SolarEdge
Objective
Collaborative engagement on human rights and hazardous chemicals in the solar supply chain.
Background / issue
We consider SolarEdge’s approach to regulations on hazardous chemicals to generally be very strong and were impressed that SolarEdge is one of few companies to disclose the percentage of products dependent on chemicals of concern. We are concerned, however, about the company’s reliance on contract manufacturers, which we feel may introduce vulnerabilities with respect to handling and monitoring chemicals of concern in manufacturing.
Actions
We led the engagement with the company on behalf of a group of shareholders. We initially wrote to the Head of ESG at SolarEdge to request a meeting to discuss the company’s commitment to responsible sourcing and operations as it relates to the critical intersection between worker health and safety, protection of human rights, and safer chemical use. As per our escalation policy, we sent a chaser in January 2023 having not received a response to our initial letter in November 2022.
Outcomes
Unsuccessful/No milestone achieved. We are currently reviewing our engagement plan on this issue at SolarEdge in order to decide the best course of action.
Steris
Objective
Strengthen our understanding of the positive impact associated with Steris’ products and services.
Background/issue
We have been speaking to investee companies as part of a project to further strengthen our understanding of the positive impact associated with their products and services. Additional insights allow us to build a stronger ‘impact investment case’ for each of our stocks helping us to deepen our analysis and refine the impact score we give to our companies.
Actions
Whilst undertaking a review of the research within Steris’ Impact Engine, we identified areas that would benefit from additional detail, including quantifying the extent to which human error influences the efficacy of sterilisation and reprocessing of medical devices, the role of Steris’s products and services in enabling the positive outcomes, and the uniqueness of the company’s contribution.
Outcomes
Successful/Milestone 2: We had a productive call with our contact in Investor Relations who provided additional detail for our impact analysis. For example, we discussed the role of human error as the most significant factor influencing the efficacy of Steris’s equipment and the measures taken by the company to reduce the risk of it occurring. This includes reducing the number of decision and touch points for reprocessing staff by increasing automation. The company was, however, unable to quantify the proportion of processes that have been automated. We also discussed Steris’ in-house training provided for the reprocessing operatives working within its outsourcing team and the technologies that it uses to ensure that processes run correctly.
In terms of other factors or services influencing the efficacy of the sterilisation process, Steris was keen to point out that hospital-acquired infections do not typically come from equipment but, instead, mostly from poor hand hygiene or improper cleaning of the operating room though the company did not have any data on this. Steris had previously made efforts to offer sterilisation for touchpoint items like blood pressure cuffs, for example, through the use of hydrogen peroxide chambers, though, this was not taken up by the industry because it slows the turnover of the equipment.
This information has been helpful for adding additional detail in understanding the positive impact of Steris’s products, however it did not change any of the underlying scores within our impact analysis.
MSA Safety
Engagement issue
Net zero carbon targets
Engagement objective
Encourage the company to set a net zero carbon target.
Scope and process
WHEB’s Voting Policy requires a vote against the election of the Chair or lead director where the company does not have a net zero carbon target. It also requires writing to company management to explain our reasons for voting against their recommendations, which is what we did after voting at MSAs 2022 AGM. Initially the company did not respond to this letter, however, later in the year, our Associate Fund Manager Victoria MacLean met the company’s Investor Relations Director at a conference where she raised the topic again.
Outcome
Successful. After this discussion, MSA asked for WHEB’s input in setting such a goal. We have since given full feedback and detailed insights during a call. This included our own perspective on sustainability and the internal targets that we work towards at WHEB. In addition, we provided details on what we expect from companies when they set carbon targets and strategy. WHEB is delighted to see one of our portfolio companies take proactive steps towards creating beneficial real economy impacts and we will continue to support MSA in setting net zero targets and strategy.
Keyence
Engagement issue
Product Impact
Engagement objective
Strengthen our understanding of the positive impact associated with Keyence’s products and services.
Scope and process
We’ve recently been undertaking a project to quantify and further strengthen our understanding of the positive impact associated with the products and services sold by our investee companies. Additional insights allow us to build a stronger case and ‘impact story’ for each of our stocks, which is especially useful for our investors. It also feeds into our broader analysis and can result in an improved impact score for the company.
We reviewed the analysis on Keyence within our impact engine to identify areas that we felt we could develop our understanding. This work formed the basis of a series of questions we put to the company in advance of an arranged discussion on them.
Outcome
Partially successful. The call was not as helpful as we had hoped, unfortunately. The main problem is that it is very difficult to quantify resource efficiency gains when using Keyence’s technology at a broad level, due to the fact that so many different variables are involved. For example, the speed of conveyor belts from other manufacturers can be a limiting factor to how many defects can be identified by machine vision tech. Further engagement dialogues with the company should encourage the company to help customers quantify their resource efficiency gains, or to sell manufacturing systems that could help improve the outcome for the customer.
Vestas & Xylem
WHEB's Investment Advisory Committee
Objective
Information gathering exercise to understand what corporate best practice is in supporting the well-being of employees in sensitive areas like reproductive rights.
Background/issue
In light of the Roe v Wade ruling form the US Supreme Court, we considered how best to approach key public social issues, especially where they are contentious and have become politicised. We therefore raised this issue with the Investment Advisory Committee in July 2022.
Actions
After a discussion in the committee meeting, it was decided that, in potentially contentious areas like reproductive rights, for example, we should encourage businesses to be sensitive to differing views within the employee base whilst encouraging companies to adopt practices that clearly support the well-being of all employees. We decided to initially undertake an information-gathering exercise to understand what corporate best practice is in supporting the well-being of employees in sensitive areas like reproductive rights. Following the committee meeting, two opportunities arose to discuss reproductive rights with investee companies: Vestas and Xylem.
- After voting at Xylem’s AGM, we wrote to the company to explain our reasons for voting against management's recommendations, as per our policy. As is often the case, this led to a dialogue with the company management and we were able to raise this topic, amongst others. Specifically, Associate Fund Manager Victoria MacLean enquired about whether there had been a discussion internally on how the recent overturning of Roe v Wade impacted Xylem’s workforce and whether there had been any subsequent changes to benefits. The company stated it has introduced new and reiterated exisiting measures that support employees whose choices about whether or not to have a child may have been influenced by Roe v Wade. Measures include access to increased travel and accommodation allowances to support out-of-state care; increased short-term disability salary cover from 75% to 100% (providing additional support to those needing down time to recover after an abortion); and increased parental leave from four to eight weeks.
- Similarly, a letter written to Vestas following our voting at the company AGM sparked a conversation with the company’s Investor Relations Team. Senior Analyst Claire Jervis shared examples of company action on employee care in response to Roe v Wade. Vestas clarified that medical plans in the US covered abortion and that travel coverage had been expanded to cover out-of-state abortion costs for employees and covered dependents. As with Xylem, Vestas has a comprehensive approach to critical ESG issues, and we are pleased to see that company management is supporting a healthy and diverse workforce
Outcomes
Successful and ongoing
The benefits of a healthy and diverse workforce are well known. It is WHEB’s view, therefore, that investee companies should look after their employees and support diversity. This is evidenced by our long history of engaging with companies on internal social issues, such as diversity and inclusion, employee safety and labour rights, all of which are well-established as valid aspects of the ‘ESG’ agenda. As stated, we are pleased to see that investee companies with a US footprint are taking appropriate measures in light of the overturning of Roe v Wade. We continue to build a picture of best practice and will share this with companies as appropriate.
Power Integrations
Objective
For the company to stop including the tax rate as part of the company’s financial model.
Background/issue
Power Integrations’ products offer the ability to significantly reduce households’ idle load electricity consumption and the company’s leading position in gallium nitride (GaN) technology enables strong growth prospects. However, most of its international sales go via the Cayman Islands, one of the most widely known tax havens. As we believe that this represents a risk to the management quality of the business, which is otherwise good, understanding this strategy has been a priority for us. We initiated an engagement with the company on this topic in Q4 2021 in order to question the responsibility of reporting sales in the Cayman Islands.
This resulted in a lengthy discussion, including a call with the CFO, in which the company indicated no plans to change its reporting practices unless the benefits of reporting in the Cayman Islands are removed. Ultimately, none of the arguments that the company presented will protect it from increasingly stringent rules of corporate tax, such as the OECD’s proposed minimum corporate tax rate or the US’s proposed increased tax rate on foreign earnings.
The discussions helped to build a foundational relationship with the company, which was new to the portfolio as of Q3 2021, though this engagement remained open, requiring further efforts.
Actions
In June 2022, we were invited to speak to Joel Achramowicz of Shelton Group, who Power Intergrations hired in preparation for their first-capital markets day. We took this opportunity to reiterate our belief that tax structuring is unhelpful for society and that it is not differentiating.
We set out our expectations that the company should not include the tax rate in their target financial model and instead should focus on their differentiated technology, intellectual property, markets and operational execution. In addition to tax, we also suggested improved impact and ESG reporting.
Outcomes
Unsuccessful
We have since spoken to the company’s Investor Relations and CFO again on tax, but they remain clear that they have no intention of changing the structure. We will continue to pursue this with the company and escalate as appropriate.
Danaher
Objective
Protect shareholder ability to use the special meeting right
Background/issue
For WHEB’s portfolio companies, routine resolutions occur far more frequently than shareholder resolutions relating to ESG issues. In 2022 a mere 1% of the resolutions WHEB voted on were proposed by shareholders and none related to environmental or social issues. This is likely because WHEB’s investee companies tend to avoid major social or environmental controversies and do not therefore attract regular shareholder resolutions. WHEB’s voting policy is therefore primarily designed to guide voting on core governance and sustainability issues in relation to routine proposals.
Actions
WHEB voted for the Shareholder Proposal ‘4. Amend Articles/Bylaws/Charter - Call Special Meetings - Reduce Ownership Threshold for Shareholders to Call Special Meeting’. This was against management’s recommendations and with ISS.
Where we vote against company management or abstain, we typically write to the company in question, explaining our reasons for doing so and seeking further engagement as appropriate. This communication takes place after the vote. We believe that a vote for this proposal is warranted. Lowering the ownership threshold from 25% to 10% would improve shareholders ability to use the special meeting right and no single shareholder would be able to act unilaterally to call a special meeting at the proposed threshold.
Outcomes
Unknown: We will continue to engage the company on these topics and where we deem them material and escalate as appropriate.
Centene
Objective
Gain an understanding of - how controversial issues – such as how decisions affecting care provision for vulnerable groups – are made and how they might be improved.
Background/issue
Centene has emerged as a major provider of health insurance to poor and vulnerable communities in the US, and in some states it is the only provider. Whilst we believe that Centene, when it does its business well, plays an important role in enabling healthcare access for poor communities in the US, it is not without controversy.
Actions
We engaged with the company over the course of 2022 to understand the various issues faced and how management has responded.
For example, the company received a number of significant fines in recent years for overbilling state-level healthcare agencies. These issues go back to 2017 and involve the way in which Centene was sourcing and billing states for pharmaceutical products. The company acknowledged that their approach led to overbilling and has since restructured that business so that any pharmacy management services are now provided purely as a pass-through so that the company makes no margin on these services.
There has also been a group of legal cases concerning the level of access to specialist services that patients are entitled to (known as network coverage). There are inevitably cases where coverage is incomplete (for example when a specialist retires creating a shortage in that indication at local level) but these instances tend to be temporary and are in any case addressed by enabling access to other providers – albeit sometimes further away – until coverage can be provided more locally. The first of these cases has been thrown out in Washington State. Our engagement with the company confirmed that they believe that the other cases are being taken on a contingent basis (‘no win, no fee’) and that they will also be dismissed in due course.
Potentially more problematic has been the case concerning a small child called D’ashon Morris. Centene, through its Texan subsidiary Superior, had reduced the level of care provided to D’ashon Morris which led directly to him suffering severe brain damage. It is clear in talking to the company that the case has caused quite a lot of introspection into how this happened. The Texan healthcare regulator has also been involved and has identified areas where Superior’s systems needed to be improved. The company claims that all of these areas have now been addressed and formally agreed with HSSE, and that a final settlement has been reached with D’ashon Morris’s family. We followed up with the company because we were keen to understand what the areas for improvement that were identified with HSSE were, what Superior/Centene have done to address them and whether, ultimately, these changes will ensure that these events cannot be repeated.
Outcomes
Partially succesful/Milestone 3:It was clear from our conversation with the company’s General Counsel and their Head of Investor Relations that substantial changes have been made to how decisions get made, particularly on foster care provision in the company’s Texan subsidiary Superior. These changes include for example, a foster care supervisory team that includes independent medical professionals to oversee feedback from clients on the company’s interactions with the foster care community. There are also now opportunities for caregivers to raise red flags before an issue becomes critical and any decision to withhold care is now subject to an appeals process to consider whether the application constitutes a medical necessity. We were impressed with the scale and scope of changes at Superior, but it is also clear that these clear improvements in governance have not been proactively rolled out across the rest of Centene’s activities.
Our investment case for Centene was originally centred around the growth opportunity from its social impact, as the company focuses on providing healthcare access to low-income and vulnerable communities across the US. We felt that the period of strongest opportunity has now passed, and the company is looking for alternative growth avenues which are necessarily less impactful. These were the prevailing reasons for us selling our position in Centene however, our remaining concerns about governance within the business did also factor into this decision-making process. We exited our position in Centene in our Health theme in Q4 2022.
Daikin
Objective
Progress on net zero carbon targets and strategy.
Background/issue
WHEB has been engaging Daikin on the topic of carbon via the CA100+ for several years now. Through this initiative, we have seen success with the company setting a net zero carbon emissions target of 2050.1
Actions
In 2022 we continued work done the year before that focused on strengthening the quality of the company’s strategy for achieving this target. Specifically, within this workstream, WHEB was involved in discussions with CA100+ on engagement tactics, requesting disclosure of targets by scope and requesting a report on lobbying activities and product development. We also suggested how to refine and improve the strategy.
Outcomes
Partially successful/Milestone 2: This ongoing dialogue with Daikin has been effective in achieving progress and enriched our understanding of the challenges the company faces. For example, Daikin is limited in its ability to influence Scope 3, but is working to promote inverter-enabled AC systems which allows great energy efficiency. The company has also co-established the GX public/private collaborative working group for accelerating action on climate, which we hope to learn more about in further conversations, particularly where activity is policy-related.