example where we voted against management recommendations was for an Australian healthcare company regarding a resolution on issuing options to a non-executive director. It is our view that performance-based remuneration for non-executive directors is inconsistent with best governance practice and therefore voted accordingly. We expressed our concerns to the company and it was acknowledged that this practice would be stopped for all new appointees going forward. The results from the AGM showed that the resolution still carried with 60% shareholder support.
Regarding resolutions to amend governance documents, these were mostly shareholder resolutions in Australia to enable the filing of additional resolutions such as those relating to climate change. These were largely opposed due to the fact there is already a legal system in place to oversee shareholder proposals (the Corporations Act) and other mechanisms that shareholders can engage companies such as submitting questions at the AGMs.
Climate change resolutions were primarily proposed by shareholders but were often not put to the meeting given they were conditional on the resolutions to amend constitutions which did not carry. Regardless, our voting intentions tended to be against these proposals given requests for climate action or information where in many cases companies were already making solid progress. Examples included the major Australian banks who have joined the Net Zero Banking Alliance, set near term targets in their lending portfolios (sector specific) and committed to the phasing out of financing fossil fuel production.
Our engagement over 2022 remained centred on climate change and key social issues such as modern slavery and employee wellbeing. Domestic developments in the climate space including the inaugural emissions reduction plan from the NZ Government and completion of climate reporting standards by the External Reporting Board helped focus company efforts on climate mitigation and adaptation and shaped our conversations with them.
At the company level, engagements related to climate change have focused on transition plans i.e. detail on how they are intending to decarbonise their operations and meet their emissions reduction targets. This has often involved discussing emerging technologies like hydrogen, electric vehicle adoption and innovation in industrial processes. Engagement has been prioritised by targeting the largest emitters in our local market and in general these companies have shown encouraging progress in developing initiatives and investing in low carbon solutions to meet their climate strategies.
We have also engaged on climate change at an industry level by providing a submission on the climate reporting standards being developed in New Zealand and have been collaborating with peers on a project to standardise the use of climate scenario analysis across investment portfolios.
Regarding social issues, one of the trends observed from company sustainability disclosures was the uptick in employee turnover rates compared to past years. This led to us querying companies to better understand what was driving this change and whether it was a company specific issue or an outcome of wider macro movements. In most cases this was simply a function of the tightness in the labour market with expectations for these levels to moderate again over time. It will continue to be an issue we monitor closely to ensure companies are still implementing strong talent retention programmes through appropriately remunerating employees and other wellbeing initiatives.
Another major development over the year has been the introduction of a New Zealand stewardship code that aims to provide a principles-based guide for asset managers and owners on best practice engagement and voting to create long term value for the benefit of clients, beneficiaries, the environment, and society. Harbour was closely involved in the drafting of the code and engaged industry both as part of the consultation process and through actively promoting the code once it was completed.
Our engagement strategy also continued to capture companies with contentious ESG issues such as Board composition and executive/director remuneration particularly around company AGMs. There were a number of companies that proposed increases to director remuneration levels which often involved discussions with the management or board to better understand the rationale and assessment whether they were justified. There was also a couple of cases where companies were paying performance based compensation to non-executive directors which is contrary to best governance practice.
These targeted engagements were supplemented by the general ESG engagement we conduct across our whole NZ investment universe each year as part of our Corporate Behaviour Survey process.
The Corporate Behaviour Survey is our primary way to comprehensively assess how well each company in our NZ investment universe is addressing ESG considerations with engagement playing a key part. More information can be found in our ESG policy at Harbour-ESG-Policy-FINAL.pdf (harbourasset.co.nz)
During the year we conducted 23 ESG related engagements on ad hoc issues in addition to the engagements we conduct annually as part of our Corporate Behaviour Survey process.
For the ad hoc engagements, these were fairly balanced between NZ and Australian companies (12 and 11) out of the total 23 conducted. This was despite Harbour portfolios proportionately having a larger weighting to NZ companies compared to Australia, which was driven by a higher number of contentious governance issues for Australian companies during the year.
There were a variety of different ESG issues covered in these engagements and, in some cases, they involved multiple interactions with the company. As part of our engagement strategy, we engaged with five companies on climate change, three on social aspects including modern slavery and two on circular economy. We continued to engage on AGM resolutions relating to board composition through four director election engagements, and seven on executive/director remuneration. There were also two on miscellaneous ESG issues.
Outcomes from these engagements were generally constructive with many of the companies receptive to our concerns and in some cases taking action to improve on the issues identified, as demonstrated through the case studies below. We are cognisant that some of these issues are long-term in nature and take time to enact change. We are both patient and confident companies will eventually make the appropriate adjustments, but we will continue to monitor and liaise with them until these are made.
Case Study 1:
We engaged with the CFO of an Australian materials company on board composition. At the company’s AGM, one of the resolutions to re-elect a director was considered contentious on the basis that the board lacked independence and gender diversity.
The context of the company was acknowledged, namely that it is small and highly technical with this particular director bringing important institutional knowledge to the board which is needed at this point in time.
Outcome: After discussing with the company, we decided to vote in support of the director’s re-election given the commitment that the board would be refreshed in the medium term to address the independence and diversity concerns.
The company noted they would be announcing at least one new non-executive director in the near future and how three out of the four-person shortlist were women.
Case Study 2:
We engaged with senior management of a NZ retail company on how they’re contributing to the sustainable development goals and their efforts to combat modern slavery given the high risk in their supply chain due to the industry they operate in.
Specifically, we aimed to find out how they measure the efficacy of their approach and provide examples of working with their suppliers in the prevention or remediation of modern slavery.
The company detailed how they are at the forefront of advising the Government on developing modern slavery legislation in New Zealand and how they co-founded a collaborative initiative with peers to help collectively address the problem. They also provided tangible examples of both positive and negative supplier engagements based on evidence of bonded labour and other human rights abuses.
Case Study 3:
We have had multiple conversations with the board and senior management of a NZ utility company over the past couple of years on the company’s emissions exposure and transition to a greater proportion of renewable generation.
Our most recent engagement with the Chair following their annual result focused on the execution of their climate strategy and how they view the energy transition playing out in New Zealand. In particular, it was noted that small pumped hydro projects may be more viable than Lake Onslow and it is still early days on hydrogen, with no infrastructure in place and a long build time.
We’ve seen encouraging progress from the company over this time such as their development of a new geothermal power station and an announcement during the year that they would be closing one of their thermal generation assets.
Overall, the year continued to see disruption from the tail end of the Covid pandemic and the new crisis resulting from Russia’s invasion of Ukraine. The latter particularly emphasised the importance of the energy transition and ensuring security of supply, especially building renewable generation capacity. We were encouraged by positive outcomes from some of our climate related engagements in terms of tangible actions to decarbonise (such as new renewable energy projects) and transparency over their strategies to meet targets. Looking after people has been another important theme with engagements focused on company efforts to manage the wellbeing of their staff as well as how they approach human rights risk across their supply chain.
The coming year is expected to involve a further focus on these themes, particularly climate change with the rollout of new climate disclosure according to mandatory reporting standards. Our engagement strategy therefore will continue to challenge companies on their transition plans and hold them accountable to their stated targets.
In addition, we will continue to engage companies as any material ESG issues arise, particularly on contentious areas proposed during company AGMs. This also includes maintaining our dialogue with companies that we have identified as lagging in an issue such as Board independence, remuneration or ESG disclosure, by constructively working with them in the long term to achieve the best outcomes for shareholders.