WHAT ESG REPORTING BRINGS TO THE TABLE? David Graham Chief - PowerPoint PPT Presentation

23 September 2016 WHAT ESG REPORTING BRINGS TO THE TABLE? David Graham Chief Regulatory Officer and Head of Listing

SEHK as a Regulator Our duties include ensuring “an orderly, informed and fair market” (s.21 of SFO) 1 Facilitates communication between issuers and investors Financial information Non-financial information 2 3 Promotes good Ensures regulatory corporate governance framework up to date 2

Benefits of ESG Reporting to Listed Issuers Strengthen risk management Attract and Attract investors retain talent Enhance share Capitalise a valuation and new business financing opportunity $ Save costs Enhance reputation What’s more … Positive correlation between ESG reporting and stronger financial performance due to greater transparency, better responsiveness to change and better understanding of the company’s long -term strategic issues and how to manage them 3

Investors’ Growing Interest in ESG Information 1 More investors taking ESG disclosure into account • Between 2014 and 2015, the number of investors that considered ESG reports “essential” or “important” when making investment decisions increased by 24% 1 Growth of the responsible investment market 2 • Global responsible investment market grew by 61% from 2012 to 2014 2 • Strong development of responsible investment initiatives, e.g. PRI, CDP and Carbon Action together represent investors with US$100+ trillion in assets 1 – Tomorrow’s Investment Rules 2.0: emerging risk and stranded assets have investors looking for more from nonfinancial reportin g , October 2015, published by 4 Ernst & Young 2 – Global Sustainable Investment Review 2014 , February 2015, published by the Global Sustainable Investment Association

Hong Kong as an International Financial Centre An ESG disclosure culture can: Attract capital from the Capital growing pool of investors committed to responsible investment practices Competitiveness enhanced Attract listings by Listings like-minded companies 5

Final Thoughts Final Thoughts Listed companies’ “buy - in” The Exchange • S hares the stakeholders’ views on the benefits of ESG reporting • Conducts training on ESG reporting • Provides various resources and toolkits on a dedicated ESG webpage http://www.hkex.com.hk/eng/rulesreg/listrules/listsptop/esg/ Ultimate Goal Develop a corporate culture in which ESG practices and reporting are fully integrated into daily business operations 6

External Stakeholders and Corporate Governance: It’s neighbourly to make the right noises? Cas Sydorowitz CEO September 23, 2016 V1DIS A COMPUTERSHARE COMPANY

Investors who voted against the most resolutions in HK # of Resolutions voted AGAINST in Since Jan 1 2015 Number of resolutions Investor which were voted against 1 Dimensional Fund Advisors, Inc. 13,024 2 BlackRock 6,047 3 SSgA Funds Management, Inc. (State Street) 3,337 4 Florida State Board of Administration 2,661 5 Ohio Public Employees Retirement System (OPERS) 2,652 6 Northern Trust Investments 2,630 7 AllianceBernstein LP 2,518 8 Vanguard Group, Inc. 1,758 9 Fidelity Management & Research Co. 1,738 10 MN 1,425 11 California Public Employees’ Retirement System (CalPERS) 1,422 12 California State Teachers' Retirement System (CalSTRS) 1,415 13 BNY Mellon 1,371 14 TIAA-CREF Asset Management LLC 1,347 15 Teacher Retirement System of Texas 1,296 16 Invesco PowerShares Capital Management LLC 1,186 17 Goldman Sachs Asset Management LP 1,162 18 WisdomTree Asset Management, Inc. 1,143 19 Mercer Australia 1,093 20 Hermes Equity Ownership Services 1,066 Source: www.proxyinsight.com 2

Resolutions types that received the most frequent opposition Director Re/Elections Capital Increase Capital Change Equity Based Plans Auditors Articles/By Laws Director Remuneration Financial Statements & Reports Capital Change – Refers to Authorise Reissuance of Repurchased Shares Source: www.proxyinsight.com Capital Increase - Approve Issuance WITHOUT Pre-emptive Rights 3

Understanding Shareholder Rationale for voting against Director (re)elections Overboarded Vote against due to lack of /Too many other time disclosure. commitments Attended less than the required Audit committee met an insufficient amount of board meetings to number of times warrant his/her commitment to the board and/or the company. We are holding members of the Nominee is a non-independent Nomination Committee accountable director on a board that lacks for failing to ensure that all key independence relative to typical board committees are fully market standards. independent. 4

Top Investor Dissent for Director Elections in Hong Kong Hong Kong Investor Jul 15-Jun 16 Jul 14-Jun 15 Jul 13-Jun 14 Fidelity Mgmt & Res 71.50% 63.10% 68.40% Goldman Sachs 72.20% 77.10% 78.90% T Rowe Price 74.30% 64.10% 70.10% BNY Mellon 79.40% 70.40% 71.00% Northern Trust 80.10% 75.70% 78.40% State Street 85.80% 83.30% 82.20% Norges 86.30% 83.90% 69.80% Vanguard 87.30% 83.70% 83.50% BlackRock 88.10% 86.70% 89.60% Fidelity Worldwide 100.00% 99.60% 97.90% Source: www.proxyinsight.com

How does the market look at your Equity Story? 6

Why is this important? Manage Shareholder Engagement Don’t leave it to chance 7

Investor Decision Making Process External Influencers External Influencers Corporates Pension Funds (BOD / IR) Other critical Research providers shareholders Governance & Investment Proxy Voting Decisions Proxy Advisors ISS Investor Community Glass Lewis Governance Teams PMs / Analysts Issuers but only Press during the AGM Institutional voting decisions are made by groups who have limited exposure to BOD / IRO’s at the issuer 8

Who are the Proxy Advisors? › Over 1,200 clients › Over 1,600 investor clients › More than 360 staff › More than 800 employees › Covers 20,000 meetings per › 15 offices in 10 countries year › Covers 38,000 meetings per › Acquired IVOX in Jan 2016 – year German based Proxy Advisor › Acquired iiWisdom in 2016 › Acquired Meetyl in June 2015 › Owned by Vestar Capital › Owned by Ontario Teachers’ Partners (PE) Pension Plan, and 20% AIMCO 9

Activism “SHAREHOLDER ACTIVISM IS NOT A PRIVILEGE - IT IS A RIGHT AND A RESPONSIBILITY. WHEN WE INVEST IN A COMPANY, WE OWN PART OF THAT COMPANY AND WE ARE PARTLY RESPONSIBLE FOR HOW THAT COMPANY PROGRESSES. IF WE BELIEVE THERE IS SOMETHING GOING WRONG WITH THE COMPANY, THEN WE, AS SHAREHOLDERS, MUST BECOME ACTIVE AND VOCAL .” MARK MOBIUS TEMPLETON EMERGING MARKETS GROUP 10

Active Investors or Investor Activist? $4.7Trill Aum Proxy Fight against G-Resources Group Ltd in HK Mar 2016 Stop the sale of the sole gold mine and changing the corporate direction $388 Bill Aum Proxy Fight against CPP Group in UK May 2016 Overhaul the Board 11

Drivers of growth in Shareholder Activism 12

Goals of Shareholder Activism 13

Activist campaigns No longer known as “corporate raiders” but “defenders of shareholder value” • Underperformance: The target has under performed relative to peers or the broader market. • Capital allocation: The target is under-levered or has excess liquidity. • Corporate clarity: The target should divest or spin-off one or more divisions or assets • Corporate control: The target should put itself up for sale, seek a higher premium for a proposed sale or abandon a proposed acquisition • Governance: The target has meaningful corporate governance issues. 14

Companies targeted each year by an activist campaign - globally 700 609 600 526 469 500 400 345 323 300 218 185 200 100 0 2010 2011 2012 2013 2014 2015 YTD 2016 To June 30 2016 Data provided by Activist Insight 15

Success rate of activist campaign 65.54% 57.19% 56.16% 56.94% 70% 60% 50% 40% 30% 20% 10% 0% 2013 2014 2015 YTD 2016 YTD 2016 is higher as not all campaigns have concluded Data provided by Activist Insight 16

What should companies be aware of? Activists spend a considerable amount of time preparing and researching the target companies (1-2 man years of research) They will speak to: o Customers o Suppliers o Current and X employees/directors o Regulators o Shareholders o Proxy advisors o Retail shareholder associations o Potential bidders They will conduct site visits, meetings with board members and management 17

Activists retain professional service providers o Financial Advisors o Lawyers o PR Firms o Proxy Solicitors o Private Investigators o Executive Recruiters o Management Consultants 18

Lessons learnt? 1. Activists are shareholders, so you should not avoid them; 2. They have very focussed portfolios and probably knows as much about the company as the board, if not more; 3. Keep detailed notes of your engagement with the activist including when they took place, who was involved and what was discussed; 4. Ask what the source of the activist information is, to understand how they are deriving their assumptions; 5. Ask for time to consider their thesis and their specific asks, before summarily dismissing their demands; 6. Take inventory of your other investors and when you last spoke to them; 7. Bring in the experts to help you with the communications, shareholder engagement, and the proxy advisor outreach. 19