※Japanese Version → 日本語
Three years have passed since Japan’s Stewardship Code was established. After the “Council of Experts Concerning the Follow-up of Japan’s Stewardship Code" discussed several times and reviewed the public comments, Japan’s Stewardship Code is going to be revised in the fiscal year of 2017. The aim of the revise based on the Japan Revitalization Strategy 2016 (approved at a cabinet meeting on June 2,2016), which states the corporate governance reforms continue to be one of the top agenda of Abenomics, is to deepen those reforms from ‘superficial’ to ‘substantial. The revise is going to stimulate the substantial engagement between investors and companies more.
We, QUICK ESG Research Center, has introduced how to proceed the engagement with companies and the investment strategy via the interview to global asset managers. We would like to help both investors and companies improve the engagement letting them know the practice by introducing those articles.
This time, we interviewed with Ms. Robert M. Wilson, Jr., who is an investment officer and institutional portfolio analyst at MFS Investment Management and asked him what the meaning of engagement to MFS Investment Management and the way to proceed the engagement with companies. MFS Investment Management set up Responsible Investment Committee to govern the ESG strategy in 2009. The committee is the highest level of the organization across geography and across all of their business units. They work on engagement with companies proactively.
◇Mr. Robert M. Wilson, Jr.
Robert M. Wilson, Jr., is an investment officer and institutional portfolio analyst at MFS Investment Management. His primary role involves working with the firm’s analysts and portfolio managers to identify and integrate environmental, social and governance (ESG) issues into the investment decision-making process. Rob also responds to ESG-related questions from institutional clients. He is a member of the task force of PRI to explore in more detail the issue of corporate tax planning.
– Investment Officer
– Research Analyst
– Joined MFS in 2013.
– Previous experience includes 6 years as Senior Investment Analyst at American Century; 5 years as FP&A/Treasury Manager at Bain & Company.
– University of Chicago, MBA, high honors
– Boston University, BS, summa cum laude
Established in 1924, MFS is an active, global asset manager with investment offices in Boston, Hong Kong, London, Mexico City, São Paulo, Singapore, Sydney, Tokyo and Toronto. We employ a uniquely collaborative approach to build better insights for our clients. Our investment approach has three core elements: integrated research, global collaboration and active risk management.
１. The RI Committee
（Ｑ）Please explain the background and the aim specifically regarding founding MFS’s Responsible Investment Committee in 2009.
（Ａ）Last decade, a number of our clients, especially institutional clients mainly in Europe and Australia started having interest in ESG topics. We received the helpful feedback from them.In addition to that, we were seeing some other asset managers starting formalizing ESG integration efforts and eventually this became great help for us to understand ESG topics very well.
Back to 2007 – 2008, we had a lot of conversation, and it became quite clear that ESG integration would be beneficial to us and we were sure that ESG investment would fit to our investment process which focuses on long term benefit and is based on the deep fundamental research. Then we set up Responsible Investment Committee to govern the ESG strategy in 2009. However, this does not mean that we started ESG research in 2009, it was our first attempt to formalize our effort to understand ESG risks.
（Ｑ）What is MFS’s Responsible Investment Committee responsible for?
（Ａ）First of all, this committee complies with the highest level of the organization across geography and across all of our business units. The committee consists of 3 teams; distribution, investment, legal & compliance across various departments of MFS. We work as a team.
There are a number of roles the committee is responsible for, however, the main function is to transmit comments and reviews each other. Giving an example, the distribution team provides the level of clients’ expectation on the ESG integration program and some feedback related to the certain aspects of ESG integration to the investment officer and the proxy voting manager in the committee. In the same way, I sometimes give feedback on our day-to-day progress. In addition, if we have difficult problems which we cannot work on individually, the organization allows us to raise any issues regarding ESG integration process and strategy to the senior management in order to make decision.
The committee has quarterly meetings and also annually reviews the responsible investment policies, which are ESG integration policy, engagement policy and many others.The engagement team is a part of this committee. The engagement team consists of two groups; one is Proxy Voting Team, which is working on the topics related to proxy voting and another team is Investment Team which leads potential issue not coming up on the proxy statement yet. In addition to this committee, we have other committee, Proxy Voting Committee. This committee is responsible for writing and ensuring the proxy voting policy to achieve the long term client’s interest.
（Ｑ）Please let us know the background and MFS’s aim specifically regarding signing up to the PRI signatory in February 2010.
（Ａ）The background is continuation of the things relating to the RI committee. It is because this was an area where formalization could add value from our clients’ point of view. Shortly after forming the Responsible Investment committee, the first its action was to assess if PRI’s principle was aligned with MFS as an asset manager and we found that.
（Ｑ）Regarding ESG integration, what is the most significant differentiator for MFS?
（Ａ）We focus on bottom up research on ESG topic. We intentionally focus less on ratings. Because we see ratings sometimes over or under emphasize certain topics that we think they are particularly material. We focus on research and analyses of ESG impacts on the securities. We have the model to assess how ESG topics add value or have impact on securities. This is more effective than rating based approach and fits to our long term investment strategy.
２. ESG Integration
（Ｑ）What kind of information does MFS purchase from ESG research providers?
（Ａ）We receive the ESG related information from a large number of providers. MSCI is the most important provider to us. We receive all of their research for both equity and fixed income related securities. Basically we do not focus on the rating information itself, however we find analysis behind those ratings and some of data point that they provide to equate valuable of our research process. We also use Sustainalytics as well. Our proxy voting team uses both ISS and Glass Lewis for proxy voting research.
We also use a few small providers to capture some details. RepRisk enables our analyst to assess news flow around ESG topics for up to something like 50,000 companies. Incentive Lab focuses on corporate executive’s compensation incentives and how those are changing from year to year. In addition, sell-side institutions’ such as large investment banks analysts are very helpful for us. We also use research and data by data providers such as Bloomberg and FactSet. Other data sources are very valuable to us. We are also the signatory to the data set like CDP and use the information from a large number of sources in addition to financial files.
（Ｑ）After MFS purchase ESG information, how do you arrange them?
（Ａ）We use ESG information to assess the model and value of the ESG risk on the company, industry, and portfolio level.
Actually we have five primary project areas based on the bottom up research. First and the most important step is the bottom up research. At this step, I talk with the analysts regarding ESG materials by using the information, which we purchased from the third party, and research deeply so that they put buy or pass on several securities. This kind of information is very helpful to clarify, model and value ESG concerns. All other 4 project areas lead back to the bottom up research. We publish a weekly email, which provides news and the most important ESG topic from the past week, any changes in MSCI’s ratings including its rationale and our own comments on several securities.
I also focus on the sector based ESG risks. Our sector analysts have the detailed framework to understand the ESG risk in each sector and down the sector risk to the individual companies. This is very helpful information for us to recognize the topics we should talk with the management members of those companies.
I do thematic research as well. This is broad approach across all different sectors and geographies.
Finally for certain portfolios, I create what we call the dash boards. Those dash boards help the portfolio managers to understand the ESG risk and opportunity on the stock, industry, and portfolio level.
I hopefully give you a sense for the different project areas and each of those different areas is going to require me to drive in different ways on those different research options that we were just talking about in the last question. But really what always comes down to is trying to evaluate even if it is a big thematic project, get down to the individual securities which we think the most likely be impacted and we evaluate which the data source to help us to assess is, again model and value just us credibly the material data point we are uncovered.
（Ｑ）How does MFS measure the effectiveness of ESG integration into the investment strategy?
（Ａ）It is very difficult to assess what the primary driver of the portfolio’s good performance is. However, we have the 360 degree review process. Through this process, each analyst and portfolio manager’s performance is reviewed to know how they contribute to add value.
３. Engagement activities
（Ｑ）What is the meaning of engagement to MFS?
（Ａ）For us, engagement is trying to encourage the companies to improve in the particular area, and for us to understand how they think about the issue.
Through dialogs with companies we make sure that we understand how they are thinking about the issues and we can again properly model and value as well.
Over-arching view on engagement is to better understand economic, business and operational risks and try to search for opportunities to make some improvements where certain risks do exist.
（Ｑ）How does MFS draw the line between collaborative and individual engagement?
（Ａ）We mainly focus on individual engagement. We are fairly large asset manager, so the companies’ management teams have the attention on our opinion. In addition to that, most of companies seek the long term oriented shareholders, so they are quite willing to have a dialogue with us. We do however occasionally consider collective engagement. Usually we will do that when there is some broader problem, which might be helpful for management team to recognize that more than just MFS is concerned about a particular issue.
（Ｑ）How does MFS lead or join the PRI based collaborative engagement?
（Ａ）Actually we interact with the PRI in many ways beyond simply completing the annual survey.
We met PRI’s managing director two times over last year to discuss where the direction of PRI and how managers should be involved in PRI activities.
We also work with PRI on several research and engagement projects.
For example, I am a member of Corporate Tax Task Force of PRI. After having put together and published a document on multi-national taxation issues we continue to work on improving it. We have also tried to work from Policy stand point to improve disclose around the tax related issues.
（Ｑ）Please describe how MFS decides which companies to engage with.
（Ａ）We have various ways to decide which companies to engage with in order to achieve our clients’ long term value. The proxy voting team is working on several proxy related issues of the company with using ISS and Glass Lewis information, so if they flag the particular concern of those we look at it and check if the ballot is aligned with our voting policy and how our voting could impact the long term value of our client interests. Another approach is based on our bottom up research. If research analysts find some interesting issues that impact on our clients’ long term value, we talk about the material unaddressed risks and potential opportunities with companies. Other factor is that some action is taken by activist investors toward the company. We talk with the board member to find what is going on.
（Ｑ）How does MFS start engagement with the target company?
（Ａ）There are many words which means talking with companies, you can call what we are doing engagement but we call it just a “management meeting”. On the investment side at the first step, we talk with management team of the company. We think talking with company management is quite useful to know the details. For example, we engaged with the oil refining company regarding their low level of disclosure on the environment related issues. We talked about how they should manage the issues and disclose the data with its management team directly.
Basically we do not immediately want to pressure the companies because we view the relationship between management and investors as very important. We know the company management knows the business very well, so we begin just asking the questions. If our concern level increases, for example we do not receive very honest answers and we believe that the company has significant risks we may choose to elevate the discussion to the board level.
On the proxy voting side, there is a strong structure in place. They generally reach out directly to either the corporate secretaries or the director of investor relations and request to talk with management team members or someone on the same level regarding the certain aspect of the proxy vote.
These requests are generally handled by general counselor of the company or secretary of boards.
This is very common way to start engagement with companies. We view it as a part of partnership since we in most cases are looking at owning securities for a long term.
We are trying to recognize that certain ESG risks are becoming more impactful today and want to share the view in hopes of making and ensuring overall performance of the company.
（Ｑ）How does MFS check that the target company is working to respond the engagement?
（Ａ）On the proxy side, it is very clear that the certain resolutions are passed or rejected as a result. If the majority of shareholders ask for something to change and the company does not try to change, we will write the letter to the company to abide by the suggestion of the majority of shareholders. If that doesn’t occur then we maybe vote against a certain members of the board directors the following year. Thus, we continue communicating with them. In fact the proxy voting team has about 300 engagements a year and about 20,000 ballots data of 2,000 companies.
On the investment side we don’t have the same volume of the engagement. It is more true and formal engagement, not more simple kind of conversation with the companies. In those situations we generally get some sorts of response fairly and quickly from the company because the companies recognize that we have serious and important topics through the dialog with the board members. Next step could include further dialog or if we are concerned about a particular topic, it could be deciding to sell out particular security.
（Ｑ）How long does the engagement continue with the one company?
（Ａ）Depends on cases. We sometimes continue engaging for many years with one specific company to see the all change regarding the certain ESG topic we request. In other cases, we see the change occurred very quickly, giving examples, we wrote to the Australian mining services company regarding our significant concern about their board structure. After three weeks passed, they carried out the board reorganization.
（Ｑ）How does MFS finish engagement with the target company?
（Ａ）We would say believe that the engagement never ends. As a particular example, the board recognizes that we are their long term partners and the reason we decided to engage with them is that we don’t want to sell the security. We see a number of positive attribute in their business that we want the client to benefit from. Giving an example, a chairman of an Australian company asked for the comment on their executive compensation program change, and we had very good discussion.
Once we show them that we are long-term serious shareholder these things often happen.
（Ｑ）Has MFS ever engaged with any Japanese companies?
（Ａ）Yes, actually we did some cases over the years, not so many as we had in U.S. and Europe. But those are starting to increase. We have seen the number of Japanese companies coming directly to our proxy voting team to offer the conversations. This kind of proactive approach is very welcome to our team. Basically, we start the engagement with Japanese companies in the same way as the other foreign companies. Over time this will be a process just as when we started engaging with US companies on executive compensation practices back in 2010 and 2011. When the regulation regarding the disclosing executive pay went place here, at first the companies were a little slow to have real in-depth dialogs. Over time they learned which investors they could trust to have a long-term view point and to be aligned with the way the managers and board members are thinking about that business. We think the number of the engagement with Japanese companies will increase in the next few years. What is important is that the knowledge base for management team members to understand which investors you can go to and trust what they are telling you is something based on the fact that they want to be shareholders for a long time.
（Ｑ）What is the benefit for Japanese companies by responding to engagement?
（Ａ）We think they can recognize risk and opportunity surrounding them through engagements. Based on the skilled research, we can carry out the ideal engagement with companies. In fact the companies, which have the active ownership investors like MFS, tend to be outperformed. We believe this is because active investors understand the company based on profound analysis and from long-term view point, which improves the opportunity for both the company and the active investor.
４. Growing interest in ESG issues from our customer
（Ｑ）Please describe the trend of the ESG-related questions from the institutional clients.
（Ａ）We certainly see the trend to both larger a number of questions and more detailed questions.
When I started about 4 years ago it was still common to see the questions such as “Are you a signatory of PRI”? That is becoming less common question.
What we have seen instead is “How does MFS evaluate the climate change related topics within the investment process?”
There are also lots of questions around our implementation of EGS integration, engagement, proxy voting, how often we support environmental proposals and social proposals.
As a more general question, “Do you think ESG integration is more about identifying risks or opportunities?”
We see lots of different questions and we sometimes write 4 to 5 pages of responses to them that we receive commonly from institutional investors.
（Ｑ）Any interesting questions to you?
（Ａ）I am always interested when a client wants to dig deeper into specific securities within their portfolio. That shows really their understanding what the key issues are for the securities are, if they are material or not, how you are modeling or valuing those of things.
This is because those questions tell me the client’s willingness to get into the appropriate level of depth and understand from different fund managers that they are serious about these topics and that they are researching them in depth or that they are not quite serious and that they are not able to articulate view point of ESG issues for those specific securities.
（Ｑ）We would appreciate if you could give us comments on any other issues.
（Ａ）We always recognize the ESG integration is one of the pieces of the larger investment picture we look at. We try to properly weigh ESG topics.
Finally, thanks to our team members, our in-house dedicated ESG topics research can achieve that we can understand the ESG issues well.
Interview Date：November 17, 2016