Archives Case Study

Danaher - DEI

Objective

For Danaher to report on the effectiveness of Diversity, Equity and Inclusion (DEI) efforts.

Background/issue

For WHEB’s portfolio companies, routine resolutions occur far more frequently than shareholder resolutions relating to ESG issues. In 2023 a mere 0.5% of the resolutions WHEB voted on were proposed by shareholders, as is consistent with previous years. Thes proposals also normally related to governance matters, presumably 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.

So far in 2024, there have been 6 shareholder proposals filed at WHEB’s portfolio companies’ AGMs. This includes one filed by the non-profit As You Sow and its co-filers requesting that Danaher publish a report assessing the effectiveness of its DEI efforts.

These parties filed a similar proposal in 2023¹. The 2024 proposal continues to emphasise the need for annual reporting on DEI efforts but is more focused on the process that the Board follows to assess the effectiveness of these programs. It calls for a detailed report that outlines the assessment procedures, the effectiveness of the programs, and relevant goals and metrics for promoting, recruiting, and retaining employees from protected classes​.

Actions

WHEB supported this shareholder proposal, against the recommendations of company management and ISS, WHEB’s proxy advisor.

Our view is that Danaher’s work on diversity has been good but there is clearly room for improvement. Danaher outlines its diversity and inclusion strategy in its Sustainability Report, including goals of 40% women and 38% people of colour in the U.S. workforce by 2025. The company also reported hiring success, with 41% of global new hires in 2022 being women and 71% of new hires being diverse².

However, the company does not disclose retention or promotion data by race and ethnicity, which is crucial for increasing diversity across senior levels.

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.

Outcomes

Unfortunately Danaher did not respond to our letter. The resolution was not passed however it did receive a just under 40% support from shareholders, indicating a strong level of investor interest in improved reporting on the effectiveness of its DEI programmes.

¹ Refer to the case study on page 69 of WHEB’s 2023 Stewardship Report.
² Meaning women and/or People of Colour https://www.danaher.com/sites/default/files/2023-10/danaher-2023-sustainability-report.pdf

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STMicroelectronics - NZC targets

Objective

The overall objective is for STMicroelectronics to achieve Net Zero Carbon (NZC) emissions across Scopes 1, 2 & 3 by 2050 at the latest.

The interim objective is for the company to set targets validated by the Science Based Targets initiative (SBTi) and to focus on improving transparency on Scope 3 emissions data.

Background

STMicroelectronics has set an ambitious goal of achieving carbon neutrality by 2027 for scope 1 and scope 2 emissions and partially for scope 3. The company has developed interim targets to reduce emissions and has recognized the importance of data collection regarding its supply chain. Scope 3 emissions reporting currently only cover the transportation of goods and employee commuting. While, STM acknowledges the challenges it faces in collecting comprehensive data from its approximately 6,000 suppliers, which vary in their maturity regarding sustainability reporting, it has nonetheless resisted including these emissions in their targets. The company will therefore only include the transportation of goods and employee commuting in its current targets.

Actions

WHEB engaged in dialogue with STM to discuss the company's progress regarding scope 3 data collection and the potential announcement of a NZC target encompassing all three emission scopes (scope 1, scope 2, and scope 3). We also sought to understand the company’s intermediary targets for reducing scope 1 and scope 2 emissions by 2025, as certified by the Science Based Targets initiative (SBTi).

Objective

The overall objective is for STMicroelectronics to achieve Net Zero Carbon (NZC) emissions across Scopes 1, 2 & 3 by 2050 at the latest.

The interim objective is for the company to set targets validated by the Science Based Targets initiative (SBTi) and to focus on improving transparency on Scope 3 emissions data.

Background

STMicroelectronics has set an ambitious goal of achieving carbon neutrality by 2027 for scope 1 and scope 2 emissions and partially for scope 3. The company has developed interim targets to reduce emissions and has recognized the importance of data collection regarding its supply chain. Scope 3 emissions reporting currently only cover the transportation of goods and employee commuting. While, STM acknowledges the challenges it faces in collecting comprehensive data from its approximately 6,000 suppliers, which vary in their maturity regarding sustainability reporting, it has nonetheless resisted including these emissions in their targets. The company will therefore only include the transportation of goods and employee commuting in its current targets.

Actions

WHEB engaged in dialogue with STM to discuss the company's progress regarding scope 3 data collection and the potential announcement of a NZC target encompassing all three emission scopes (scope 1, scope 2, and scope 3). We also sought to understand the company’s intermediary targets for reducing scope 1 and scope 2 emissions by 2025, as certified by the Science Based Targets initiative (SBTi).

Outcomes

STM outlined its commitment to carbon neutrality, targeting 2027 for scope 1 and scope 2 emissions, while also addressing scope 3 emissions to some extent. The company noted that it is actively assessing challenges within its supply chain, especially upstream, and is working to expand its scope 3 data collection beyond its current limitations. STM indicated it has around 6,000 to 7,000 suppliers, varying in their maturity regarding sustainability reporting, which complicates comprehensive data collection. It did however confirm that there are no plans to commit to SBTi targets covering scope 3 emissions.

In terms of emissions reduction strategies, it plans to install a perfluorocarbon (PFC) abatement system to significantly reduce scope 1 emissions. The company also aims to decrease energy consumption per unit of production by 20% from 2016 to 2025 and is currently on track with a 17% reduction achieved. Furthermore, STM is progressing toward a 100% renewable energy target by 2027, with 71% of its electricity currently sourced from renewables, supported by Power Purchase Agreements (PPAs) with wind and solar utilities.

STM also discussed its approach to managing emissions from transportation and mentioned that while it plans to implement carbon offsets for unavoidable emissions, it has no current offsetting projects included in its reports. Overall, the company emphasised its commitment to transparency in reporting and stated that it would only disclose data that meets robust standards, promising to update its long-term goals regularly.

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Gerresheimer - Product impact

Objective

For Gerresheimer to publish data that helps to strengthen investors’ understanding of the positive impacts enabled through its products and services.

Background

We continually seek to further strengthen our understanding of the positive and negative impacts associated with the products and services sold by our investee companies. Additional insights allow us to build stronger investment conviction in a stock and more clearly set out the ‘impact story’. Equally, understanding negative impacts is an essential step towards addressing these impacts.

Actions

During a call with Gerresheimer we raised the issue of product impact. Specifically, we focused on the environmental impact of their auto-injectors and pens, particularly around end-of-life disposal.

Outcomes

M2

Gerresheimer confirmed that this issue is firmly on their agenda, and they are actively in discussions with customers to address the challenges. However, several factors make this a complex problem:

Regulatory Challenges: The pharmaceutical industry is highly regulated, and any changes to how used auto-injectors are handled must comply with strict standards. This makes it difficult to implement widespread changes quickly.

Hazardous Waste Management: Used auto-injectors are considered hazardous waste, meaning that they must be dismantled and disposed of in separate parts, which complicates the process of managing these devices responsibly.

Logistical Barriers: There are significant logistical challenges in setting up a system for returning used injectors. GXI is evaluating options for collection points, such as pharmacies or doctor's offices, but these considerations require further analysis and planning.

Gerresheimer also acknowledged that multiple-use injectors could reduce waste, although they don't completely eliminate the issue. As the market for auto-injectors is growing, the company recognises that this will become a more pressing topic in the near future and is committed to finding solutions. They are actively exploring product lifecycle improvements, but significant barriers remain that will require innovative approaches and collaboration within the industry. We will continue to raise this topic with Gerresheimer during our meetings with the company, but ultimately advancements will need to be made in collaboration with pharmaceutical companies and the FDA.

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AstraZeneca

Objective

Aligning executive pay with performance, fostering long-term value creation, and improving corporate governance.

Background

In advance of the 2024 AGM, AstraZeneca’s management proposed a new remuneration policy significantly increasing maximum variable pay for executives. This included a potential maximum long-term incentive plan (LTIP) level of 850% of base salary, which is unprecedented in the FTSE and further widens the variable pay gap with FTSE 10 peers. This proposal follows a period where the CEO has achieved his maximum LTIP awards ensuring that his overall package is already generous compared to European peers.

AstraZeneca’s rationale for increasing pay is based on the company’s global reach in a high-paying sector with a CEO who is well regarded CEO..

We acknowledge these factors and understand the need for executive compensation to remain competitive on an international basis. That being said, it is WHEB’s view that the scale of this further increase is neither justified nor in the interest of shareholders.

Actions

WHEB voted against the proposed remuneration policy at the 2024 AGM and, as per our policies, we wrote to AstraZeneca’s management to explain why. We later joined a broker call with AstraZeneca’s Chair discussing governance and executive compensation, which occurred following the AGM.

Outcome

Milestone 2 – company shares or agrees to disclose information on the issue

Typically, 20-30% votes against management is considered a clear signal of shareholder dissent, even if the proposal is passed. This proposal received only c.60% support, sending a strong signal to AstraZeneca that a significant proportion of its shareholders do not believe the pay policy is in their best interest. This potentially explains why the Chair dedicated time to further justifying the policy in a broker call.

During that discussion, the Chair argued that the remuneration policy was fair in a global context, especially when compared to US peers which do not disclose the performance criteria in the LTIP to the extent that UK companies do. The Chair also counterargued that the value created by the company under the CEO’s leadership justifies the pay levels.

While we are not supportive of the pay increase, we acknowledge that AstraZeneca is looking particularly strong at the moment, and that the business could potentially double in size under the CEO's leadership by 2030 thanks to the very strong pipeline which includes 20 novel molecules. On this basis, we remain supportive of AstraZeneca from both a fundamental quality and an Impact standpoint.

It seems unlikely that the company is likely to change its attitude on compensation, unless forced to via policy or regulatory action. We will continue monitoring executive remuneration to ensure that the basis on which the pay policy has been adhered to.

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Infineon Technologies

Objective

1. For Infineon to set more ambitious gender diversity targets (increasing from 20% to 30%)

2. Better understanding the company’s approach to broader aspects of DEI

Background

Infineon has over 33% gender diversity at the board and senior management levels, placing it in the top quartile of the portfolio. In addition to this, it has a time-bound target for 20% of management positions to be held by women by 2030. Still, we feel that more could be done to address DEI throughout the business.

Actions

Prompted by WHEB’s voting policy that recommends engagement with businesses showing inadequate diversity we arranged a call with Infineon’s Investor Relations team in Q1 2024.

Specifically, we were keen for the company to build on its approach to gender diversity by increasing its target on management position to be increased to 30% (from 20%) and to learn more about the company’s flexible work policies.

In addition to this we were also keen to learn about Infineon’s approach to DEI beyond gender and asked specifically about goals relating to underrepresented groups such as ethnic minorities, LGBTQ+ and people with disabilities as well as data collection and analysis for these groups, hiring policies and inclusivity and supplier diversity.

Outcome

Milestone 2 - Company shares or agrees to disclose information on the issue / Milestone 3 - Company develops or commits to developing an appropriate policy or strategy to manage the issue

Currently, Infineon feels that a 30% target for gender diversity is challenging within the semiconductor industry. That being said, it is working to increase awareness of the career opportunities in the semiconductor industry via a number of initiatives for example with schools and universities. It also has the largest kindergarten in Germany and enables flexible working and has policies to address bias in promoting mothers.

Nevertheless, Infineon has implemented various initiatives aimed at promoting inclusivity and diversity, such as accommodating religious dietary restrictions, establishing employee resource groups, conducting surveys to gauge employee satisfaction and identify areas for improvement, and setting up an anonymous integrity line to address any concerns raised by employees. These efforts indicate a commitment to creating a supportive and inclusive work environment, even if specific targets for diversity metrics are not yet in place.

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First Solar

Objective

Substantive reductions in GHG emissions across all scopes and net zero carbon emissions by 2050.

Background

Despite its products representing a critical technology in decarbonising the global economy, First Solar is one of the WHEB strategy’s top greenhouse gas (GHG) emitters by financed emissions. An additional frustration of ours has been that the company has failed to capture the opportunity to use its own panels to help reduce their own Scope 2 emissions.

WHEB has therefore been engaging the company on this, as well as other issues, jointly with the Investors for Sustainable Solar initiative¹.

Actions

WHEB took part in a group call with Frist Solar’s Head of ESG and Sustainability, along with our collaborating investors, in which we pushed for reduced Scope 2 emissions by replacing fossil based energy sources with renewable energy and increased energy efficiency.

During the latest call, in December 2023, the company highlighted its commitment to sourcing 100% renewable energy by 2028. Disappointingly, this has been pushed back by two years primarily due to First Solar’s considerable growth rate, which will cause a continued increase in its emissions through to 2026.

More positively the company has now received Science Based Targets initiative (SBTi) validation of both their near and long-term net zero carbon (NZC) targets and has published a carbon reduction roadmap.

Outcome

Milestone 4 - Company provides evidence that the issue is being managed in line with the policy or strategy, demonstrating concerns have been addressed

As the global economy continues to decarbonise, First Solar is positioned to benefit from increased solar demand. Its decarbonisation targets are now aligned with the Paris Agreement, and it is implementing robust systems and processes to reduce its absolute emissions, which we hope to see in the next five years.

Furthermore, in January 2024 we were pleased to see First Solar announce plans for its Indian operations to be 70% powered by renewable electricity provided by its own panels by the end of the year. This is expected to displace 7,000 kilotons of CO2e emissions over the 15 year duration of the Power Purchase Agreement. On top of this, emissions overall have not increased, which is impressive given the company’s rate of growth.

With WHEB having made a commitment for our investment portfolio to be net zero carbon by 2050, we will continue to monitor the company’s progress in achieving absolute emissions reductions across all Scopes.

¹ https://iehn.org/our-work/investors-for-sustainablesolar#:~:text=Investors%20for%20Sustainable%20Solar%20is,and20Asset%20Management%20LLP

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MSA Safety

Objective

For MSA Safety to improve its gender diversity by improving female board-level representation to at least 33%.

Background

We have previously engaged MSA Safety on the topic of gender diversity. In 2022, we used our voting rights to vote against the re-election of Lead Director, Robert A. Bruggeworth and wrote to the company explaining our dissatisfaction with less than 33% of board members being female.

We raised the topic again later that year during a call, and MSA mentioned a challenging period for making diverse hires, possibly due to the pandemic. It did, however, express intentions to make improvements and highlighted that a diversity metric had been included in the pricing a credit facility (meaning that the company would have to pay a higher interest rate if specified targets were not met).

Later, MSA’s 2022 Impact Report highlighted other diversity-related metrics, including 30% board diversity and 36% diversity at the executive leadership level.

Actions

We spoke to MSA Safety’s Chief Financial Officer and Investor Relations at the same conference the following year and took the opportunity to raise several ongoing engagement issues¹  as well as gender diversity.

Specifically, WHEB outlined how reporting all facets of diversity under a single metric does not allow a sufficiently detailed understanding of the different dimensions of diversity in the organisation. Instead, MSA should be aiming for a minimum of 33% female board-level representation, as well as improving representation of, and reporting on, other aspects of diversity.

Outcome

Milestone 2 - Company shares or agrees to disclose information on the issue.

Though we attempted to probe the company about whether there is an internal differentiation between measures of diversity, we remain concerned about MSA Safety’s strategy for improving diversity, and especially gender diversity at the board level. There is not only a moral case justifying the need for businesses to address diversity and inclusion concerns, but also a strong business case. Diversity at the executive-level has repeatedly been shown to improve the likelihood of financial outperformance².

In its 2022 Impact Report³, MSA states that it defines diversity using U.S. Government Guidelines that define “individuals as diverse if they belong to one or more of the following groups: female gender, racial or ethnic minority, protected veteran class, or persons with a disability. Employees in multiple groups are only counted once”. However, there is no requirement to report all diverse individuals in a single metric.

Our concern is that a combined diversity metric represents a considerable lack of ambition from leadership to improve firm-wide diversity. This may indicate, at best, a weak understanding of the benefits experienced by more diverse businesses or, at worst, implicit bias causing a resistance against efforts to diversify the workforce.

These concerns are further reinforced by the fact that, despite targets and supporting incentive structures, senior-led diversity continues to remain flat in recent years. As such, we continue to monitor developments at the company and are considering how to engage on this issue further.

¹Including phasing out the use of PFAS chemicals in fire-fighting equipment and progess towards NZC emissions.
² https://www.mckinsey.com/~/media/mckinsey/featured%20insights/diversity%20and%20inclusion/diversity%20wins%20how%20inclusion%20matters/diversity-wins-how-inclusion-matters-vf.pdf
³ https://s7d9.scene7.com/is/content/minesafetyappliances/5000%2D1041%2DMC%5FMSA%2DImpact%2DReport.pdf

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Ecolab

Objectives

Overarching objectives of the initiative:

• Increase transparency;
• Publish time-bound phase-out plan of products that are, or contain, persistent chemicals;
• Develop safer alternatives for hazardous chemicals.

Background

WHEB has been engaging Ecolab on the topic of hazardous chemicals since 2012, to support this work, we have been involved with ChemSec’s Investor Initiative on Hazardous Chemicals (IIHC) since 2021¹.

Through previous engagements, we were confident that Ecolab had a good understanding of the need to move away from hazardous chemicals. It had, for example, committed in 2021 to: prohibit the development of any new products containing substances of very high concern (SVHC); and, incorporated the SVHC authorization list into its internal chemical ingredient policy in support of an internal target to eliminate the remaining <2% of products using these chemistries.

However, while ChemSec had identified 18 SVHCs for the company to phase out, Ecolab considered there to be only one. It therefore intended to speak to ChemSec to explain that the others were monomers being used as intermediaries (i.e., the monomer is being used to make another chemical) and so did not leave the factory gates. Our priority in 2023 was therefore to better understand the extent to which this has been resolved with ChemSec

Actions

When  engaging collaboratively, WHEB aims to be as active a participant as possible. Having already been involved in a long-term engagement with Ecolab on hazardous chemicals, we volunteered as co-lead for the investor group targeting the company.

We began the 2023 IIHC engagement season by speaking to ChemSec’s experts for an update on the disputed SVHCs. ChemSec had told Ecolab they would agree not to class the monomers in question as SVHCs, should Ecolab state publicly on its website that these chemicals are used only as: a) intermediaries; or b) to produce a polymer in a process that is irreversible under normal conditions.

We then lead an investor call with Ecolab in November 2023, which covered:

• Ecolab’s discussions with ChemSec about which chemicals to phase out.
• Proportion of revenue and production volume linked to chemicals identified for phase out.
• Timeframes and roadmap for phase out and the extent to which it plans to make this information publicly available.

Outcomes

Milestone 3 - Company develops or commits to developing an appropriate policy or strategy to manage the issue.

During the call, Ecolab’s Chief Sustainability Officer (CSO) and Investor Relations contact, explained it has increased its ambitions for SVHC phase-out. More specifically, the SVHC revenue target has decreased to <1% by 2030 and there are intentions to publish the roadmap of how to achieve this in its forthcoming Corporate Sustainability Report report (May 2024). This roadmap will cover three target areas:

1. Improving system engineering to minimise risks and improve safety.
2. Investment into research and development
3. Working with strategic partners to find safer alternatives.

Ecolab has also since spoken with ChemSec and has now met its requirements for the disputed SVHCs to be reclassified by publishing information about how they are used on their website. In addition to this it has also published details of processes used to help minimise their use risk.

While it’s clear that Ecolab is making great progress in some areas, we made suggestions for further improvements. For example, improving disclosure on circularity should be a focus and will help the company improve its ChemSec score on Transparency. The CSO also highlighted ongoing internal discussions to publish Ecolab’s responses to the Chemical Footprint project.

During the call it became clear that Ecolab had not been aware of ChemSec’s marketplace for advertising its safer alternative products and so emphasised the importance of listing its products there.

¹ https://www.whebgroup.com/hazardous-chemicals-engagement-case-study-2023

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TE Connectivity - NZC

Objective

TE Connectivity has already committed to strong and credible near-term targets in line with the Science Based Targets initiative (SBTi). Still, as long-term targets are crucial, our objective is for the company to commit to SBTi NZC by 2050. We are also keen to discuss plans for reducing Scope 3 emissions and how climate-related governance is structured.

Background

As one of the top 10 emitters (by financed emissions) in the strategy, TE Connectivity is a high priority company for our Net Zero carbon (NZC) engagements. WHEB had already been engaging TE Connectivity and encouraging it to scale its climate ambition (by moving from GHG emissions reductions targets to setting a 2050 NZC target) when we joined the Net Zero Engagement Initiative (NZEI) in 2023.

Actions

Established by the IIGCC in March 2023, the NZEI wrote to target companies¹ requesting disclosure of a comprehensive corporate net zero transition plan that includes:

1. a comprehensive net zero commitment;
2. aligned GHG targets;
3. emissions performance tracked; and,
4. a credible decarbonisation strategy

Although it acknowledged receipt, TE Connectivity ignored several follow-up attempts made by WHEB and our co-collaborators.

Although TE Connectivity initially acknowledged receipt of this letter, the company failed to respond to several further attempts to discuss the letter in more detail. These were made by a sub-group of its investors that are members of the IIGCC including WHEB, another asset manager and a private bank and involved contacting the company’s investor relations team as well as its brokers.

Our aim had initially been to applaud the company for its progress so far whilst also encouraging further action. For example, TE Connectivity has committed to strong and credible near-term targets in line with the Science Based Targets initiative (SBTi) covering absolute reductions in all scopes. Still, the need for both long and near-term targets is crucial and we agreed that committing to SBTi NZC by 2050 will strengthen the company’s position as a sustainable leader.  We were also keen to discuss plans for reducing Scope 3 emissions and how climate-related governance is structured.

After six months with no response, we suggested that the group should consider how to escalate this engagement. The group decided to first try contacting investor relations team a final time and then, if that was also unsuccessful, formally writing to the Chair requesting a response otherwise we would make a statement at the forthcoming AGM.

As the investor relations contacts remained unresponsive, we wrote to the Chair in January 2024 as planned. WHEB also invited another of TE Connectivity’s institutional investors to sign the letter, adding further weight to our requests

Outcome

Milestone 2 - Company shares or agrees to disclose information on the issue

The escalation proved successful, as we are now in the process of scheduling a call with TE Connectivity to discuss our requests. The company’s investor relations contacts also confirmed that its Corporate Responsibility team plans to announce progress against its goals in May 2024.

If the forthcoming call and/or announcement on progress do not include a commitment to a NZC 2050 target or credible plans towards making such a commitment, we may escalate further, for example by filing a shareholder resolution in the 2025 proxy season.

¹ Target companies are heavy users of fossil fuels beyond those captured in the Climate Action 100+ list. WHEB has previously contributed to the CA100+ engagement initiative in our work with Daikin. More details are available in our 2022 case study: https://www.whebgroup.com/daikin-ca100-engagement-case-study