EOS Stewardship | Federated Hermes Limited (2024)

In April 2018 we began engaging with Alphabet on how its technologies manage the prioritised content of Google Search and YouTube, to avoid human rights concerns arising through the application of artificial intelligence (AI). We encouraged the company to go beyond publishing AI principles, to demonstrate how the principles are being applied. After multiple touchpoints we stepped up our engagement, including writing to the chair of the board, asking for further disclosure on content governance and recommending a feedback system in its AI ecosystem. At the 2019 annual stockholder meeting, in addition to supporting one of the shareholder proposals aimed at better addressing societal risks, we voiced our concerns relating to AI governance directly to the executives and board.

With regard to our request for demonstration of how the AI principles are being applied, in January 2019 the company published a 30-page white paper on AI governance. In January and February 2019, YouTube took a series of actions to improve transparency and accountability. Since 2019, the company has made improvements to tools to measure fairness, transparency and explicability of AI which also helped satisfy our request. It has also improved stakeholder engagement and communications with regard to how AI social impact is assessed and measured.

In November 2020, Alphabet changed its audit committee to become an audit and compliance committee (ACC). The ACC’s charter now includes sustainability, data privacy and civil and human rights risks as items which must be reviewed by it – becoming closer to meeting our request for enhanced board oversight. We continue to engage with the company through a human rights lens to encourage board accountability over the responsible use of AI.

EOS started engaging with Posco in 2011 over human rights concerns. We also engaged with Posco International on a gas project in Myanmar and child labour cases related to cotton picking in Uzbekistan. Lack of engagement progress led us to recommend a vote against one of Posco’s board directors in 2016. In the same year, we started dialogue on palm oil – following our suggestion, Posco International began a discussion with the Roundtable on Sustainable Palm Oil (RSPO) to develop its sustainable pam oil strategy.

In 2017 engagement intensified, including a meeting with NGOs asking Posco International to commit to a no deforestation, no peat, no exploitation (NDPE) policy; to preserve areas of high conservation value and high carbon stock; and to contribute to reforestation. In 2018 we urged Posco International for better practices and highlighted financial and reputational risk. It then became a member of the RSPO and committed to a plan to obtain the Indonesia Sustainable Palm Oil (ISPO) certification by 2020. In 2019 Posco International’s subsidiary achieved the ISPO certification.

We broadened the conversation and engaged with Posco group’s sustainability team on climate change. In 2020 Posco International committed to an NDPE policy and promised to preserve areas of high conservation value and high carbon stock and implement a programme outside its concessions on a scale that corresponds to the size of the developed plantation. EOS continues to monitor the company’s progress in implementation.

EOS first raised concerns regarding the high number of fatalities at G4S with its senior independent director/deputy chair in 2009. We reiterated our concerns in subsequent years. In 2011 the company placed increased value on its impact on wider stakeholders by enhancing its board-level governance, upgrading its CSR committee to a full board committee.

In 2013, the company launched its road safety programmes, implementing them globally in 2014 when it also introduced mandatory health and safety training for senior leaders and management staff. In 2015, the company started to disclose its lost-time injury rate, after we pressed for robust CSR data collection across the group. In 2016 the CEO introduced monthly performance reviews with the regional heads and the central executive team.

Fatalities decreased significantly in 2017 following improvements in health and safety policies, practices and training performance. Notable progress has been made on road-related incidents, and non-attack fatalities also decreased from 20 in 2012 to four in 2019. The improvement in the lost time incidence rate, from 8.5 per 1,000 employees in 2015 to 5.7 in 2019, is also notable.

We have engaged with oil major BP on climate change for more than a decade. As part of Climate Action 100+, a collaborative engagement of more than 370 investors and their representatives seeking greenhouse gas emissions reductions from the world’s largest emitters, we co-lead the engagement with BP. In 2018, we intensified our engagement, as we were concerned about whether the company’s growth strategy was consistent with the Paris Agreement goals. We acknowledged BP as a relative leader on climate change at that time, with market leading targets to manage its operating emissions. However the company had not disclosed a plan to reduce emissions associated with its products – so-called ‘scope 3’ emissions. These are critical to the future of the industry and the energy transition.

To accelerate change, we led the drafting of a shareholder resolution calling on the company to set out its strategy consistent with the Paris goals. We worked collaboratively with BP to ensure the resolution was in the company’s long-term interests. The resolution gained management support and was co-filed by nearly 10% of the shareholder base, passing with a very large majority at the AGM in 2019.

In early 2020, the newly-appointed CEO, Bernard Looney, announced a new ambition for the company to transition to net zero by 2050 or sooner, supported by 10 underpinning corporate aims. This included the company aiming to be net zero by 2050 or sooner, and covers Scopes 1, 2 and 3 emissions – ie the carbon in its products.

The company has since laid out a detailed strategy by which it intends to transition the energy it produces from high carbon to low carbon, including short, medium and long-term targets and aims on the journey to net zero. The company also has market-leading disclosures demonstrating how it evaluates new material capex investments for consistency with the Paris Agreement goals. EOS further intervened at the 2020 AGM, asking the company to reconsider its assumptions for Paris-consistent investment and its long-term oil-and-gas price assumptions, in light of the coronavirus pandemic. During its Q2 2021 results, BP reduced the long-term oil-and-gas price assumptions used in its financial statements, giving shareholders greater visibility about the firm’s climate-related risks. We continue to engage with BP to seek assurances that it has in place a rigorous investment process, with economic criteria consistent with the company’s purpose and a range of price scenarios including assumptions consistent with the Paris goals.

Following a compliance crisis, we engaged Siemens on strengthening its governance, and raised our concerns about the composition and effectiveness of its supervisory board. We spoke at seven of the company’s AGMs between 2007 and 2018 pressing for board refreshment, and in 2014 for timely succession planning for the chair. Over the period of our engagement the company has improved its corporate governance in many regards, including supervisory board composition by adding diversity and critically, expertise more relevant to the development of the business, such as in engineering, digitisation and software.

Following the spin-out of Siemens Energy AG in September 2020, we started engagement with the new entity, which became the focus of a Climate Action 100+ (CA100+) engagement. We attended the shareholder meeting in February 2021 and asked questions focused on measures to align the energy sector with the Paris Agreement and to address the climate emergency. We urged the company to set science-based targets that cover Scope 3 emissions. We also asked what processes the company has in place to ensure that the activities and positions of external membership bodies, are aligned with its own on climate change.

Siemens Energy AG announced its science-based target on 22 April 2021, in line with our engagement. This covers the company’s target to become climate-neutral by 2030 (Scopes 1 and 2). Following our request for targets to cover Scope 3 emissions, the company announced that by 2030, the greenhouse gas emissions of products in the gas and power segment (Scope 3) are to be cut by just under a third (27.5%) over a lifetime, versus 2019. In 2021 the Science-Based Targets initiative confirmed that Siemens Energy AG’s CO2 reductions contribute to limiting global warming to 1.5°C, in line with the Paris Agreement. EOS continues to lead the CA100+ engagement, focusing on transparency around lobbying practices.

EOS began engaging on climate change with Japanese energy company Inpex in early 2017, when we challenged it to clearly articulate its long-term strategy, addressing climate change issues and stranded assets. Inpex develops upstream oil and gas projects so the transition to a low carbon economy is particularly material. Nearly 20% of the company is held by Japan’s Ministry of Economy, Trade and Industry, which we believe might make it more difficult for the company’s strategy to deviate from the government’s energy policy.

We continued to engage in 2018 and 2019, when we again shared our view that the company’s target to increase renewable energy to 10% of its portfolio by 2040 appeared unambitious. In a call with the company in early 2020, we reiterated that it should set a more stretching target than that of reducing greenhouse gas emissions by 28% by 2030 from a 2013 baseline. We also challenged the company to set a net-zero goal by 2050, in line with its global peers.

Inpex has improved its disclosure on climate change in recent years, with more detailed scenario analyses. In a meeting with the company in early 2021, we welcomed the announcement of a 2050 target to achieve net-zero emissions for Scopes 1 and 2, with additional targets on methane and flaring. It also has plans to promote carbon capture and storage, a hydrogen business, carbon recycling and renewable energy. We said that we would like to see an ambitious target for Scope 3 emissions, and encouraged it to set a 2030 target to reduce absolute emissions, as the current 2030 target is to reduce carbon intensity. We continue to engage with Inpex on this and its capital expenditure plans, as well as increasing renewable energy in its portfolio.

EOS started engaging with Brazilian miner Vale on board composition and succession in 2019. As the company was transitioning from concentrated to dispersed ownership, the board succession model, based on nominations by the controlling shareholders, which prevails in most Brazilian companies, was not fit for purpose. We raised our concern with the chair, emphasising the importance of implementing a structured approach to board nomination, based on a skills matrix aligned with the strategic pillars and a board evaluation.

Subsequently, we engaged with the independent directors, the chair and the deputy chair on best practice in board composition and succession, led by a formally established, majority independent nomination committee. We highlighted that engagement with investors and other stakeholders is a key component of the board nomination process. In Q3 2020 the company created a nomination committee and committed to implementing a structured board succession process, in line with international best practice, aiming for the 2021 board election. In Q4 2020, we expressed our expectations to the nomination committee, for a majority independent board with a diverse range of skills, experiences and personalities, an independent chair and the elimination of the role of alternate director.

The nomination committee published its report in Q1 2021, outlining the target skills matrix, the search procedure and the 12 nominees, in line with our expectations, which warranted our recommendation for their election. A group of investors requested that the election be held under the cumulative voting system and presented four alternative candidates, who were elected together with eight of the nominees selected by the nomination committee.