Heading in the Right Direction

– David Wanis, January 2021

Despite the challenges of COVID-19, most companies are clearly moving forward across environmental, social and governance matters. In our second semi-annual ESG proxy voting report we note observations of interest from the F2020 proxy voting season, highlight a range of practices in environmental impact and reporting and where we are focused on social issues going into 2021.

We believe that the direction of travel across all ESG matters is improving. Some of the things we call out as sub-par today were probably considered best practice or at least common practice ten or fifteen years ago. As we tend to engage with companies directly regarding concerns we may have, it is counterproductive to name and shame them in this format, however we have provided a summary of some of the areas for improvement related to governance we observed this year.

As a reminder, all our ESG assessments are made relative to the industry in which a company competes.

Annual report proxy season is busiest between October and December and we will start this report by looking at some of the governance issues that stood out for our portfolio.


As part of our governance research process, we complete an overall governance assessment and capture quantitative information on inside ownership (alignment), percentage of independent directors and whether executive compensation is linked to ESG outcomes. The purpose of director independence is to ensure that agency risk in the form of executives with no ‘skin in the game’ is prevented through a majority of shareholder representatives on the board. If a director is not independent but has significant share ownership, we believe this is likely to provide the correct incentive.

We evaluate an individual company’s overall governance on the following criteria:

  • Does it foster a culture of open disclosure and transparency in its business practices and financial reporting?
  • Is its board of directors diverse, independent, and accountable?
  • Does its board of directors have a demonstrated track record of representing the interests of minority shareholders?

Are its compensation practices transparent and aligned with long-term shareholder value creation?

In light of what we are looking for, below are a sample of some of the governance issues put forward on AGM ballots we voted against during the period;

  • STI set as a fixed percentage of shareholder distributions with no KPI disclosure,
  • LTI with a vesting period of 12 months,
  • Compensation plan with no LTI and no performance hurdles. Complete discretion to award up to 5% of issued capital by the remuneration committee,
  • STI with no hurdles, LTI that has an option payoff (non-recourse loan against shares) with only KPI being share price performance,
  • Company making lots of acquisitions through issuance of new shares looking to approve a plan that compensates executives for the equity dilution they have suffered (and all other shareholders also suffered),
  • Board using discretion to payout part of an LTI which does not complete until 2022,
  • Lack of STI or LTI plan and then using controversial one-off payments reward executives. Even after this, no new plan has been proposed to address the core issue,
  • Non-independent, executive dominated board who are putting forward compensation proposals that are weak in vesting, hurdles and disclosures,
  • Moving the goal posts of the LTI through allowing management discretion on the measurement of outcomes via non-recurring accounting items,
  • Refreshing 15% placement limit ahead of a potential transaction because another placement had already used this limit during the year.

It should be noted that most of these proposals were successfully passed by shareholder vote at their respective AGMs. Although many of the ballots themselves were passed, many triggered remuneration report ‘strikes’ due to a greater than 25% vote against.

We have seen examples this year where reasonably well-governed companies with previously below acceptable standard compensation policies have responded positively to a ‘strike’ and subsequently improve their remuneration practices. Often this results in short and long-term incentive plans that are fair, transparent, and aligned with shareholder interests. It often results in the removal of a free lunch, and as such can be expected to face resistance that takes many forms, but ultimately can be explained by human nature – free lunches are things people would rather keep access to and will fight for.


Environmental impact is clearly an area we are seeing progress and we continue to believe that the best way to ensure this continues is to link compensation to the achievement of environmental outcomes.

We evaluate an individual company’s overall environmental performance on the following criteria:

  • Does it take a proactive approach to matters of environmental concern with respect to their product design, business practices, distribution, and procurement?
  • Does it provide clear disclosure of its environmental practices and examples of continuous improvement?
  • Does it incorporate “environmental impact” into its long-term business planning and articulate how this is achieved?
  • Does it incorporate internal benchmarks to ensure its environmental practices are aligned with minimum industry standards, e.g. CO2 emissions, use of renewable energy sources, implementation of ISO 14001, etc.?

Best practice is not just to monitor and measure current impact but also set measurable targets for future impact and implement and incentivise against strategies to meet those targets (hence the linkage to compensation).

One group of companies believes they have found an ‘out’ when it comes to environmental impact – they conclude that their particular business or industry (often technology or office based professional services) has such a minimal environmental impact as to not warrant need to measurement nor future reduction. One such company explicitly stated this year:

“…has not provided detailed reporting on environmental, economic and social sustainability risks because it is in the early stages of reporting on non-financial information. … has reviewed the disclosure recommendations and given that the current business operations are subject to limited climate related risks and opportunities has decided that further reporting is not required and would not be useful for investors

This is far from a best practice effort. We have seen businesses with similar environmental footprints do a lot more. We list here a range of environmental activities of best practice low footprint companies we observed in 2020;

Monitor and reduce water and energy consumption and set targets for future consumption;

  • Reducing and consolidating office space
  • Reducing water and energy consumption
  • Installing energy efficient LED lighting and rooftop solar
  • Measuring Scope 1 & 2 emissions
  • Piloting a “1 in 5” program where staff work from home 4 days a week.
  • Promoting the use of green buildings, including new offices
  • Number of buildings in the target emissions group that have an Energy Rating
  • Number that have a Water Rating
  • Number that have a Waste Rating
  • Report of data server efficiency and power (use of cloud, virtualisation, power source etc)
  • Disclose Scope 1 & 2 Emissions (kgCO2-e/sqm)
  • Disclose Scope 1 & 2 Emissions (tCO2-e/employee)

Minimise Waste

  • Active encouragement of recycling with paper, glass and aluminium and printer toner cartridge recycling stations encouraged in each office
  • Improve data collection on landfill waste, providing a credible starting point to benchmark and measure future performance
  • Source fibre-based packaging from certified or recycled sources
  • Utilise returnable and recyclable cardboard boxes for delivery

Promote sustainable transport to employees, clients and suppliers

  • Where possible, offices are in central locations near public transport hubs. Most employees travel to and from work via public transport (train, bus, ferry) or active transport (walking and cycling).
  • Video and audio communication is encouraged in order to reduce air and road travel (pre COVID and post COVID)
  • Carbon offset domestic and international flights
  • Use travel providers that enable the company to monitor air travel by employees and the environmental impact of their travel

Support sustainable procurement and other sustainable work practices

  • Procurement of environmentally-friendly office supplies encouraged.
  • Hard copy corporate brochures and business cards have moved to online versions. Reduce annual report printing.
  • Printers are set to print double-sided output
  • Issue employees with a water bottle and keep cup to reduce the use of single use containers

We assess companies relative to their sector peers for a couple of reasons. Firstly, as we saw above, being in a low footprint sector can encourage complacency and finger pointing at the big emitters. Secondly, some of the companies operating in industries with a large environmental footprint should be encouraged to do all they can to improve.

We may all want solar powered energy charging electric cars, but today we have coal powered energy and fossil fuel powered cars. We should want a petrol refinery and fuel retailing business to reduce as much as possible their environmental impact for the period over which we still require their products. Many of these companies, such as Viva Energy, are making a big environmental difference to what is currently an essential product.


We evaluate an individual company’s overall social performance on the following criteria:

  • Is it a respected employer that recognises the rights of workers, customers and suppliers?
  • Does it take a proactive approach to workplace relations, employee diversity, promote the health and welfare of its employees and provide examples of continuous improvement in these endeavours?
  • Is its main product or service harmful to human health and wellbeing (e.g. tobacco)?
  • Does it engage in charitable and/or other community welfare activities?
  • Is it sensitive to cultural norms in the countries in which it operates?

As with environmental goals, we want to see the linkage of executive compensation to social outcomes – particularly employee safety. Learning happens through pain and executives need skin in the game to at least feel financial pain. The families of injured workers suffer far worse emotional pain.

We had observed a small number of companies in 2019 who were already embracing flexible working given the technology that was available. This has now expanded to the entire economy.  Flexible work challenges were handled well in 2020 and the real challenge comes in 2021 and beyond. Numerous employees far prefer working from home. Many employers fear a loss of face-to-face benefits. There will be a balance to achieve in meeting the needs of employees and employers. Those companies who can find a balance that works will have a more satisfied and productive workforce and will have full access to a global talent pool. Those that fail to adapt will see access to talent reduced.

Other specific social areas of interest for our team during 2020:

Privacy and Data Security: For those companies that hold sensitive data we need to see evidence of compliance with either ISO27001 or SOC 2 certification. If these certifications are absent, then acknowledgement that they are being pursued is needed (they take between 2 – 6 months to implement). No mention of either is not best practice. Too many companies that hold sensitive customer data – and as such have a social responsibility in how that data is protected – fail to meet this standard.

Modern slavery act: On 1 January 2019, the Modern Slavery Act 2018 (Cth) (Commonwealth Act) commenced. Entities will need to report under the Commonwealth Act if they are an Australian entity or carry on business in Australia with a minimum annual consolidated revenue of $100 million. Reporting entities must provide their approved modern slavery act statement to the Australian Border Force for publication on an on-line public register. Most companies have not yet passed their mandatory reporting deadline, and many noted in their 2020 annual reports the work they are currently undertaking to meet the act.

Despite the challenges of COVID-19, most companies are clearly moving forward across environmental, social and governance matters. As investors, consumers and the community continue to engage with companies on these issues, we expect to see a continued raising of the bar which will increase the quality of those businesses who chose to meet the challenge.

Download the complete ESG Observations and 1H2021 Proxy Voting Report


This communication is prepared by Longwave Capital Partners (‘Longwave’) (ABN 17 629 034 902), a corporate authorised representative (No. 1269404) of Pinnacle Investment Management Limited (‘Pinnacle’) (ABN 66 109 659 109, AFSL 322140) as the investment manager of Longwave Australian Small Companies Fund (ARSN 630 979 449) (‘the Fund’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.

Link to the Product Disclosure Statement: WHT9368AU

Link to the Target Market Determination: WHT9368AU

For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com

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