Ethics in investment: burden or benefit?

A question many trustees ask is whether an ethical policy is consistent with their fiduciary duty. This is because of concerns that it may reduce investment returns. On the face of it this might seem a reasonable question given that our ethical approach currently excludes 16% of the UK stock market.

However, our proprietary approach ensures that despite the exclusions, the economic sensitivity of the CFB portfolios are not significantly different from the overall market. Calculations provided by our performance measurement consultant show that the proprietary benchmark index for the CFB UK equity fund produced a total return of 4.8% pa over the ten years to 29 February 2016 compared to 4.9% pa for the unconstrained index and just 4.4% pa for the more traditional adjustment of ethical exclusions. Over three years, relative to the index with no ethical exclusions, our proprietary index outperformed by 0.8% pa, whilst using the traditional methodology to adjust for ethical exclusions, the index underperformed by 0.3% pa. It seems that at the very least, it is possible to argue that our approach to ethics is not a burden over the long term.

Moreover, the understanding of fiduciary duty is evolving and rather than focusing on relatively short term financial returns there is a realisation that seeking long term sustainable returns is in the best interests of beneficiaries. As this is at the heart of our policies, we can say with some confidence that ethics in investment is a benefit.

We highlight some of our work that we believe provides the long term sustainable benefits, both financial and ethical, that Methodism demands.

Ethics in investment: burden or benefit?

Greater fuel efficiency means more profitable companies

The fossil fuel forum

The importance of climate change to the Methodist Church was reflected in the business of the 2015 Methodist Conference, which included a presentation, Fossil Fuels and Ethical Investment, three Memorials on investment in fossil fuels and a Notice of Motion that requested a strategy for increased investment in renewable energy. As is often the case, there was insufficient time at the Conference to do justice to the subject. Consequently, we decided to hold a forum in conjunction with the Joint Advisory Committee on the Ethics of Investment.

The day comprised eminent speakers setting climate change into its theological and economic contexts, industry scenario analysis and the case for divestment. In addition to JACEI members, attendees included representatives of those who had raised the profile of climate change at the Conference, observers from other churches, expert advisers and Methodist members with an interest in the subject. The event has a page devoted to it on our website, where a full report of the day can be found.

Implementing our fuels policy

The policy concluded that 'ethical acceptability' should be dependent on how consistent a company's current operations and future investment plans are with a target to reduce the UK's greenhouse gas emissions by 80% from 1990 levels by 2050. Therefore, encouraging companies to embrace the transition to a low carbon economy is the main focus of our approach. However, it also sets out areas of investment that would be incompatible with the position of the Methodist Church, particularly companies with significant exposure to thermal coal and tar sands as well as those with business models dedicated to exploring for and developing new fossil fuel assets.

Much of our work over the year has been to review our holdings to assess compliance with our new policy. So far we have analysed the oil, oil service and mining sectors in both the UK and Europe. As a result nine companies were considered to be in breach of the policy, five of which we held and have now been sold.

Collaborative engagement

63 climate change 'laggards' were identified following analysis using the 2015 CDP survey. Consequently, these were included in the successful Church Investors Group (CIG) engagement programme. Over half subsequently improved their disclosure score and 30% moved up a performance band or responded to the survey for the first time.

Over the past three years of CIG engagement results have shown a signi cant improvement with 35 'laggard' companies now achieving above a 'C' grade, 12 of which scored a 'B' and one an 'A'. An independent assessment commissioned annually from the University of Edinburgh concluded with a 95% confidence level that had CIG not conducted the engagement programme 13 of these companies would have failed to improve their CDP performance grade over the three years.

Ethics in investment: burden or benefit?

Treating workers well means more efficient companies

Living wage

The Living Wage has been at the heart of CFB engagement since 2011. In 2014/15 we co-signed letters to 75 FTSE 100 companies of which over 70% have since become accredited Living Wage employers or accepted the idea in principal, whilst only 12% refused to respond. Over the five years we contacted 19 companies directly, none of which were fully accredited Living Wage employers when the CFB engagement process began. Of these ITV, Smith & Nephew, Lloyds Banking Group, Pearson and National Grid are now fully accredited, whilst HSBC confirmed its commitment to pursue accreditation. In addition British Land, Rexam and Land Securities are all seeking to be compliant but still need to ensure their contractors also pay the Living Wage. Three further companies had made progress and were assessing the impact of becoming compliant. Overall 62% of targeted engagements had resulted in a positive shift in the position of companies.

The introduction of a 'National Living Wage' adds complexity as it provides only for those aged over 25, and is significantly lower than the rate set by the Living Wage Foundation. The CFB will continue to engage around adoption of the Living Wage as de ned by the Living Wage Foundation, whilst urging companies not to apply the higher age bar when paying the National Living Wage. To their credit, Tesco and J Sainsbury have said the National Living Wage will be paid to all staff over 21.

Human rights

CFB joined a coalition of investors in signing an Investor Statement calling on companies to improve disclosure on integrating the UN Guiding Principles reporting framework into their risk management. The initiative was designed to catalyse more robust disclosure in meeting the Framework guidelines. In response to CFB engagement on trafficking in the airline industry, British Airways informed us of the steps it has taken to address the issue. It had recently integrated behavioural and observational training into its employment practices and noted that several instances of potential traf cking had been detected, showing the risk to be a real one.

Funeral poverty

The cost of a funeral has risen by 80% over the past decade with the average cost now over £8,000. Those on low income or benefits are hardest hit, as they have fewer savings and a proportionately higher part of their income is therefore needed to cover funeral costs. Consequently an increasing number are being plunged into serious long-term debt.

Funeral poverty exists when the cost of a funeral is beyond a person's ability to pay, leading to difficult choices at a time of suffering and grief. The Fair Funerals Pledge encourages providers to make their most affordable funeral package clearly visible and available. CFB wrote to Dignity and the Co-op, the two largest UK providers of funerals and related savings plans asking them to support the Fair Funerals Pledge. They both responded encouragingly suggesting that their approaches are consistent with the Pledge, and that staff are trained to act sensitively to issues of affordability.

Ethics in investment: burden or benefit?

High quality products and services mean more sustainable companies


The Access to Nutrition Index (ATNI) ranks the world's 22 largest food and beverage companies against international standards and best practice for their approach to undernutrition and diet-related chronic illness. In 2016 Unilever was the highest rated company, closely followed by Nestlé. ATNI also uses a separate additional methodology to assess the manufacturers of breast-milk substitutes. This ranked Nestlé at the top of the 6 companies reviewed.

We remain strongly committed to a process of robust dialogue on breast milk substitutes (BMS). Engagement via the FTSE4Good process is viewed as a vital way of improving standards. Each year a member of the Connexional Team attends the annual FTSE4Good workshop in which NGOs and the churches discuss ndings from the verfication process. Nestlé was the only BMS manufacturer to comply with the performance requirements for inclusion in the Index for many years, but has recently been joined by Danone. The process commits them to an in-country audit by PwC every 18 months to test compliance with the Code. In addition, the CFB arranges an annual in-depth meeting with senior personnel from Nestlé UK which brings expertise from around the world on specific issues. In addition to BMS Code breaches, we discussed health and safety, human rights, sustainable agriculture, water risk and healthy lifestyles. JACEI believes that the comprehensive nature of our engagement, together with the independent assessment by ATNI and FTSE4Good provide compelling evidence that its advice on Nestlé is firmly grounded.

Animal welfare

The CFB is a supporting investor of the Business Benchmark on Farm Animal Welfare (BBFAW) believing the welfare of farm animals in the food supply chain is an issue of material interest to many church members. Using the 2015 Benchmark, CFB engaged with two companies Whitbread and Compass Group on their low overall ratings. Both companies responded positively suggesting that their poor showing was a result of inadequate disclosure rather than inadequate process management and undertaking to work with BBFAW in future. The 2016 benchmark published in January saw both companies improve their ranking markedly from the lowest Tiers (6 and 5 respectively), to Tier 3. 40% of companies assessed still provide no disclosure on farm animal welfare despite it being a material part of the supply chain. Consequently, we are collaborating with BBFAW to produce an Investor Statement on Farm Animal Welfare and have joined a coalition of investors working with BBFAW on laggard companies.


40% of the most pressing global risks highlighted by the World Economic Forum are now environmental, with water stress ranked as the third biggest risk in terms of impact. Some 2.7bn people or 40% of the global population lives with water shortage for at least one month a year and water scarcity will, it is suggested, increasingly lead to migration and conflict. The latest projections suggest that demand will exceed sustainable supply by 40% by 2030 unless water management practices change. Business has an important role to play as a key user of water. Reducing water impact and increasing security of supply will be fundamental to successful business in many parts of the world.

CFB is leading a new strand of CIG engagement focused on water risk. Working alongside CDP, the CFB identified 37 UK companies for whom water stress represents a strategic or operational risk, and wrote to them with a view to their responding to the 2016 CDP Water survey. As with CDP Carbon, better water disclosure will allow investors to improve their assessment of risk based on reported data around use, management and conservation. However, unlike carbon, water is a local resource risk and some companies have declined to respond on the grounds that the survey does not adequately reflect the local nature of water management. The feedback we are receiving will be shared with CDP, which will help to refine the survey.

Financial services

Financial misconduct and ethical probity have long exercised our attention, and we welcomed the concern expressed in the Memorial to the 2015 Methodist Conference on HSBC. We met with the company to understand how it was responding to the disclosure of a number of financial scandals and the consequent reputational damage. Some reassurance was given that global processes had changed, and that private clients now had to provide more evidence regarding their tax arrangements. It remains a major concern that examples of previous misconduct are still emerging with RBS, Lloyds Banking Group and Barclays also having to pay or make large provisions for misconduct fines.

Ethics in investment: burden or benefit?

Effective engagement means more responsible companies

Shareholder voting

We vote all our UK and European holdings using the Church Investors Group global voting template. This was agreed collaboratively with our church investor partners and is executed through a common proxy voting service provider, ISS. It has long been an aspiration to build a strong Church coalition of like-minded voters. We were therefore delighted when it was finally achieved in 2015, and believe it was a significant moment in giving the Church a stronger voice in company engagement.

Overall we opposed or abstained on 11% of UK resolutions, taking a particularly robust position on excessive executive remuneration packages. In deciding how to vote, we consider the quality of disclosure, how stretching performance hurdles are and the potential for excess. During 2015, out of 140 UK remuneration reports and policies, we opposed 81 and abstained on two. Bank remuneration remains a major challenge with all the UK banks choosing to circumvent new EU rules by introducing 'role based pay' which increased fixed pay against which bonuses were measured. This is, we believe totally inappropriate and we voted against all bank remuneration policies as well as specific votes to approve bonuses of 200% of salary.

Mining Reflections Initiative

The Mining Reflections Initiative, which brings together mining executives and church leaders to discuss sustainable mining, continued to command a high priority over the past year. We participated in visits to a copper mine in Peru (led by Glencore), and a diamond mine in South Africa (led by DeBeers/Anglo American). There continues to be strong commitment by the major mining companies participating in the Reflections process, and plans are underway for a Global Day of Reflection in 2017, involving senior representatives of the major Christian denominations.

Aiming for A

We are members of the Aiming for A coalition of investors encouraging 10 major UK companies in the utility and extractives sectors to aim for continuous inclusion in the CDP Climate Performance Leadership Index (CPLI) by achieving and retaining an 'A' performance rating. The coalition co-filed supportive shareholder resolutions at BP and Royal Dutch Shell in 2015 calling for more disclosure on portfolio resilience to climate change. Extensive engagement earned the support of the respective Boards, and over 95% of votes were cast in favour. This year, the coalition focused on Anglo American, Glencore and Rio Tinto, with the CFB as lead investor for the Anglo American resolution. The resolutions call for routine reporting from 2017 to include further information on operational emissions management; resilience to the International Energy Agency's scenarios; low-carbon energy research, development and investment strategies; relevant strategic key performance indicators and executive incentives; and public policy positions relating to climate change. These were supported by all three boards and over 96% of votes were cast in favour.