2024 Responsible Investing Update

Introduction

NS Partners is pleased to share its fourth annual Responsible Investing (RI) Update, which highlights its progress and initiatives from RI efforts over the last year. This report includes highlights on stewardship, engagement and integration activities as they relate to financially material environmental, social and governance (ESG) issues.

As a global asset manager, NS Partners takes its fiduciary responsibility seriously, demonstrated through its fundamental stock selection and comprehensive RI approach. NS Partners believes that ESG factors can have a material impact on investment performance and present unique risks and opportunities for investee companies. As such, ESG factors that are financially material are considered, along with traditional financial factors, as part of the firm’s bottom-up research and stock selection approach.

The Evolution of Responsible Investment at NS Partners

Since inception, NS Partners has considered material factors, including ESG factors, in its investment process. NS Partners became a signatory to the United Nations Principles for Responsible Investing (PRI) in 2016 and has since developed a Responsible Investing Policy that aligns with its commitment. NS Partners continues to look for ways to enhance the risk-adjusted returns for its clients, while further developing its approach to integrating material ESG factors in its investment process.

Evolution of NS Partners’ approach to responsible investing​

* Task Force on Climate-Related Financial Disclosures.​

As of August 2024. Chart is for illustrative purposes only and is not drawn to scale

Source: NS Partners Ltd

ESG Integration in the Investment Process

By ensuring that financially material ESG factors and their trajectory over time are captured in the investment process, the firm’s policy on responsible investing aligns with the duty to seek the best returns for clients.

Case Study – Techtronic Industries Co.

Techtronic Industries is a Hong Kong-listed manufacturer of power tools, hand tools and outdoor power equipment. The company was proposed as a new holding for NS Partners’ portfolios in 2024. As part of the analysis carried out, financially material risks and opportunities related to environmental and governance factors were identified and integrated into the investment research.

The team identified environment-related opportunities in the company’s Outdoor Power Equipment (OPE) division. Currently, the market is dominated by gasoline-powered tools; however, battery tools, which have lower emissions and reduce noise pollution are gaining share. Techtronic is the market leader in battery powered OPE and will benefit from an increased penetration of this technology. This trend is also supported by regulation. For example, California has banned the sale of new gasoline-powered lawn equipment effective January 2024 and other US states such as New York and Illinois have bans coming into effect in 2025.

On the governance side, the financially material risks identified in the research involve the majority shareholder and Founder, Horst Pudwill, who holds the position of Chair, and his son, Stephan Pudwill, as Vice Chair. Although the board recently achieved greater than 50% independence, four of the 14 board members are considered entrenched at a tenure of more than 15 years, and in the case of the Founder/Chair close to 40 years. Remuneration is a concern with the Chair having historically received large pay awards. NS Partners notes that this has scaled down in recent years, however, the CEO received a total remuneration package of $33 million (USD) in 2023 which remains a concern. Additionally, NS Partners also identified some aggressive accounting practices. Techtronic consistently increased their R&D spending, and they have capitalised a significant proportion of this R&D spend as allowed under IFRS; GAAP accounting would force them to expense all the R&D spending – NS Partners believes this would be best practice.

Taking into consideration these factors as well as the broader investment analysis, NS Partners concluded that the investment was suitable for the portfolios. However, factoring in the governance risks identified, a smaller active weight was deemed appropriate as suggested by the risk models.

Industry Collaboration

Collaborative Initiatives

NS Partners participates in collaborative engagements and initiatives to pool resources and speak with a stronger unified voice to protect the interests of shareholders in the companies in which it invests on behalf of its clients.

NS Partners is a supporter of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. As supporters of the TCFD, NS Partners is currently working to publish its TCFD-aligned disclosure describing its approach to identifying, assessing, and managing climate-related risks in its investment process. This report will be available in Spring 2025.

Since 2020, NS Partners has been a member of Climate Action 100+, an investor initiative to engage the world’s largest corporate greenhouse gas emitters on their action on climate change. As part of this initiative, NS Partners continues to participate in the collaborative engagement with Lockheed Martin Inc.

NS Partners is a supporter of the International Corporate Governance Network (ICGN) through its affiliation with member Connor, Clark & Lunn Financial Group (CC&L Financial Group).

In February 2016, NS Partners became a signatory to the PRI initiative.

2024 Global Investor Statement to Governments on the Climate Crisis

NS Partners signed the 2024 Global Investor Statement to Governments on the Climate Crisis, a sign-on statement advocating for greater public policy action to enable investors to meet their climate commitments and limit global warming in line with the objectives of the 2015 Paris Agreement.

UN PRI Assessment Results

NS Partners is pleased to share its 2024 PRI Assessment Summary Scorecard. NS Partners is ranked above median in all reported measurement categories, and improved on the Policy Governance and Strategy, and Confidence Building Measures module scores from 2023.

The scorecard is calculated according to the PRI’s Assessment methodology, which converts the indicator scores to an aggregate module score using a points-based system ranging from 0-100. The scoring methodology for the 2024 Reporting Framework remains unchanged from 2023. More information on the PRI’s Reporting and Assessment can be found on their website.

A copy of the 2024 PRI Assessment is available upon request.

Climate Change

Carbon Footprint Reports

As supporters of the TCFD, NS Partners is committed to measuring and disclosing the carbon footprints of its core funds.

Each of NS Partners’ funds outperformed the benchmark in terms of its carbon intensity and weighted average carbon intensity (WACI). While the carbon footprint of its portfolios is an outcome of its investment process and not specifically targeted, NS Partners believes its investments in high-quality issuers and industry leaders has contributed to its lower carbon footprint.

Figure 1: Portfolio Carbon Exposure Overview

Source: Institutional Shareholder Services Inc. (ISS) for the reporting period – as of September 30, 2024, in USD.

Stewardship & Engagement

Stewardship and engagement are key components of NS Partners’ active ownership efforts. NS Partners believes that commitment to responsible investment cannot be fulfilled by analysis alone. We believe engagement with the companies we invest in is crucial to deepening our understanding and driving improvements on material ESG risks or opportunities.

As an affiliate of CC&L Financial Group, NS Partners receives support from the centralised Stewardship & Engagement (S&E) team. The S&E team supports NS Partners’ investment managers on engagements with investee companies, participation in collaborative initiatives with like-minded investors and the facilitation of proxy voting.

Proxy Voting

Approach to Proxy Voting

NS Partners has a fiduciary duty to vote proxies both in a timely manner and in the best interests of its clients. NS Partners’ proxy voting policy is based on the central tenet that good corporate governance enhances long-term shareholder value.

As a signatory of the UN PRI, NS Partners considers ESG implications in its proxy voting. For specific proposals related to ESG, issues will be reviewed and analysed on a case-by-case basis. NS Partners will generally vote in favour of proposals that seek to: improve disclosure of environmental risks, improve transparency regarding social issues and favour proposals that encourage good governance and greater independence – provided it is in the best interest of shareholders.

Over the past year, NS Partners voted at 425 company meetings and voted against management on 9% of the 5,377 proposals it was eligible to vote. Additionally, NS Partners supported 45% of shareholder proposals it was eligible to vote. See Table 1 for the proposals voted by category.

Figure 2: Total Proxy Votes

Source: ISS for the reporting period 10/01/2023 to 09/30/2024.

Proxy Voting Highlights

Table 1 – Votes against management and ISS by proposal category

Source: ISS for the reporting period 10/01/2023 to 09/30/2024.

*Votes against ISS indicate where NS Partners vote instruction deviated from ISS’ benchmark voting policy.

Proxy Voting Examples

PetroChina Ltd.

In June 2024, NS Partners voted against management on a proposal to approve the report of the board of directors for PetroChina Ltd., a Chinese energy company. The company is considered to be a significant greenhouse (GHG) emitter and has not taken the minimum steps needed to assess and mitigate risks related to climate change. The company had not set targets including mid-term nor any 2050 GHG emission reduction targets for its own operations and electricity consumption. By 2024 the company had not mentioned a specific year for its individual neutrality goal on its scope 1 and 2 emissions. Due to the company’s lack of climate risk assessment and mitigation, NS Partners elected to vote against the resolution.

Microsoft Corporation

In December of 2023, NS Partners supported a shareholder proposal at Microsoft Corp. calling for the American information technology company to commission a report assessing the implications of siting cloud data centres in countries with significant human rights concerns, and their plans to mitigate these risks. The company is greatly expanding their data centre operations in the coming years and while they currently issue human rights-related reports, the resolution’s proponent outlines that the company will need to expand upon their current efforts to address the growing legal, reputational and workforce risks in their operations. NS Partners elected to vote in favour of this proposal as further reporting on the company’s due diligence efforts regarding these operations would benefit shareholders in assessing the company’s efforts to mitigate these risks.

Meta Platforms Inc.

In May 2024, NS Partners voted in favour of a shareholder-sponsored proposal at US-based communication services conglomerate Meta Platforms, asking the company to initiate and adopt a recapitalization plan for all outstanding stock to have one vote per share. The company’s current multiclass share structure gives one class of shareholders disproportionate voting rights, which serves to entrench management and the board of directors while minimizing the voting rights of other shareholders. The company has also been the focus of several governance related controversies in the past, which the proponent of the resolution suggests equivalent voting rights for all shares would help avoid in the future. NS Partners believes a one-vote-per-share policy would be beneficial to unaffiliated shareholders and therefore voted to support this proposal.

Engagement

Approach to Engagement

NS Partners engages with management of the companies in its portfolios and the broader investment universe as part of the investment research process. Portfolio managers regularly meet with management teams of investee companies and review strategic and operational objectives, including ESG issues. The S&E team also supports the investment team on engagements with investee companies on ESG concerns.

During the reporting period, the S&E team participated in a total of 28 engagements with companies held in NS Partners’ funds, 82% of which were related to governance matters.

Engagement examples

Constellation Brands Inc.

In July 2024, NS Partners engaged with Constellation Brands, an American beverage producer, to discuss the company’s commitment to climate targets, particularly in relation to its supply chain water risk exposure. The company explained that they recently centralized their ESG program, and their focus on water risk had only covered their own operations until recently, despite their significant expansion and growth in the last decade. The company mentioned their intention to focus on the supply chain as the next step in their water journey and are currently conducting climate scenario analysis and supplier water risk assessments. NS Partners decided to support the shareholder resolution requesting the company report on its efforts to reduce supply chain water usage as additional disclosure would bring the company into alignment with its peers and standard best practices.

Entero Healthcare Solutions Ltd.

In August 2024, NS Partners engaged with an Indian healthcare solutions provider, Entero Healthcare Solutions, regarding the company’s board independence. The proportion of independent directors on the company’s board was below NS Partners’ guideline of 50%. The company outlined that local regulations require that if the chair of the company is an independent director, then only one third of directors on the board are required to be independent. Following the annual meeting, the company would meet these requirements and would then be in line with relevant regulations and local best practices. As such, NS Partners supported management on the election of a non-executive director at the annual meeting.

NIKE, Inc.

In August 2024, NS Partners engaged with NIKE, Inc., an American apparel company, regarding their dual-class share structure and multiple shareholder-sponsored proposals ahead of their annual meeting. The company noted that the dual-class share structure currently benefits both classes of shareholders for director elections and carries equal weight and the same economic incentives, risks and rewards. The shareholder resolutions requested that the company expand their current reporting processes on gender and racial pay gaps and environmental targets. The company expressed that their current reporting already accounts for gender/racial pay gap disclosures and the specific median pay gap metric requested by the proponent would not fairly represent these metrics. They also noted their current environmental targets are well established in their most recent impact report. After consideration, NS Partners elected to support management on these proposals.

Kobe Bussan Co. Ltd.

NS Partners engaged with Kobe Bussan, a Japanese supermarket and food conglomerate in October 2024. The company was rated poorly by MSCI on environmental factors as well as falling short on corporate governance. NS Partners reached out to Kobe Bussan, since it was not featured in the Tokyo Stock Exchange (TSE) monthly list of companies that have disclosed plans to improve on these factors. The company believed it would appear on the list before year end as it has a set of initiatives designed to improve various governance factors and capital efficiency. The company’s management established a planning committee and is looking to set targets for the proportion female managers. It was also actively managing succession and will be looking at its cost of capital and return on invested capital. The company’s management was willing to engage and show an awareness that better governance is required. It committed to making additional disclosures on its website before year end and to providing further information after their January 2025 annual meeting. NS Partners will seek further dialogue following this initial discussion.

BNP Paribas SA

In June 2024 NS Partners met with the CFO of French bank BNP Paribas. Part of the discussion covered green financing, energy transition and funding of fossil fuels. When discussing green financing, BNP highlighted the need to learn about new technologies, noting that they have built a team of engineers so they can gain a better understanding of these technologies, and the likely winners and losers. They believe bringing together bankers, engineers and sustainability experts is a unique proposition in European banking, allowing them to identify the right solutions and fund them, thereby taking market share. BNP is scaling back on lending linked to fossil fuels and renewables is now a larger proportion of their loan book than oil and gas extraction – they target an 80/20 balance by 2030. However, the company emphasised that this is a transition and will take time; it will be a long journey, but an opportunity.

MSCI Ratings

An analysis of NS Partners’ portfolios based on MSCI ESG ratings suggests scoring of representative mandates across all categories is ahead of their respective benchmarks. In addition, the proportion of ‘ESG Leaders’ in NS Partners’ representative portfolios is higher than that of their respective benchmarks.

While the MSCI ESG scores of NS Partners’ portfolios is an outcome of the firm’s investment process and not specifically targeted, NS Partners believes its investment in high-quality issuers and industry leaders has contributed to its higher MSCI ESG scores compared to the benchmark.

Figure 3: Weighted-Average ESG Score

Source: MSCI Data as of September 30, 2024, in USD.

Figure 4: ESG Ratings Distribution

*Source: MSCI Data as of September 30, 2024, in USD.

Governance Summary

As advocates for good corporate governance, NS Partners continues to monitor various governance metrics and performance of our investee companies. Below is a look at the progression in female representation on boards, and the proportion of companies with separate CEO and Chair roles in the past three years.

In 2024, average female representation increased across its portfolios, as seen in Figure 5, compared to previous years.

Figure 5: Average Female Representation on Board of Directors

Source: MSCI as of September 30, 2024.

 
The percentage of issuers with a separate Chair and CEO increased for NS Partners Global Equity and NS Partners European Equity portfolios. While the NS Partners International Equity fund remained the same in 2024 and NS Partners Global Emerging Markets Equity saw a slight decrease in the percentage of issuers with separate Chair and CEO.

Figure 6: Issuers with Separate Chair and CEO

Source: MSCI as of September 30, 2024.

Corporate Social Responsibility

NS Partners, as a firm, is committed to being a responsible corporate citizen and strives to have a positive impact on the communities where we live and work. In partnership with CC&L Financial Group and its Business Practices Working Group (BPWG), NS Partners recognises that our business practices should consider the impact on our workplace, community and society. In addition, through the CC&L Foundation, NS Partners supports philanthropic and volunteering initiatives.

The BPWG is focused on three areas:

• Diversity, equity, inclusion and belonging (DEIB);
• The health and wellness of people who work here; and
• Environmentally sustainable business practices.

To oversee the execution of initiatives aligned with these themes, CC&L Financial Group has organized working groups and committees comprising members from a range of business functions, seniority levels, geographic locations and demographics. There are plans and policies in each of these areas.

Below provides a summary of some of the initiatives undertaken in these areas over the last 12 months.

Diversity, Equity, Inclusion & Belonging

We are committed to workforce diversity, promoting equity and creating a culture of inclusion. To ensure our people feel a sense of belonging, we strive to foster a culture that unites people of diverse backgrounds and perspectives, in an environment where everyone has the opportunity to achieve personal and professional success.

Over the last 12 months, DEIB initiatives focused on education, communications and events to promote a culture of inclusion, celebration and learning throughout the year. Some examples include:

• Observed and celebrated Black History Month, Lunar New Year, International Women’s Day, LGBTQ2S+ Pride Month and National Day for Truth and Reconciliation.
• Launched the 4 Seasons of Reconciliation Course across the company that describes the foundation of the relationship between Canada and Indigenous peoples and promotes a renewed relationship through education.
• Introduced a Demographic data collection process to better understand the needs of our people.

Health and Wellness

We believe the health and wellbeing of the people who work here is critical to maintaining our collective performance. We are committed to undertaking initiatives that support a safe and healthy work environment within a culture where everyone feels secure and supported.

The Health & Wellness committee has focused on the following initiatives over the last 12 months:

• Hosted Health and Wellness Month, which included workshops on topics such as “the power of embracing failure” and “the benefits of meditation.” In addition, the BPWG held a company-wide fitness challenge where participants collectively took over 23 million steps to travel 16,895 kilometres. This challenge was a fantastic way to motivate everyone to get active. Prizes were awarded to the top participants, including those who were consistent throughout each week and all month.
• Celebrated Mental Health Month, including a webinar with a former Olympian on managing stress, building resilience and harnessing the connection between mental and physical fitness.
• Developed a framework for employee-led health and wellness activities, including supporting a team comprising CC&L Financial Group and affiliate participants in the Bay Street Hoops charity basketball tournament.

Environmental Stewardship

We believe that through our actions we can contribute to the vitality of our environment, and we are committed to undertaking initiatives that support ongoing environmental stewardship.

Over the last 12 months, the Environmental Stewardship Committee has focused on the following initiatives:

• Researched the sustainability practices of our travel so that individuals can consider this information in making travel choices.
• Provided education on low emission commuting solutions and centralised information on office service amenities to create awareness of environmentally friendly options.
• Delivered events and communication circulars to promote a culture of environmental consciousness and create volunteering opportunities such as Earth Day City Clean-Ups and Bike-to-Work Week.

CC&L Foundation

We aim to enrich the communities in which we live and work by creating opportunities for both philanthropy and volunteerism through CC&L Financial Group and its affiliates in support of causes that are important to our clients, employees, partners and stakeholders.

The CC&L Foundation has provided support to a broad range of organizations that focus on promoting a better environment, improving education, advancing science and medicine, creating stronger communities and encouraging the arts. Over the last 12 months, the CC&L Foundation has supported a broad range of philanthropic and volunteer opportunities, some of which are highlighted below:

• Provided support through the Canadian Red Cross and the Jasper Community Team Society to those impacted during the Alberta wildfires.
• Organised an employee-led Week of Giving campaign focused on strengthening communities, alleviating poverty and addressing food insecurity. This initiative supported CC&L Financial Group’s community partners, including the United Way. This firm-wide initiative has raised almost $8 million over 20+ years.
• Made a multi-year commitment to BC Children’s Hospital Foundation to the Heart Centre program to purchase essential medical equipment to support children across the province who face serious injuries and illnesses.
• Participated in the CanSupport Dragon Boat race to raise awareness and funds for the Cedars Cancer Foundation to improve the quality of life of cancer patients and support fundamental research initiatives.
• Aided students through bursaries and scholarships, including Indspire’s Building Brighter Futures program, the National Educational Association of Disabled Students and the Onion Lake Education Trust Fund.
• Held an internal fundraiser to support inclusivity and allyship during Pride Month, with donations directed to Pflag chapters across Canada.
• Participated in a Canada-wide blood drive campaign in partnership with Canadian Blood Services and Héma-Québec.
• Became a Moisson Montreal ambassador, volunteering time and contributing financially to address food insecurity.