Smurfit Kappa
Objective:
To convince the company to help regenerate biodiversity as an opportunity for the business rather than focus primarily on limiting negative impacts as part of compliance.
Background:
As a manufacturer and wholesaler of recycled cardboard, we note Smurfit Kappa’s high-level of awareness of biodiversity through its forest certification work. However, in order to bolster its sustainability leadership claims, our objective is for the company to seize the associated innovation opportunity rather than focus only on the compliance aspect.
In late 2021, we briefly discussed this with the company’s Chief Sustainability Officer and they acknowledged the opportunity, mentioning their partnership with WWF for Colombian forest management1. We requested more detail on progress but at the time, focus shifted away from the topic.
Actions:
After a previous unsuccessful attempt to initiate a collaboration, we took the opportunity to support a Biodiversity Campaign arranged through our involvement in Shareholders for Change2 network.
WHEB has since contributed to the letter sent to Smurfit Kappa as part of this campaign.
Outcomes:
M3 - Company develops or commits to developing an appropriate policy or strategy to manage the issue
The company responded, highlighting ongoing biodiversity management efforts, including double materiality assessments and related KPIs tied to compensation and funding costs. Importantly, the company has a focus not just on how to limit negative impacts on biodiversity from their operations, but as importantly, on what the company can do to regenerate biodiversity and whether efforts to date have been successful. Latest updates are available in the company’s 2022 Sustainability report3.
Xylem
Objective:
Improve gender diversity within company leadership.
Background:
WHEB has been using our voting rights and engaging management in dialogue to encourage Xylem to improve its board-level gender diversity since 2019.
In a 2020 call, Xylem highlighted a range of 2025 sustainability goals it had set, one of which was based around gender parity in leadership. Xylem planned to implement measures to increase diversity in the talent pipeline to achieve this, focusing particularly on traditionally more difficult areas such as engineering and technology.
We continued discussing gender and reproductive rights in 20221 but expressed our concerns that gender goals had been pushed out without details of revised timelines. Xylem explained its female leaders had been disproportionately affected by COVID-19, so had chosen to redevelop policies and processes and after this would publish a revised goal.
Actions:
In a recent research trip to the US2, we met with Xylem to discuss the company’s water-saving technologies, carbon emission targets and diversity within the leadership team. Specifically, we asked about 2025 gender and minority leadership targets and emphasized the importance of flexible working arrangements for parents to enable improved gender diversity.
Outcome/Investor Contribution:
M3 - Company develops or commits to developing an appropriate policy or strategy to manage the issue.
Disappointingly, Xylem will likely miss its 2025 target for 35% female representation in leadership. Currently this figure sits at 25% and will be lowered further following the company's acquisition of Evoqua Water Technologies.
That being said, gender balance is now more equal at entry and mid-management level, ensuring a good female talent pipeline. It's our view that Xylem is genuinely trying to think creatively about reaching their target. For example, since setting targets in 2019, it has focused on enabling internal moves to even out diversity amongst teams, looking for talent from ancillary industries and implementing leadership programmes with strong female representation.
Still, there remains the hurdle of moving women into senior roles. We pushed on this point during the discussion to which the company responded that it has strengthened parental leave policies. We believe these measures, which include eight weeks of paid leave for all new parents and flexible working and time off, are progressive for a US company and hope they are sufficient to meet objectives.
We will continue to support the company in updating its original 2025 target and look forward to hearing about further developments in their strategies . In the meantime, we commend Xylem for its work to improve other measures of diversity and were pleased to hear it is on track to meet its target to reach 25% minority representation in leadership by 2025 as this figure currently sits at 21%.
1 https://www.whebgroup.com/vestas-xylem
2 https://www.whebgroup.com/our-thoughts/a-walk-down-water-street-highlights-from-our-recent-us-research-trip
Vestas
Objective
For Vestas to mitigate negative impacts and maximise positive impacts of their activities on biodiversity.
Background
Despite the strong interdependence between climate change and biodiversity, global energy systems are being decarbonised, often to the detriment of habitats that support wildlife. A renewable energy transition that both avoids harm and contributes to the regeneration of biodiversity is therefore essential and requires help from those involved in all stages of planning and implementation.
In early 2022, having previously identified Vestas as having an elevated level of exposure to potential biodiversity impacts (both positive and negative), WHEB tried to initiate a discussion with the company around its approach to managing biodiversity. However, the company procrastinated in revealing any information and later indicated that managing biodiversity impacts was not currently a priority. We grew concerned that Vestas had no real plan to address biodiversity and identified this as a candidate for escalation.
Actions
We initiated a collaborative engagement initiative with a like-minded client in early 2023 which then expanded to include other investors that agreed with us that Vestas needed to demonstrate a greater sense of urgency on managing biodiversity impacts.
Together, we wrote a letter, addressed to the CEO, calling on the company to support nature conservation and biodiversity in the transition to renewable energy. The letter also outlined our belief that it is critical that Vestas develops and articulates a clear position on biodiversity and that it publishes its approach to mitigating negative impacts and maximising positive biodiversity impacts.
Outcome
Milestone 3 – Company develops or commits to developing an appropriate policy or strategy to manage the issue.
Vestas’ IR responded in quite some detail, for example, disclosing their use of bird and bat protection systems, environmental impact assessments and instruction of specialist consultants to aid with the development of the biodiversity strategy. Overall, we are pleased to see so full a response on the issue and, having seen the letter, are now deciding next steps with our collaborators. This will likely constitute agreeing on further questions that have arisen and points for further encouragement. We will report any further progress in due course.
TE Connectivity - net zero carbon targets
Objective
For TE Connectivity to set net zero carbon (NZC) targets.
Background
For WHEB’s portfolio companies, routine resolutions occur far more frequently than shareholder resolutions relating to ESG issues[1]. WHEB’s voting policy is therefore primarily designed to use our votes on routine proposals to express our views on key governance and sustainability issues. Combined with our approach of writing to company management to explain our reasons for a vote against management, we find this an effective enabler of dialogue on core sustainability issues.
While TE Connectivity’s carbon targets, at the time, to reduce 40% GHG emissions by 2030 were laudable, we believe that greater ambition is required across all companies in the portfolio as set out in our Net Zero Carbon policies[2]. In addition to this, TE Connectivity is one of the top 10 emitters in the portfolio and so is an especially important target for engagement on this issue.
Actions
At the company’s AGM, WHEB voted against the proposal “Elect Director Thomas J. Lynch“, as the Chair of the Board. In our follow up letter, we explained our strict policies on environmental issues and highlighted that this was the second year in a row voting against Mr. Lynch for this reason. We therefore strongly urged the company to set a net zero carbon target to be achieved by 2050 at the latest and to develop science-based targets (SBTi) for GHG reduction covering Scopes 1, 2 & 3.
After a short while of not hearing back, we chased the company for a response given the urgency of the matter and it being a strategic priority for engagement.
Outcome
Milestone 2 – company shares or agrees to disclose information on the issue.
After chasing, TE notified us of its commitment to set near term company-wide emissions reductions in line with climate science that would also be SBTi validated. To fulfill this commitment, the company has increased its target to reduce Scope 1 and Scope 2 emissions to more than 70% on an absolute basis by 2030 and established Scope 3 reduction target of 25% on an absolute basis by 2032. These updated targets and commitments will be further communicated in the company’s annual corporate responsibility report in late spring.
While, crucially, TE is yet to set a net zero carbon target, its decision to improve the ambition of its targets does demonstrate a promising commitment. We will continue to pursue the issue with them.
[1] In 2022 a mere 1% of the resolutions that 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.
[2] https://www.whebgroup.com/investing-for-impact/sustainability-policies1
HelloFresh
Engagement issue
Animal labour in the supply chain
Engagement objective
Understand the extent to which animal labour is used in the supply chain, and specifically monkeys for the harvesting of coconuts.
Scope and process
We arranged a call with a member of the Corporate Engagement team at PETA to gain a bettr understanding of PETA’s investigation, its interactions with HelloFresh and what a responsible transition away from Thai coconut milk would look like:
i. The investigations: PETA’s undercover investigations provide irrefutable evidence that the use of monkey labour is widespread and deeply ingrained in Thailand. It is also fragmented, both geographically and with many different parties involved such as monkey training schools, brokers, pickers, and the farms themselves. Coconuts harvested by monkeys are mixed with those that are not making traceability through the supply chain nearly impossible. Supplier audits, which are often announced in advance, are difficult as monkeys can be easily moved from farm to farm, as is often the case during the harvest season. Still, undercover site visits found evidence of the practice easily. PETA has previously contacted major coconut suppliers though most have not responded to the latest investigation, indicating the need for government intervention.However, part of the problem is that the Thai government are actually promoting it as a traditional practice to generate tourist revenue.
PETA estimate that roughly 50% of all Thai coconut milk is being harvested in this way. While the practices will exist in other growing regions, such as Sri Lanka, Philippines and Vietnam, tit is not nearly as entrenched, industrialised and ubiquitous as it is in Thailand.
ii. PETA’s Interactions with HelloFresh: PETA first contacted HelloFresh in Germany in 2020 to share findings from an earlier investigation, which was when the company was first alerterd to the issue. At the time, the German subsidiary committed to stop sourcing Thai coconut milk from two of the suppliers named in the investigation, Aroy-D and Chaokoh. HelloFresh was targeted as a well known global brand a major buyer of coconut milk and, by all accounts, had been cooperative. Changes in personnel at the NGO contributed to the decision to target the company a second time.
iii. Managing a responsible transition away from the use of monkey labour: PETA confirmed that farmers using monkey labour are small-scale, based in rural communities with limited resources. We expressed our concern about the risk of financial ruin, or uptake of equally concerning practice such as child labour, as a result of the campaign to stop sourcing from Thailand and asked how companies can responsibly transition away from Thai coconut milk. PETA stated that the next part of its campaign will focus on targeting the Government and some of the big suppliers. The aim is to have these parties provide funding for human and machine collection, as well as for the prevention of capture, facilities to look after rescued monkeys and to stop the tourist department from promoting the use of monkeys.
WHEB’s view
We believe that HelloFresh was establishing proportional measures to prepare for the risk as soon as it became aware of it. Understanding of the scale of the issue in Thailand has only recently become apparent to PETA. We are pleased to see that the company has made the decision and subsequent public commitment to stop sourcing form Thailand and we will continue to monitor the company’s progress on responsible sourcing of coconut milk from other geographies, as well as broader quality and assurance practices and animal welfare policies that it stated it was developing as a response to this subject.
A larger question remains about how to support low-income communities in transitioning away from using monkeys for harvesting coconuts. Support for this needs to be led by the Thai government and supported by major suppliers, which is what PETA are pushing for. We would welcome any action from HelloFresh on this however, believe that the company has taken proportional measures already.
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.