Stewardship service provider EOS, part of the US-headquartered investment manager Federated Hermes, was “knocking on the door of ExxonMobil for eight years” before they secured a meeting. Similarly, EOS was “trying to engage with Tesla for a number of years”, and finally got a meeting in January.
“Many of our competitors simply couldn’t do that,” says Mike Wills, head of EOS business development and client management at Federated Hermes. “It requires a lot of tenacity, a lot of resilience, but ultimately, when we got there, we have been able to make the case and get the trust of those organisations [to] actually listen to what we have to say and to take on board our feedback.”
EOS’s 30 engagement professionals hop on video calls and schedule in-person meetings “on a one-on-one basis” with the senior management and board executives behind their clients’ equity and fixed income investments, says Wills. “We have a team focused on North America, one on Europe and one on Asia and global emerging markets. They represent 16 nationalities [and] speak 19 different languages. They’re able to go to countries around the world where all of our clients are invested [in], and speak to these companies on their own terms, with understanding of the local market [and] the culture.”
But why would these companies be willing to listen? EOS works on behalf of “long-term, global investors” across 14 countries who entrust them with the stewardship of approximately US$1.8 trillion ($2.3 trillion) in assets, as at June 30. EOS pools the resources of these “like-minded investors” and engages companies “on behalf of many clients”.
According to EOS, clients purchase their service as an “overlay” to their investment management mandates. This enables these institutional investors to “be more active owners of their assets”, through EOS representatives’ dialogue with companies on environmental, social and governance (ESG) issues.
Some businesses, however, “don’t want to speak to their investors [and] shareholders”, says Wills, a former relationship manager to high-net-worth and institutional clients.
See also: TNFD framework launch floats nature-related risks to corporates' attention
Speaking at The Edge Singapore’s Sustainability Investment Forum 2024 on Sept 17, Wills says he finds such attitudes bewildering. “They don’t want to know about it or just want to crack on doing things that they really want to do; it’s a bit more prevalent in North America than it is in other parts of the world.”
From left: The Edge Singapore’s Jovi Ho, Lendlease REIT’s Kelvin Chow, Federated Hermes’ Mike Wills, BCG’s Dave Sivaprasad and IBM’s Arun Biswas
See also: Carbon cost of AI, corporate decisions in focus at The Edge’s sustainability forum
Eye on ESG issues
Wills acknowledges that EOS’s experts “don’t have the answers” to all the companies they engage with. “It’s not on us to tell the company what their business strategy should be and how to best manage their business. That’s on them; they’re best-placed in order to do that. But it’s for us to hold them to account [for] the risks that are widely perceived — not just by us — but by the broader market, and to ask them to demonstrate how they’re tackling those risks.”
Some sceptics may think EOS’s focus on ESG risks is less important than analysing financial metrics, but Wills insists “all of these [are] financially material”. “We’re not doing anything from the good of our hearts; it’s not about doing something good for the world; it’s about creating better, more resilient businesses.”
Wills cites the 2015 “dieselgate” emissions scandal at German automaker Volkswagen as an example of “really poor corporate governance”.
Volkswagen had programmed its diesel engines to show lower emissions only during lab tests, with the vehicles emitting nitrogen oxide some 40 times higher than US regulatory standards in regular use.
Volkswagen shares lost 20% of its value in September that year. “Anyone who has a pension fund has probably had some exposure to that stock. We’ve been engaging with them for a number of years on corporate governance failures at the company; they didn’t have adequate things in place in order to mitigate such risks. Luckily for us, a number of our clients were able to adjust their positions accordingly to mitigate some of the damage to their portfolios,” says Wills.
EOS can also flex its muscles against errant companies by recommending its clients vote against certain resolutions, Wills adds. “We can vote against directors if we think that they’re not taking on board the risks that we’re raising and dealing with them in an effective way.”
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Since the Volkswagen scandal broke, EOS has engaged with the supervisory and executive board members that are leading on culture change. EOS has also spoken at the automaker’s annual general meetings (AGMs). EOS engagement professional Lisa Lange says in an April 2023 report that her firm has “consistently advocated voting against the discharge of board members that were at the company at the time of the scandal”.
EOS notes “some improvements” to address culture issues, such as introducing employee surveys and a new whistleblowing system. EOS says it has pressed for transparency around the underlying key performance indicators (KPIs) that Volkswagen uses in assessing its progress, but the executive board member responsible was unable to elaborate on these KPIs at the company’s first sustainability day for investors.
Closer to home, EOS also takes credit for Alibaba Group Holding publishing its sustainability report, which the Chinese company began releasing annually from 2022.
According to an EOS report from December 2022, it first raised concerns about Alibaba’s lack of shareholder communications in 2015 and insufficient board and committee independence in 2016. The dual-listed stock debuted in the New York Stock Exchange in 2014.
“In 2019, having had little success in arranging a follow-up discussion, we sent a letter to the board of directors seeking dialogue about our concerns,” says EOS. “At the 2020 AGM, we recommended voting against the election of the CFO to the board in order to support more independent directors.”
In 2017, EOS requested more information from Alibaba on its ESG strategy and reporting. The company released its first ESG report in 2019, and would later set a 2030 carbon-neutral target.
What’s next?
EOS marks its 20th anniversary this year. Compared to the “less structured, less professionalised” talks between EOS and corporate leaders back in the mid-2000s, Wills points to an “escalation ladder” in place today that helps maintain pressure on management.
“We can have a dialogue with the company, and if it’s not going our way, we can vote against directors or resolutions at an AGM. If that still [doesn’t] work, we can increase the pressure in the public sphere,” says Wills in a subsequent panel discussion on Sept 17. “We can collaborate with other investors across the world to hammer that point home. We can file shareholder proposals at a future AGM in the hope that there’ll be wide support for this change that we’re seeking to be voted through. So, there’s a variety [of actions].”
According to Wills, EOS typically sets an objective “to last about three years”. “Although we do have a very long-term view, we tend to break down the activity, how we measure it and how we deliver it to our clients in three-year chunks.”
Once sustainability disclosures are in place, EOS would ask companies to set net-zero commitments, with targets that are validated by the Science-Based Targets initiative (SBTi). “It really is 10, 20 years of engagement, but broken down into small chunks that we can measure and report on to our clients.”
‘High-priority’ issues
Reducing carbon emissions and working out the teething pains of transition finance are just two issues in a broad range of sustainability matters today. “There’s an argument to say that, no, you can’t cover every single risk out there to the same degree, but some of them are more of a priority than others,” says Wills.
For example, climate change and biodiversity loss are “very high-priority” issues that have “huge ramifications for the food system”, he adds. “I remember seeing a statistic at a conference last year where they said if every human on the planet consumed as much as a British individual — myself being British — we would need four planet Earths in order to meet that need. That just blows my mind.”
Allocating resources to these priorities may shift focus away from other ESG risks “like board independence, executive remuneration, bribery and corruption”, says Wills. “[These] things are meaningful [and] will have a financial impact on the business, but [are] perhaps less existential for our species. So, it’s ultimately down to the investor to choose what they value the most and how they try to affect change on those [issues].”
Photos: Samuel Isaac Chua/The Edge Singapore
