
A MESSAGE FROM OUR CEO
ESG integration means fully understanding the value opportunity at stake for a given company. As value managers, we look to improvement in business fundamentals as a source of excess return. Where ESG issues are financially material, ESG improvement may also be a source of alpha. We believe that value isn’t a factor – it’s a philosophy of investing in out of favor stocks that are systemically undervalued; similarly, we do not think in terms of “good” or “bad” ESG stocks. Rather, we focus on the embedded investment opportunity, ESG or otherwise.
Stewardship (through direct engagement and proxy voting) is one of the more effective tools that an active manager such as Pzena has at its disposal to exert a constructive, long-term-oriented influence on the trajectory of a company. We view stock ownership as an opportunity to help steer companies in the direction of creating long-term value for our clients, and therefore explicitly favor engagement over divestment.
We hope this inaugural stewardship report gives a sense of the engagement we have with companies in which we invest. We believe that true ESG integration should be industry-analyst led, and therefore what follows by way of examples reflects the investment analyst perspective on key engagements from the prior calendar year.

CAROLINE CAI
Chief Executive Officer and Portfolio Manager
Pzena Approach to Stewardship
At Pzena, our role as responsible stewards of capital is an integral part of our fiduciary responsibility to act in our clients’ best interests, maximizing long-term shareholder value.
As value investors, we often find ourselves in situations where something has gone wrong, and we rely on fundamental research to assess the likelihood of improvement on these issues. Taking advantage of the gap between a valuation that reflects near term challenges compared to the value of the long-term earnings power of the company is the heart of our investment philosophy. In some cases, the issues or opportunities facing a company fall under the ESG umbrella.
Deep research and extensive engagement can help value investors capitalize on controversy and access this potential source of alpha, making engagement a cornerstone of our investment philosophy and a critical component of our process as long-term active investors.
As we do with all key investment issues, significant ESG considerations are analyzed internally, discussed with company management and industry experts, and monitored. Each step of this process contributes to the team’s determination of whether to invest and, if we do, at what position size. Once an investment has been made, we continue to engage management on an ongoing basis. Through these conversations, along with our proxy voting and other escalation options, we seek to exert influence in a constructive way, oriented toward the long-term success of the company.
ENGAGEMENT APPROACH
We engage with company management throughout our due diligence process, and extensively after an investment is made, on all material or potentially material investment issues. As shareholders, we believe we have the opportunity to help guide companies toward long-term value creation, and therefore prefer engagement over divestment.
If we determine an ESG consideration to be material to our investment thesis, we raise it with the management team. Each company and management team is unique. Consequently, our approach to management conversations is organic in each case; however, we always seek an open, cooperative dialogue. We prefer to maintain an ongoing dialogue with company management through regular meetings, in-person site visits, and calls. When we engage with companies, we are typically speaking to some combination of the following: senior management team, members of the board, ESG or sustainability lead, and investor relations.
Roles & Responsibilities
For ESG to be integrated into the research process, the industry analyst covering the stock must also lead the associated investment due diligence, of which engagement is a key part. The industry analysts are best placed to evaluate the investment implications of ESG issues, and therefore they bear primary responsibility for discussing these with company management. Our ESG analysts support the industry analysts in these conversations as needed, but we intentionally do not delegate these responsibilities to a separate stewardship team.
Engagement Purpose
Broadly speaking, our discussions with company management have the following purposes in mind:
- Testing assumptions — intended to deepen our understanding of issues that we have identified as material or potentially material to the investment. Sometimes we identify these issues at the point of investment and other times they arise during ownership. In both cases, we discuss the issues with management, solicit their input, assess their response, and evaluate the impact on our investment thesis. To the extent that the issues are ongoing, we continue to follow up until the issue is resolved or no longer relevant.
- Maintaining an informed dialogue — whereby we keep apprised of decisions relating to strategic and operational considerations. We routinely meet with management following earnings, strategic business updates, and management transitions.
- Advocacy – an explicit opportunity for us, as shareholders, to advocate for different decisions that we believe will enhance long-term shareholder value. With increasing regularity, companies also proactively seek our input on a range of issues.
The success of each engagement is measured on a case-by-case basis, depending on the company-specific context and goals of the engagement. Below are some examples of different engagements we have had with companies with one or more of the above purposes in mind.

BASF: German multinational chemical company
The most material ESG issue facing BASF is finding a way to decarbonize operations. We engage regularly on this issue in our conversations with management. However, the challenge for BASF, along with the chemicals industry as a whole, is that getting to Net Zero by 2050 will require considerable financial investment and in some cases the application of new technologies that are not yet commercially viable.
Our research and engagement have focused on how BASF will continue to grow the business and simultaneously reduce emissions over time. While there is a cost to developing and implementing emissions reduction technologies, we view BASF as competitively positioned because of its best-in-class R&D platform and integrated (and therefore more efficient) Verbund approach to production. BASF’s phased strategy to decarbonize and grow includes the following:
- Converting fossil fuel cogeneration plants to run on renewable
- Capturing value uplift from increasing demand for low-carbon footprint and sustainable product
- Scaling carbon-efficient technologies as they become economic (e.g., blue and green hydrogen, e-cracking)
We are also continually tracking BASF’s emissions reductions trajectory. Based on our discussions with management, BASF has a reasonable line of sight to hitting its 2030 target to reduce Scope 1 & 2 emissions by 25% (baseline 2018). Meeting these targets requires an estimated associated capex of €1B over the next 5 years and a further €2-3B between 2026-2030, which is modest relative to the total capex spend of €25.6B from 2022-2026.
Management acknowledges that the path beyond 2030 remains more uncertain for BASF and the industry, both in terms of emissions reductions and associated capex, due to lack of clarity on which emissions reduction technologies will become commercially viable. BASF is engaged in exploratory technology development, and we continue to discuss these developments with management. Based on recent conversations, BASF expects to spend another €10B after 2030 to hit its 2050 net zero target. The financial impact of this net zero plan is reflected in our forecast. We are also anticipating an accelerated pace of decarbonization of BASF’s European assets in response to the ongoing energy crisis in Europe.

Andritz: international engineering and construction company
Andritz has been on our radar for having a higher risk of labor and project governance issues purely due to the nature of its business, mobilizing a low-cost workforce to work on different projects around the world. We have analyzed these risks and engaged management, which has led us to the conclusion that Andritz is a responsible operator.
Strong policies, procedures, and operating practices are, however, not a guarantee that there will never be project-specific issues. It came to our attention that a third party had flagged Andritz for historical issues in their hydro business and alleged human rights violations at associated infrastructure projects. After engaging Andritz on these concerns, it became clear that the third party had an incorrect interpretation of events. Andritz was merely part of a consortium of entities as an equipment supplier and was not running the alleged forced labor camp. We also learned through engagement that Andritz maintains a very rigorous project management checklist for projects (including environmental and social issues) and has stepped back from the bidding process when their checklist is not met. Andritz is actively engaged in trying to correct the third party’s assessment, and Andritz’ ESG rating has already been upgraded.
In this case, our engagement with Andritz confirmed our view that it is a responsible operator and helped Andritz correct market misperceptions of its ESG credentials. We will continue to engage on the operating practices at Andritz to make sure there is no change in our assessment and perception of the risk profile of the investment.
SPOTLIGHT: OPPORTUNITY LIST
The belief in our ability to push for better outcomes by engaging with the companies we own has been a driving force behind the development and application of the Pzena Opportunity List. The Opportunity List seeks to systematically identify opportunities in our portfolio where material ESG issues exist and engagement could have a positive impact. If we choose to add a company to the Opportunity List, it means there is significant room for improvement on material ESG considerations.
Once a company is placed on the Opportunity List, we create an engagement plan with specific objectives and milestones to track progress. In practice, progress against the engagement plan will not manifest all at once, but will appear in incremental steps over the investment time horizon. If we see a company is trending off-track, we have several options to escalate engagement. Persistent failures to address our concerns could lead to our reevaluation of the investment thesis and potential divestment.
In some cases, removal from the Opportunity List will come with the gradual resolution of the ESG issue(s) over time and/or only requires discreet changes, such as the resolution of a pending litigation. In many cases, removal is more nuanced and requires continuous research, engagement, and monitoring. Regardless, all investments require us to be in dialogue with management and to respond to changes that may impact the range of investment outcomes.
OpportunityListProcess

Opportunity List Engagement Examples

Hon Hai: Taiwanese electronics manufacturer
Labor is both a critical business resource and potential risk factor for Hon Hai. From a business perspective, ensuring a supply chain that meets international standards is critical to the long-term success of the company. For example, Hon Hai has been subject to inspection of its facilities and practices by customers, including Apple, for which it is a major supplier. There is a risk that Apple will choose to diversify if Hon Hai is seen to mismanage its workforce. We therefore consider social issues a tail risk that we continue to monitor. In 2022, there have been several labor-related issues which have required an ongoing dialogue with Hon Hai, and we therefore added Hon Hai to the Opportunity List.
In early 2020, Hon Hai was accused of using controversial Uighur labor by an Australian think tank report. We took these allegations seriously and engaged with Hon Hai. In so doing, we could not find any evidence of complicity in the mistreatment of Uighur and other minorities inside and outside Xinjiang. Hon Hai, along with a wide range of manufacturers in China, participated in the government’s ‘poverty alleviation’ program and employed Uighur workers in its factories in the past. However, as the program generated significant controversy, Hon Hai Investor Relations indicated to us that they have discontinued participation in the program.
However, this issue resurfaced in late 2022 when other organizations picked up on the same 2020 report. We re-engaged with Hon Hai and believe there is no new information, as the 2022 reports were referring to the prior 2020 report. Hon Hai has since conducted a series of independent third-party audits of its facilities, and none of them have evidence of forced labor at Hon Hai campuses.
In early 2022, we engaged with Hon Hai on allegations that worker dormitories and dining rooms in Indian facilities did not meet required standards. Indian operations account for less than 2% of Hon Hai’s total production, though this incident led to Apple putting Hon Hai on probation as a supplier. Our assessment was that, while regrettable, it was an isolated incident, and we were pleased with Hon Hai’s corrective actions. These actions included raising its code of conduct and operating practices to global standards and replacing the local operating team that presided over this issue.
Most recently in November 2022, worker protests erupted at Hon Hai’s Zhengzhou campus in response to strict COVID lockdown measures and delayed incentive payments. It appears these were caused in part by a technical error in the Hon Hai payments system. We engaged with Hon Hai and learned that there may also have been shortcomings in the recruitment process, including miscommunication of the timeline of incentive payments and hiring too many new workers for one campus at one time. Our assessment is that this is another regrettable incident, but not necessarily one indicative of broken corporate culture or management practices. Hon Hai emphasized the negative impact strict COVID-19 policies have had on employee relations and the ongoing importance of anonymous channels by which employees can report any concerns. While we see scope for improvement at Hon Hai, we recognize the unique challenge of operating a massive and highly labor-intensive process in the chaotic and uncertain environment under the zero COVID policy.
We continue to advocate for increased transparency of reporting on these issues, and, while we are disappointed to see a recurrence of labor-related issues, we are pleased that Hon Hai is more proactive in disclosing information and discussing these incidents with shareholders. It is our assessment that management is focused on compliance with best practice operating standards, including a commitment to human rights and equal treatment of workers. We maintain an ongoing dialogue with the company on labor issues and will only consider removing Hon Hai from the Opportunity List once we feel more confident these issues are behind the company and the risk of losing market share is reduced.

Edison International: U.S. regulated utility
We view Edison International as an overall above-average ESG performer in the industry. Edison has a history of generally positive trends in resource intensity and workforce safety, in addition to well-articulated decarbonization strategies in line with California’s ambitious climate change and air quality goals. It is exposure to wildfire-related liabilities that led us to add Edison to the Opportunity List. This exposure, while presenting a valuation opportunity, will also likely imply structurally higher risk going forward given increasing wildfire frequency and severity, associated (in large part) with climate change.
The challenge of navigating the shifting complexities of wildfire liability offers Edison unique potential opportunities to collaborate with the state of California in reducing wildfire risk and mitigating financial impact. We believe Edison is well positioned, given its reputation and strong business, including a robust operational and technological approach to building a climate-resilient energy system.
In recent years, Edison management has noted highly risky conditions continue; however, catastrophic wildfires have quelled. Edison attributes the 65-70% risk reduction to their mitigation investments. These include fire prevention capex, targeted shutoffs, situational awareness, vegetation management and partnerships on suppression.
We continuously engage Edison about their capex project to deploy miles of covered conductor to the high-risk areas. In the last few years, we have been pleased to see progress towards objectives put in place early on. The aim is 10,000 miles of covered conductor in total (5000 by 2023), 3,600 of which has been deployed so far. Edison has worked for approval from the California Public Utilities Commission for certain permissions around how much conductor they may deploy. We anticipate the partnership will continue, and additional fillings will be approved. Leveraging this partnership has proven successful for an even more effective risk mitigation strategy than Edison acting alone.
We continue to engage with the objective of tracking and assessing Edison’s success with their capex goals and the overall ongoing wildfire mitigation plans.

Isuzu: Japanese automaker
For some auto makers, a return to normal earnings may hinge on how effectively they can address growing demand for electric vehicles (EVs). Isuzu is a case of an Opportunity List company that we felt was not adequately addressing this market reality, with no carbon neutrality strategy or published plans for EV rollout. We added Isuzu to the Opportunity List with the goal of encouraging management to set a coherent transition strategy.
Through multiple engagements in 2021, we monitored the steps management was taking to advance that strategy. This included strategic partnerships they were planning with Hino and Toyota to develop fuel cell and electric light trucks. In the second quarter of 2022, Isuzu published its plan to achieve carbon neutrality in its operations, beginning with a goal to halve scope 1 and 2 CO2 emissions by 2030. Additionally, management set a timeline to research and develop the conversion of the product lineup of light-duty and heavy-duty trucks and buses to electric and hybrid models with short and medium-term development targets.
These insights assured us that management is appropriately positioning the business for the EV transition, and their capex plans and timeline seem reasonable. This led to the determination that Isuzu could be removed from the Opportunity List. We will continue to engage with management to ensure the company is following through on the stated plan.

Ube: Japanese chemicals company
Ube Industries is on our Opportunity List because it is in the 10th decile of carbon emissions intensity for our Japanese investment universe. The high carbon emissions intensity results primarily from its chemicals and cement businesses (the latter of which is now reported off balance sheet following recent deconsolidation). Our ongoing engagement efforts are therefore focused on Ube’s decarbonization plan.
Ube’s decarbonization targets include:
- Reduce scope 1 and 2 greenhouse gas emissions 55% by 2030
- Achieve carbon neutrality by 2050
- Lower emissions in the cement business
When assessing decarbonization plans, we are focused on credibility and rigor, as well as what makes sense from a long-term shareholder value creation perspective. We are encouraging Ube management to provide additional granularity on the steps towards their reduction targets for 2030 and 2050, as well as the associated financial implications.
Ube management has a line of sight to hit the 2030 emissions reduction target (primarily from closing ammonia production in Japan by 2030) but lacks detail for the 2030-2050 timeline. This is partly because the path to Net Zero for the chemicals and cement industries remains somewhat uncertain; the commercial viability of technology required to significantly reduce emissions for these sectors is unclear (e.g., carbon capture and storage). We will continue to engage on this topic and encourage Ube to release more details on their long-term decarbonization plan as soon as possible.
In the meantime, the deconsolidation of the cement business and the chemicals segment restructuring will considerably lower Ube’s emissions baseline. There will be inevitable reporting complexities, so we will need to closely monitor how Ube plans to report emissions moving forward.

Volkswagen: German automaker
From a third-party ESG ratings perspective, Volkswagen is a poor performer. These ratings are largely reactive to the 2015 “Dieselgate” emissions scandal, one of the worst ESG-related controversies in corporate history from a cost perspective. ESG improvement has been central to our investment thesis for Volkswagen, which made it a natural candidate for our Opportunity List. We spend considerable time engaging with management on the two most material ESG considerations: electrification and corporate governance.
Overall, we are pleased with Volkswagen’s electrification strategy and the pace at which it is being rolled out across Europe. As part of the Opportunity List, we are continually tracking how the strategy may need to evolve with tightening EU emissions standards. Volkswagen (along with many peers) did not meet its 2020 emissions targets, which resulted in a costly fine of more than 100 million Euro. While Volkswagen met 2021 emissions standards and expects to comply with targets set by the government for the next couple of years, 2025 is the year to watch, as it is when the targets become significantly more challenging. We will continue to monitor progress and engage management to make sure we continue to agree with their strategic decisions.
With corporate governance arguably foundational to sound business strategy, it is unfortunate that there are clearly several governance shortcomings at Volkswagen. These include a lack of a fully independent audit committee, the entrenched power of the Porsche family, and labor unions that are often opposed to necessary business transformation initiatives. We continue to engage on these topics in the hope that we see some improvements.
There have been select yet notable improvements in corporate governance, including conformity with the German Corporate Governance Code and long-term equity grants for the top 7,000 managers so that decisions may be better aligned with shareholder interests. We hope to influence additional incremental governance improvements through our ongoing engagement efforts.