Engagement

Background:
COP28 highlighted the need to reduce methane emissions while natural gas continues to play an important role in the transition away from more carbon intensive fossil fuels. We believe that establishing best practices in natural gas production, with particular regard to methane management is a key imperative for gas producers. We have engaged and encouraged Coterra Energy to take a leadership role in defining and adopting industry best practices for methane management, including operational and technology investments, transparency and reporting and joining industry collaborations such as the Oil and Gas Methane Partnership 2.0 (OGMP 2.0).

Today, the energy sector accounts for around 40% of total methane emissions attributable to human activity, second only to agriculture. Methane is responsible for around 30% of the rise in global temperatures since the Industrial Revolution¹. Methane that is emitted is essentially product that is lost. Capturing methane can improve operational efficiency by turning potential waste into a marketable product. Companies that effectively manage their methane emissions can improve their reputation with stakeholders, investors, and the public, helping to maintain their social license to operate.

Scope and Process:
We have been engaging with Coterra CEO Tom Jorden on a range of sustainability issues for well over a decade, dating from when he served as CEO of Cimarex. During his tenure, the company was responsive to shareholder feedback regarding expanding its disclosures and initiating a methane leak detection and reporting system, among other actions.

After a merger establishing the current Coterra organization was completed, our dialogue continued within the context of generating a new set of practice standards, disclosures and emission targets for the combined company. At the request of management, we sat down with CEO Jorden, the senior operating team with direct responsibility for establishing emissions reduction targets, and members of the company’s sustainability team to discuss related-issues and provide comprehensive recommendations, such as aligning climate disclosures with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), formalizing board oversight of climate matters, and including an emission reduction metric in the compensation program.

In addition to direct engagements with the company, in 2023 we also reinforced this feedback through the inclusion of our support in NB Votes, our advanced voting disclosure initiative, for the shareholder proposal that called on Coterra to provide more comprehensive reporting on its approach to methane measurement, including collaboration with industry efforts, such as the OGMP 2.0. Within the oil and gas industry, the move toward real-time methane emissions methodologies is becoming a central part of regulatory standards.

Outcomes and Outlook:
Coterra, in our view, has an engineering-based culture that is committed to reducing methane emissions across its own operations, thus reducing the risk that such emissions pose to its business and the environment over the long term. In response to our engagement, the Company published a TCFD/SASB aligned sustainability report, included an emissions reduction metric in its incentive program, and joined the OGMP 2.0, demonstrating leadership and advancing industry best practices. We value our ongoing dialogue with Coterra and look forward to continued discussions in addressing the opportunity for responsible natural gas producers to drive climate leadership.

¹ International Energy Agency, as at February 2023.

Background:
EG Group is the largest forecourt retailer in Europe with a diversified portfolio of branded sites, providing fuel, convenience retail and food-to-go. It operates over 5,500 sites across the U.S, continental Europe and Australia. The company has been looking to expand its electric vehicle infrastructure, an endeavor we have supported, while seeking greater transparency around goal-setting and sustainability in general.

Scope and Process:
While electrification of motor vehicles has gained substantial momentum as part of the transition to a low carbon economy, infrastructure remains a stumbling block and requires aggressive moves to expand charging stations to facilitate electric vehicle (EV) use. Retailers have also identified growth opportunity with greater EV adoption, as each charge lasts an average of 20 – 25 minutes, providing meaningful time to shop.

EG Group took initial steps in addressing this market with the addition of close to 400 chargers between 2021 and 2023, and now has a total of 635 across 189 sites in the U.K. and continental Europe. However, in ongoing discussions with the management team, including the heads of investor relations and sustainability teams, we encouraged the company to be more concrete in its business plans around EVs. We also asked to enhance its sustainability disclosures, specifically the setting of a quantified public target to substantially increase the number of EV charging stations across the group by 2030, and by publishing an annual sustainability report in line with Sustainability Account Standards Board (SASB) standards.

Outcomes and Outlook
With its recent purchase of 300 ultrafast chargers from Tesla, there is potential for the company to roll out 20,000 units across 3,600 sites throughout Europe. The company also has announced the sale of its U.K. locations to ASDA, to which it will lease the newly rebranded “evpoint” chargers, while adding them to its own still-proprietary locations and seeking additional business from third parties. In terms of disclosures, the company published its first sustainability report in October 2022, followed by an annual report in June 2023, which included the SASB metrics we had requested.

Overall, we are encouraged by EG Group’s expansion in the EV-charging space and encourage the company to continue rolling out EV chargers and to set related quantifiable targets.

Background
Okinawa Cellular is a regional telecom company operating in the southern islands of Japan. The result of a joint venture between local business leaders and KDDI (its controlling shareholder and Japan’s second leading telecom company), Okinawa Cellular holds a 50% market share in its region and generates substantial free cash flow.

Over the years, we have favored Okinawa Cellular largely because of its stable revenue and cash-flow generation, which is expanding in the transition from 4G to 5G networks, leading to more data usage, customer plan upgrades and increased revenue per user. However, despite these advantages, the company has historically struggled with capital allocation, with much of its cash deployed in loans to KDDI via its parent’s shared cash management system. We believed this was an ineffective use of capital: As a leading cellular company, KDDI could easily obtain loans more cheaply from external sources. Moreover, we felt the cash should be used to benefit Okinawa Cellular shareholders. We urged the company to devote its cash instead to building its business and/or improving shareholder returns.

Scope and Process
Over the years, we engaged with Okinawa Cellular on capital allocation and board composition, among other issues. Although pleased when it initiated its first share buybacks in 2020, limited subsequent progress made it clear we would need to take additional action in line with our milestones-based engagement process.

This emerged in three stages: First, in February 2022, we submitted a letter to Okinawa Cellular’s board requesting that the company address the cash issue in a timely manner. Second, in June 2022, we leveraged the NB Votes initiative to pre-disclose our decision to vote our proxy against top management and its external directors for their failure to adequately address the capital inefficiencies and limited board independence. Third, in a joint effort between the Japan Equity Engagement and International Equity team, we engaged with KDDI and its top management on these issues, and asked that the parent address them with Okinawa Cellular.

Outcome and Outlook
In October 2022, Okinawa Cellular released its first-ever midterm plan, which committed to a three-year earnings-per-share growth target of 15%, half of which would come from organic growth and mergers and acquisitions, and half from share buybacks. Investors reacted favorably to this important step, which was followed six months later by an announcement that the company would unwind a third of its loans to KDDI and use the proceeds for share buybacks.

Looking ahead, we plan to help guide Okinawa Cellular on further capital reallocation, and potential uses for the remaining balance of loans to KDDI, including potential investments in non-cellular businesses. We will also weigh in on board independence and the skillsets of board members, which will be important to effective capital planning. Finally, the retraining of its workforce remains an important issue as it expands its IT consulting business as part of the digital transition affecting multiple industries. We are pleased with the progress achieved by Okinawa Cellular so far and look forward to working with management over time.

Background
Pentair provides water solutions such as pumps, filters and heaters across multiple end markets. Historically associated with consumer pool equipment, the company has been diversifying toward more commercial and industrial water treatment applications. On behalf of clients that have chosen strategies focused on intentionally seeking measurable positive environmental and/or social outcomes from companies they invest in, we advocated in support of this strategy to expand the business mix with the addition of a new water treatment segment and believed that the company could benefit from more comprehensively reporting the positive outcomes achieved by its products.

Scope and Process
Since establishing our position in 2021, we have engaged regularly with Pentair’s Chief Financial Officer and Investor Relations teams. At the outset, our discussions focused on the opportunity for Pentair to increase investment in its water treatment solutions business, which was smaller than its consumer pool segment but had the potential to reduce the cyclicality of its overall business and provide more critical outcomes for water quality. We also discussed the potential to report the aggregate positive outcomes from its products, instead of one-off case studies and statistics. In 2023, we also participated in an in-depth “perception study” conducted by a strategic investor relations advisory firm hired by Pentair, through which we were able to reinforce our message on fundamentals and impact, while sharing examples of best practices from water peers.

Outcome and Outlook
In 2022, Pentair acquired a medium-sized commercial ice and water treatment provider, diversifying its business mix toward more critical services and away from consumer pools. In its 2021 Sustainability Report, released in April 2022, the company reported aggregated and more detailed positive outcomes on its products that we could use in our impact analysis. These included detailing roughly 440,000 tons of CO2 avoided through the use of energy-efficient pool pumps, recovery solutions with the capacity to recover an estimated 7.5 million tons of CO2 annually, and 9 billion single-use plastic water bottles avoided, among other examples. Finally, the company reorganized in 2023 from two to three divisions, with a new water treatment segment to help margin expansion efforts and provide investors with greater transparency as to the performance of this growth area, which we felt was underappreciated.

We continue to engage Pentair on multiple fronts, including capital allocation priorities and achieving its science-based emission reduction targets.

Background
Welltower is a real estate investment trust (REIT) with a focus on health care facilities including nursing homes, skilled nursing homes and office buildings. With a $52 billion equity market capitalization as of February 29, 2024, it is the fourth largest REIT in the U.S. We believe that the company could make more strides in limiting climate impact.

Scope and Process
Real estate is acknowledged as one of the most impactful economic sectors on climate emissions, but in some cases has been slow to initiate change due to a lack of clarity as to the economic benefits. This is particularly true within health care real estate, where costs of conversion and mitigation can be significant without the marketing advantages found in offices and warehouses, to name two examples. Therefore, a key aspect of engagement can be to highlight potential bottom-line impacts from increased sustainability.

In our most recent engagement with the company, we posed a series of questions regarding the company’s plans to achieve Scope 1 and Scope 2 emissions reduction targets as well as longer-term net zero emissions targets; plans for capital expenditures on “green technologies”; increasing its number of green-certified buildings; the potential installment of efficient technologies such as electric boilers; and the use of funds from green bond issuances. We also made use of our Net-Zero Alignment Indicator, drawing on third-party data and qualitative inputs from our research analysts, to illustrate the company’s position relative to peers in terms of climate goals, and ways it can make further progress.

Outcome and Outlook
We were encouraged with the responses we received from the company. Welltower has already hired a new vice president of sustainability, who can help drive emissions targets, and has achieved the sustainability goals laid out in the long-term incentive plan. Now the company is working to enhance disclosures and carbon efficiency across a range of metrics, understands the importance of interim goal-setting, and recognizes potential revenue and tax opportunities associated with improvements. It also expressed interest in setting a Scope 3 target, but is waiting on further regulatory guidance from the SEC, and is considering the institution of a net-zero target.

We look forward to the company’s next ESG report, where it plans to lay out its plans and commitments in further detail.

Background
Zimmer Biomet designs, manufactures and markets orthopedic reconstructive implants, as well as supplies and surgical equipment for orthopedic surgery. The company holds the leading share of the reconstructive market in the United States, Europe and Japan. With improvements to manufacturing protocols and stronger governance practices, we believed Zimmer Biomet could move beyond regulatory issues to innovate and grow revenues in line with its potential.

Scope and Process
Zimmer Biomet has been a holding within Neuberger Berman portfolios for several years. Through a proactive investment team-led process, we encouraged the company to take incremental steps to provide additional disclosures, oversight and targets across a range of areas. Most notably, this included product safety and quality given its past history of elevated recalls and warning letters, and relatedly, supply chain improvement and executive compensation. The Large Cap Value, Equity Research and ESG Investing teams conducted regular discussions with the company’s management, investor relations and ESG teams over the course of 2022 and 2023.

In relation to product safety and quality and the supply chain, we proposed updating quality control protocols and improving product testing requirements to ensure a sustained reduction in product recalls, regulatory warning letters and Forms 483 (created by the Food and Drug Administration to flag possible regulatory violations). Over time, Zimmer Biomet made considerable progress on this front, reducing recalls from over 100 in 2017 to just three in 2022, and cutting Forms 483 and regulatory warnings to minimal levels. In an important step, the company moved to have all its manufacturing sites certified by the International Organization for Standardization (ISO), as well as audited by third parties—something we had encouraged them to pursue.

Believing that accountability for improving product safety and quality could be further strengthened within executive compensation plans, we requested that the company increase disclosure and quantitative targets relating to the product quality modifier in its compensation plan—a proposal that the company accepted as a way to help build on recent progress. More broadly, the company added an individualized skills matrix to its 2023 Proxy Statement and committed to, in a leadership transition, separate the Chair and CEO roles—a change that we have encouraged the company to make permanent.

Outcome and Outlook
Zimmer Biomet has seen improved operating performance in recent years, largely in our view due to its move beyond product quality issues to focus on executing in the marketplace, where it has increased the cadence of its new product offerings across the franchise. We continue to engage with the company on quality and other issues to ensure sustained progress and enhance prospects for future, sustainable growth.

Background
PPG Industries, Inc. is a global specialty chemicals company and a leader in paints and coatings with a diverse portfolio of products across several end markets. The company has made strides in mitigating material climate risk; however, we believed there was an opportunity to set more ambitious long-term targets around emissions and environmentally sustainable products.

We believe these objectives are particularly relevant for PPG given the potential compliance risks and opportunity costs related to weak decarbonization targets or a lack of sustainable product offerings. Over 30% of PPG’s revenues come from European markets, where regulatory requirements are tighter than those in the U.S., and customers are increasingly selective based on these issues.

Scope and Process
As an investor in PPG bonds, we have regularly engaged with senior management, investor relations and its ESG team to provide guidance on a range of issues. We view climate transition as both a financially material risk and opportunity for chemical companies. PPG is an important supplier to many companies across end-markets including automotive, aerospace, packaging and architectural coatings, where both regulatory and consumer-driven requirements for lower carbon impact are rising. Given growing demand for products with lower carbon impact by sustainability conscious customers seeking to abate their own Scope 3 emissions, we asked the company to set more ambitious goals to sell sustainable products. We believe capital allocation to expand PPG’s product offering to more sustainable products may help them profitably and improve market share.

Initially, PPG only pledged to reduce Scope 1 and 2 emissions intensity by 2025, a shorter-term goal than many of its peers. As part of our engagement, we encouraged the company to set longer-term targets and extend them to Scope 3 emissions as well. We also asked that it more clearly articulate an emissions reduction pathway, and introduce a net-zero target to better align with a longer term decarbonization commitment that helps guide future management teams.

Outcome and Outlook
In July 2023, PPG announced new emissions targets, with the goal of a 50% reduction in Scope 1 and 2 emissions and 30% reduction in Scope 3 emissions by 2030 (relative to 2019 levels), in addition to its existing 15% carbon intensity reduction target by 2025 (from a 2017 baseline)—goals that have been validated by the Science-Based Targets initiative. Another important commitment was to target 50% of sales from sustainable products by 2030, up from just over 40% of sales today. This will include a greater portion of water-borne coatings with a smaller carbon footprint than traditional paints and coatings—a transition that could not only support climate goals but also introduce new market opportunities addressing emerging end-market needs.

We view these actions as an important step for PPG in managing its climate risk; however, there are still opportunities to engage on further improvements. At this stage, the company remains reluctant to introduce a net-zero target, which we think would be achievable given its already low-impact profile relative to other more carbon-heavy chemical companies.

In the meantime, we want to acknowledge the company’s progress so far and look forward to continuing our highly constructive dialogue.

Background
Utz Brands is a U.S.-based company that sells a variety of salty snacks. After nearly 100 years as a private company, Utz went public via a special purpose acquisition company in 2020. Utz was appealing to investors for its strong and improving position within a durable category, as well as self-help levers to drive margin expansion. However, the company carried a high level of debt and provided limited disclosures related to its sustainability practices and related data. Through the engagement process, we hoped to help ameliorate these issues along with others often faced by relatively “young” public companies.

Scope and Process
Following the public offering, we conducted regular digital and in-person meetings with the Utz CEO, CFO and investor relations team, discussing capital structure and debt, as well carbon emissions, financial metrics and compensation, and offering detailed recommendations on possible improvements. Given the company’s elevated financial leverage in a rising interest rate environment, we suggested that it maintain a capital structure that appropriately reflected the cost of capital, risks of the business, and conditions in the broader financial markets. Regarding executive compensation, we encouraged Utz to consider including targets for return on invested capital in its long-term incentive plan. In terms of climate disclosures, we advocated for the disclosure of Scope 1 and 2 and material Scope 3 greenhouse gas emissions—reflecting our belief that climate change is a material risk to the food industry.

Outcome and Outlook
Following this extended engagement, Utz announced in January that it would sell three manufacturing facilities and two of its brands for gross cash proceeds of $183 million, allowing the acceleration of its 3.0x net leverage target by one year to the end of 2025. Through reduced interest payments, this should enhance the potential for profitability and free cash flow, as well as enable greater concentration of achieving strategic goals. Separately, the company released its second sustainability report, in which it included Scope 1 and 2 emissions data.

We were pleased to see both developments and congratulate Utz on achieving these important milestones. That said, we see further opportunities for improvement in executive compensation metrics, sustainability disclosures and capital structure—areas where we have provided input and intend to continue our engagement moving forward.

Background
According to the Environmental Protection Agency (EPA), freight railroads contribute to only 0.5% of the total U.S. GHG emissions and to 1.7% of transportation-related GHG emissions, while cars and trucks contribute to 58.5% and 23.4% respectively. This stark difference underscores rail's potential to contribute to US and global environmental goals by shifting freight from road to rail. While the direct fuel efficiency benefit of moving a ton of freight by rail four times as far than a ton of freight by truck is easy to understand, there are additional more nuanced benefits from rail removing freight from truck. Decreased highway congestion has a number of wide-ranging benefits, including reduced emissions, increased safety and better quality of life.

Given the railroad industry is classified as common carriers serving a public good for societal benefit, there is meaningful federal regulatory oversight. In recent years, the industry has faced increased scrutiny especially following incidents such as the highly publicized derailment in East Palestine, Ohio in 2023. Notwithstanding these challenges, railroads have shown significant improvements in safety and accident rates since 2000. According to 2023 Federal Railroad Administration (FRA) data, derailment rates across all railroads and hazardous materials accident rate per carload have significantly decreased. Further, among US Class I railroads, main line accident rates and yard accident rates have also improved substantially.

Scope and Process
Our engagement with CSX, the leading supplier of rail-based freight transportation, began in 2018 as part of our overall due diligence ahead of our initial investment. Our relationship with the prior CEO Jim Foote, a recognized industry leader, spans two decades, underscoring our long-term engagement with the sector. At that time, we were attracted by the company’s overall governance and culture as a solid operator. Since then our interactions with CSX have included multiple visits to the company, allowing us to meet with operations personnel, the management team, and to tour classification yards and maintenance facilities. The turnover and succession of CEOs, from Hunter Harrison’s tenure (2016-2017) to Jim Foote (2017-2022) and eventually Joe Hinrichs (since 2022), have been pivotal.

In our opinion, for competitive durability and moat, safety with board level oversight in a rail road operator is a critical Key Performance Indicator (KPI). As such, in seeking to compound multi-year returns for shareholders, we encouraged the company to add safety metrics to its executive compensation plan, and to refine its existing emissions reduction targets to be aligned to net zero and have them approved by the Science-based Targets initiative (SBTi).

Furthermore, during the Covid-19 pandemic, we proactively engaged the company, in consultation with the Workforce Disclosure Initiative (WDI), advocating for the health and safety of the company’s essential workforce, enhancing paid sick leave policies, and addressing workforce concerns.

Outcome and Outlook
In response to our engagement, safety metrics were included in CSX’s executive compensation plan for the first time in 2019 at a 10% weighting. We view CSX’s early adoption of credible safety metrics and KPIs, which include both workforce injuries and derailments, as a reflection of an authentic pro-stakeholder culture, which we communicated in our NB Votes in 2020 and 2024. The relentless focus on safe operations represented by the 2019 targets has helped to drive a 9% improvement for CSX in train accident frequency and a 13% improvement in personal injury frequency.

The company also successfully navigated its essential workforce throughout the Covid-19 pandemic and subsequent union negotiations while also refining its emissions targets to align to a net-zero pathway and certification by the SBTi. CEO Hinrichs has been successful in improving employee engagement, labor relations and reinforcing an overall culture of safety and a priority on social license to operate, all of which directly impact shareholder outcomes.