Socially Responsible Investment Review

June 2014

Climate Change

Our new policy, Climate Change: Implications for Electricity Generation marked a further stage in our work on climate change issues. We have now applied the policy to UK and European electricity generators. For each company, we looked at relative carbon intensity, the change in intensity over time, and the CDP disclosure ratings and the change in intensity over a three year period. The resulting score table indicated two stocks with particularly high intensity and poor disclosure: Drax and RWE. The first practical result of applying the policy was to sell the RWE holding. We did not have an existing position in Drax, and both will be excluded until further notice. We will also be engaging with SSE and Centrica regarding their future strategies and plans.

Engagement on climate change continues to be a major part of our work, through the Church Investors Group (CIG), the Institutional Investor Group on Climate Change (IIGCC), and the Aiming for A project. The carbon footprint of our UK equity portfolio continues to be lower than the FTSE All Share index, according to this year's independent estimate from Trucost, although the gap between the two narrowed.

In the light of disinvestment campaigns, the Methodist Conference has asked for a review of our policy regarding climate change. We will undertake this over the next year, with the focus of our work on the various types of fuel.

High Interest Lending

High interest or predatory lending has attracted considerable public scrutiny of late. Companies operating predominately in the high interest lending, pawn-broking and door-step lending sectors have long been excluded from our portfolios. We reviewed the approaches of other churches to investment in the sector and found them to be broadly consistent with our own.

Human Rights and Trafficking

We were concerned at allegations reported by The Observer of routine human rights violations and poverty wages on tea plantations in India. We wrote to Unilever and AB Foods, two of the largest buyers of tea who confirmed they neither own nor manage tea plantations in northern India. Both companies recognise there are challenges to be met in tea supply, but emphasised their own human rights and supply chain policies. They aim to work with long-standing suppliers to improve worker conditions. AB Foods offered to meet to discuss the issue further. In the light of the 2014 World Cup in Brazil, we engaged with three major airline groups on their policies relating to international trafficking. We await responses from easyJet and the British Airways parent, IAG, but Ryanair provided a detailed account of its work in this area, which goes beyond the legal minimum.

Living Wage

We continue to work with Share Action to identify companies for engagement believing it to be an issue of pay justice, with a company's decision to pay the Living Wage making a material difference to many employees. We received a disappointing response from Bunzl, which acknowledged that the underlying reasons for the Living Wage were 'sound' but argued it does not adequately reflect variations in the cost of living and the local jobs market. Engagement with Bunzl will continue. We also heard from Restaurant Group where payment of the Living Wage would have a particular impact on service personnel. The company argued that waiting tips 'significantly boost... employee wages' and that implementing the Living Wage would disproportionately increase costs.

For some time Lloyds Banking Group has failed to mirror moves made by other UK banks to apply the Living Wage to employees and third party contractors. The bank wrote to us confirming they feel it inappropriate to 'impose reward structures' on third parties and we are now seeking a meeting.

We welcomed the announcement that Nestlé UK had become the first large UK manufacturer to become an accredited Living Wage employer.

CDP Water survey

Water scarcity represents a serious and growing challenge for business. We are signatories to the CDP Water survey that targets 1,000 of the world's largest companies impacted by water risk. We wrote to SSE and Tullow Oil, identified as being high impact water users. SSE told us that a detailed sustainability review is underway with a view to re-assessing its most material risks. It recognises water as a serious issue, but notes its operations are solely UK based where water quality rather than quantity is the key concern. Tullow Oil confirmed it had not participated in the CDP survey but pointed to full disclosure about water in its corporate responsibility report. It endorsed access to potable water as a fundamental human right. The company has offered a meeting, which we will take up.

Nestlé

During the quarter we met with senior Nestlé UK personnel as part of our regular engagement with the company. We pressed them on the company's health & safety record, which had shown a significant deterioration in 2013, and learnt of measures being taken to address it. The meeting also covered progress on the two Nestlé initiatives: sustainable cocoa and coffee. Our regular meetings also cover developments relating to breast milk substitutes. We support the FTSE4Good process which has seen Nestlé (so far alone) meet FTSEs stringent criteria on breast milk substitutes to enable its inclusion in the FTSE4Good Index. The company submits to independent audits of processes in two 'high risk' countries each year, publishing the findings and responses.

Corporate governance

The second quarter represents the peak of the UK voting season and we voted at over 100 company meetings. Excessive or poorly structured remuneration packages remain our key priorities and we opposed over 120 proposals linked to the binding vote on remuneration policy or the advisory vote on the remuneration report. For 8 companies re-election of the entire remuneration committee was opposed owing to pay being particularly egregious. We opposed proposals at HSBC, Standard Chartered and Lloyds Banking Group to circumvent EU bonus caps by introducing 'fixed rate allowances' and 21 long-term incentive plans were opposed due to poor performance or excess.