2023 Responsible Investing Update

Introduction

As we encourage companies to enhance their transparency, we work to do the same. We are pleased to share our third-annual Responsible Investment (RI) report, which will review our progress and initiatives from our RI efforts over the last year. This report includes highlights from our stewardship, engagement, and integration activities as they relate to financially material ESG issues.

This past year, financial market participants have observed more scrutiny regarding the relevance and efficacy of ESG factors. As a result, certain jurisdictions are restricting the consideration of ESG factors in investment decisions. At the same time, we note various regulators moving forward with requirements and rules focused on enhancing disclosure from both investors and public issuers.

As an asset manager, we take our fiduciary responsibility seriously, evidenced through our fundamental stock selection and comprehensive RI approach. At NS Partners, we believe that ESG factors can have a material impact on investment performance and present both unique risks and opportunities for our investee companies. As such ESG factors that are financially material are considered, alongside traditional financial factors, as part of our bottom-up research and stock selection. Given our stance, NS Partners considers itself well positioned to navigate the changing regulatory landscape and other developments relevant to our business.

Collaboration

International Corporate Governance Network

As an affiliate of CC&L Financial Group, NS Partners is a member of the International Corporate Governance Network (ICGN).  In June 2023, the ICGN submitted a feedback letter to the Chair and Vice-Chair of the International Sustainability Standards Board (ISSB), supporting the development of globally aligned sustainability-related disclosures, built upon the TCFD recommendations and the SASB standards. NS Partners supported this letter and welcomed the ISSB’s publication of the IFRS S1 and IFRS S2 standards which are designed to help users understand the governance processes, controls, and procedures an entity uses to monitor, manage, and oversee sustainability-related risks and opportunities.

In supporting the ICGN’s letter to the ISSB, NS Partners holds the view that verifiable and reliable corporate sustainability disclosures are needed to make informed stewardship and investment decisions. NS Partners shares the ICGN’s belief that IFRS1 and IFRS S2 should be endorsed by the International Organization of Securities Commission Organizations (IOSCO) and that regulatory authorities should adopt the ISSB standards to contribute to greater reporting transparency and management of sustainability risks and opportunities.

Climate Action 100+

We continue to progress with our participation in Climate Action 100+, an investor initiative to encourage the world’s largest corporate greenhouse gas emitters to act on climate change. As part of this initiative, we have signed on to participate in the collaborative engagement with Lockheed Martin.

In May 2023, the group engaged with Lockheed Martin, discussing the company’s enhancements to its climate-related reporting and changes to its reporting frequency. The group invited a representative from the Science-based Targets Initiative (SBTi) to provide guidance regarding target setting approaches and methodologies. As an outcome of the engagement, the group provided Lockheed Martin feedback regarding their most recent TCFD and Sustainability report in July 2023.

Climate Change

At NS Partners we recognize that climate change can present risks and opportunities that can have material financial impacts on companies in which we invest. Governments globally have enacted legislation to reduce greenhouse gas emissions, have increased investment in energy security and energy transition programs, and established climate reporting obligations for issuers. Companies are recognizing the new investment opportunities associated with climate change as regulations and incentives increasingly reward those that are driving greater energy efficiency, investing in renewable energy sources, sustainable infrastructure, and circularity. At NS Partners, we believe that all else equal, better governance and action with respect to mitigating exposure to climate risk may result in improved financial outcomes for corporates.

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

Chart 1: Portfolio vs Benchmark Carbon Intensity

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Chart 2: Portfolio vs Benchmark Weighted Average Carbon Intensity

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Proxy Voting

At NS Partners, our proxy voting decisions are guided by our customized proxy voting policy. We continue to use our voting rights as a means to escalate concerns with companies’ approach to ESG, among other issues. We seek to vote proxies in a manner that enhances shareholder value on behalf of our clients.

As part of our governance approach, we review our proxy voting policy annually and recently updated it in April 2023 to enhance disclosure regarding our approach to voting on environmental and social shareholder resolutions.

Over the past year, NS Partners voted at 296 company meetings, voting against management on 9% of the 4,686 proposals we were eligible to vote on, as seen in Chart 3.

Chart 3: Total Proxy Votes

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Details regarding the breakdown of votes against management are summarized in the table below.

Table 1: Total Proxy Votes

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

As seen in Chart 4, we note a significant portion of our votes against management were made on governance issues, with 89% on governance-related proposals, 8% of votes against management were on social-related proposals, and 3% on environmental-related proposals.

Chart 4: Percentage of votes against management by ESG Category

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

At NS Partners, we analyze specific shareholder resolutions on environmental and social issues on a case-by-case basis. In addition, we have customized guidelines designed to promote good corporate governance practices when voting on management and shareholder-sponsored proposals.

Over the last year, we voted in favour of 41% of the shareholder resolutions we were eligible to vote on. As seen in Chart 5, NS Partners supported 55% of governance, 28% of social, and 14% of environment-related shareholder proposals.

Chart 5: Support for Shareholder Resolutions by ESG Pillar

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Starbucks Corporation

In May 2023, NS Partners supported a shareholder resolution requesting that Starbucks Corporation provide a report on their commitment to freedom of association and collective bargaining rights.

While we noted the company’s commitment to international norms, such as the UN Guiding Principles on Business and Human Rights, the Women’s Empowerment Principles, and the ILO Core Labor standards, NS Partners felt that the proposed third-party assessment may benefit shareholders by providing additional information on the company’s management of risks related to human rights, freedom of association, and collective bargaining.

JPMorgan Chase & Co

In May 2023, we supported a shareholder resolution requesting that JPMorgan Chase & Co. report on its climate transition plan, including a description of how it intends to align its financing activities with sectoral greenhouse gas reduction targets. We noted that the company had committed to aligning its financing activities with the Paris Agreement goals, which included achieving net-zero emissions by 2050 and limiting global warming to 1.5°C. However, we considered that additional information on the company’s metrics and timelines around its decarbonization strategy would benefit shareholders. As such, NS Partners supported the resolution, which received 35% of shareholder support.

Bank of America

In April 2023, NS Partners supported a non-binding shareholder resolution at Bank of America, calling for the company to establish an independent Board Chair. NS Partners generally believes that effective board leadership may be enhanced by separating the roles of Chair and CEO. We noted that the size, complexity, and legal and regulatory landscape further supported the potential value in having independent oversight in the form of an independent Chair. While the proposal did not pass, 26% of shareholders voted in favor of the resolution.

Proxy Engagement Examples

NS Partners uses proxy voting as a route to engagement.  Where our proxy voting policy recommends a vote against management, we reach out to investee companies in order to engage in a constructive dialogue regarding the issue at hand before voting.

Samsung SDI Co, Ltd

In March 2023, NS Partners engaged with Samsung SDI Co. regarding the election of a director nominee, who was an insider sitting on one of the key Board committees. As per our voting guidelines, we generally believe that key committees should be comprised of independent directors. As such, our policy recommended to vote against the nominee’s election. The company shared that following the completion of the AGM and in an effort to pursue transparency and objectivity of the Board of Directors, they had plans to reorganize the Board Committees to be comprised exclusively of Independent Directors. Thus, NS Partners supported the director’s election and will monitor their progress prior to next year’s AGM.

Equifax

In April 2023, NS partners engaged with Equifax to discuss the company’s executive compensation practices. In 2022, the company’s CEO, Mark Begor, received a $25 million retention award and some shareholders raised concerns around the rigor of the performance criteria linked to the award. Equifax noted that Begor had been instrumental in transforming the company and thus the company has extended his employment agreement to 2025 and adjusted his compensation package. To address the gap identified between Begor’s pay and their peers and the associated retention risk, the company felt that the additional grant would further add certainty to his employment internally and for shareholders. Following shareholder engagement and feedback at the previous AGM the company added additional performance metrics as part of their equity award structure. NS Partners elected to support the say-on-pay resolution, recognizing the importance of talent retention, and considering the changes made to the performance criteria following shareholder feedback.

Engagement Examples

In addition to engaging with investee companies through proxy voting, NS Partners regularly meets with company management teams and where it is financially material to the investment case discusses relevant ESG topics.

Meeting with HSBC Sustainability Officer March 2023:

In March 2023, NS Partners engaged with HSBC regarding their new energy policy. During the meeting the company shared that they have worked to develop a holistic policy that links all energy production to achieve real world emissions reductions without endangering regional security of supply or introducing blanket bans on fuels in high emitting areas, such as emerging markets. In line with its commitments, HSBC will not provide new finance to clients for the purposes of Oil & Gas exploration, appraisal, development and production pertaining to ultra-deep water offshore O&G projects, shale oil projects, extra heavy oil projects, projects in environmentally and socially critical areas; or infrastructure whose primary use is in conjunction with the above activities. Further, HSBC shared that as a part of their new energy policy, they engage with their clients and encourage them to develop plans to transition to net-zero and to reduce their GHG emissions. HSBC also clarified that they have a nuanced approach, where they do not off-board a client for not having an initial plan to align with net-zero goals; rather, HSBC collaborates with clients by considering their individual circumstances and specific needs.  This approach demonstrates their efforts to promote net-zero practices whilst considering the capacity of issuers to do so, both in the short and long-term. Additionally, we discussed HSBC’s approach to internal modelling and data analytics of ESG metrics and performance. From this discussion we gathered that any RWA adjustment based on this modelling has not been implemented as this requires a regulatory approval that has not been granted yet. This was a productive discussion which provided useful insight into HSBC’s approach to sustainability and revealed a proactive and pragmatic methodology.

Meeting with Mindray IR and ESG team May 2023 at their Shenzhen HQ:

In May 2023, NS Partners engaged with Investor Relations at Mindray on the topic of their Russian exposure, which contributed to approximately 3% of FY22 revenue, and other ESG matters. The company shared that they have no plans to cease supplies to Russia, given the nature of their products, which include patient monitoring devices and other medical equipment. We believe this is a humanitarian issue and should not have a negative ESG impact. On the topic of MSCI’s ESG rating of Mindray, the company mentioned that they had not been engaged by MSCI and noted that they had no Chinese-speaking analysts who could carry out in-depth company-specific analysis. As such, MSCI was only able to formulate a rating by reviewing Mindray’s translated Annual Report. Mindray has since actively reached out to MSCI and improved its ESG disclosure, leading to an upgrade from BB to AA in June, the highest rating among A-share listed companies.

Governance Summary

As advocates for good corporate governance, we continue to monitor various governance metrics and performance of our investee companies. Here we look at the progression in female representation on Boards, average Board independence, and the proportion of companies with separate CEO and Chair roles.

Female Representation on Boards

Whilst average female representation on boards saw marginal year on year increases for NS Partners’ International Equity Fund from 2021 to 2023, this figure either remained the same or decreased for other funds.

Chart 6: Average Female Representation on Board of Directors

Source: MSCI as of 09/30/2023.

Average Board Independence

Average board independence saw strong progression across most of NS Partners’ funds from 2021 to 2023 with particularly strong progression over the last year. The NS Partners Global Equity fund saw modest progression whilst there was no progression for the NS Partners US Equity fund.

Chart 7: Average Board Independence

Source: MSCI as of 09/30/2023.

Separate Chair and CEO

The percentage of issuers with a separate Chair and CEO increased across all of NS Partners’ funds from 2021 to 2023. NS Partners’ Global Emerging Markets Equity fund saw particularly strong gains of 37% over the last two years.

Chart 8: Percentage of Issuers with a Separate Chair/CEO

Source: MSCI as of 09/30/2023.

MSCI ESG Ratings

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

While the MSCI ESG scores of our portfolios is an outcome of our 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.

Chart 9: Weighted Average ESG Score

*Source: MSCI Data for the reporting period 10/01/2022 to 09/30/2023.

Chart 10: ESG Ratings Distribution

*Source: MSCI Data for the reporting period 10/01/2022 to 09/30/2023.