ESG Update

Mar 31, 2015

Slides

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the ARM Holdings Introduction for ESG Investors Conference Call. At this time, all participants are in a listen only mode. I must advise you that this conference is being recorded today, 31st March, 2015. I would now like to hand the conference over to one of your speakers today, Mr. Philip Sparks. Please go ahead, sir. Great. Well, thank you, everyone, for joining our call this afternoon. I'm Phil Sparks from ARM's Investor Relations team. And I'm joined here today by Simon Humphrey, ARM's Corporate Responsibility Manager and Julie Hudson, Head of the Global ESG and Sustainability Research Team at UBS Investment Bank. And today, Julie and Simon are going to discuss Arm's approach to corporate responsibility and some of the ways in which ARM technology can influence environmental and social issues. If you have any specific questions you would like answered on the call, please e mail them to investor. Relationsarm.com. And if we don't get a chance to answer those today, we will follow-up with you afterwards. And if you would like to learn more about Arm after the call, you can view an online presentation, which Simon has prepared for ESG investors and that's currently available on our website ir. Arm.com. So without further ado, I will hand over to Julie. Thank you very much, Philip. So Simon, I think probably I'd like to start by asking you to tell me a little bit about yourself and your role at Arm by way of background. Yes. Thanks, Julian, and hello to everybody who's been able to join the call. Yes, I'm Simon Humphrey, Corporate Responsibility Manager here at Arm. And I've been with ARM for around 18 months. Prior to that, I worked as a consultant on sustainability, energy and climate change for a whole range of large companies mainly in the mining, oil and gas sector and other extractive industries. So we've gone from heavy industry to technology. But along the way through my career, I have done a little bit of technology. But this is quite an exciting role here at ARM. For those who you probably all are familiar with ARM, but we're the world's leading supplier of semiconductor intellectual property, designing low power, low cost technologies used by hundreds of chipmakers and designed it to billions of electronic devices each year. So our basic business model relies on a license and royalty income stream. We'll receive royalty every time one of our chips is shipped by our partners. And last year that was 12,000,000,000 chips. So there's quite significant growth in the business. And that growth actually and that ambition continuing sustained growth for the business is actually mirrored in the way that we do corporate responsibility. And my role as Corporate Responsibility Manager is really in I suppose at 2 levels. There is the work that I do in developing strategy and then delivering on that strategy. And that's working with a whole range of different partners in the charity, non government sector, but also government sector to actually deliver on our corporate responsibility. Then the very important part and today is in fact part of that important part and that is communication. So as I'll talk sort of through this call or hopefully touch on sort of how we communicate, how we determine our strategy and how we shape our approach, it should sort of come across that the way we do corporate responsibility is as much about delivering on it as it is communicating Thank you, Simon. Considering that semiconductor IP is a large part of what you do as a company, I'd be interested to know to what extent energy efficiency is a driver of customer demand. Well, energy efficiency is at the heart of our technology. It's where a lot of our success has been built on in terms of the mobile sector where our chips can deliver extended battery life, can deliver additional many additional features using the same level of battery life. So when the world went mobile, energy efficiency was critical and our chips deliver on that. But actually the way that our technology provides the most significant impact at a social and environmental level is probably in the way that it's used, in the way that it's used into different devices to actually make broader energy savings than in its own direct use. So I'll give you examples of that. And that would be within the smart buildings and the way that it can be used to deliver quite large scale energy efficiency in building management and estate management. Buildings represent just the largest sector for global emissions and energy consumption around the world. So where we're able to deliver through smart grids, smart metering and smart power consumption management, so energy management, we can deliver 15% energy efficiency through ARM technology in that sector. Energy efficiency is also critical and well fundamental to some of our work in embedded no, sorry, enterprise infrastructure and the way that an ARM chip can be used in servers to reduce energy efficiency. We've done some work with the Carbon Trust which shows that an ARM chip within an enterprise server could deliver 30% to 70% energy to but actually it's the way that it's used means that we're actually able to make real I guess real tangible difference at a global scale making access to sort of our technology both affordable and truly accessible for everybody. Okay. That's very interesting. In your materials on the website, I noticed a discussion of water efficiency and agricultural efficiency. I just wonder how significant those other areas of resource efficiency might be for you? I think what you picked up there 2 very exciting future applications. I mean there is some in trial being done at the moment on how we can use smart irrigation to conserve water resources. But these are things we expect to grow massively over the next few years. And that's all to do with the Internet of Things and sensor based technology, which can be deployed at very low cost and across a wide scale at both very affordable but very effective. A good example on that is actually around the use of smart irrigation in India where around onethree of all available water in India is used for irrigation. But most of that use is actually not being directed or targeted where it's necessarily needed to be. So it's just applied evenly across fields. And certain parts of the field will need watering, some won't. And really what the smart irrigation systems do based on our technology is it can lead to massive reductions in the wastage that goes on with water, which has other sorts of knock on effects. It means more of that water is available for direct human consumption. It also reduces cost in the treatment of water. Another issue is to do with the general waste of water and the way that you may have pollution caused by a combination of excess water and fertilizer use. So there's all sorts of advantages around that. In agriculture, more directly, there is the use of our technology already proven in as a means to deliver information which will aid agricultural practices. And that's the deployment of mobile technology and truly affordable mobile technology to the poorer sections of society in the developing world right through to something I may talk about later, which is the Talking Book project, which we run with Literacy Bridge, which is a talking book. Basically, it's quite a sophisticated computer, but it's used to share agricultural messaging, which has been shown and demonstrated quite significant increases in agricultural output with all sorts of knock on benefits. So there are huge opportunities in these areas and we're starting to see the results now in trials, but we can expect to see that being more widely deployed over the next 3 to 5 years. Thank you. That all sounds really interesting. I noticed that you mentioned emerging markets several times in that discussion. And I'd just like to throw in sort of flip side of that, which is that technology sectors are seeing increasing competition from emerging and developing markets. And I wonder how this might affect ARM's core business? I'd say it complements and provides opportunities to the core business. We are actually sold into just about every manufacturer of devices around the world. So we'd welcome increased competition. What it's doing is it's driving down the price of some of the technology in which our chips are embedded in our IP, which means that smartphones are available for $30 providing opportunities for many billions of people in fact to get access to that technology and get connected to the Internet for the first time. So we welcome the competition whereas our technology is applicable in a cheap smartphone or a cheap mobile device as it is in very high end service. So both in the developed and the developing world, we see great opportunities. And importantly, those opportunities being energy efficient technology so and technologies that have the opportunity of increasing well-being and having a demonstrable social impact. Okay. And I can see from hear from what you're saying that intellectual property is absolutely key to opportunity in both the developed and developing world. Considering how important it is as the overall sustainability of the business model, how does Arm seek to maintain the steady development of intellectual property? Yes. No, very good question. Well, we will we definitely seek to seek the steady development of IP. It's critical. It's core to our business. We've achieved our success over the last 25 years through our investment in some extraordinary people. It's people that provide and develop IP for a business like ours. And so we're continuing to invest very heavily in our people, just in the way that we recruit and the way that we seek to retain, but the way that we seek to inspire our people, the way that we motivate them and all of these elements that are quite fundamental to our approach to corporate responsibility is that we know we need great people and those people need to be given the right environment and the right reward mechanisms and the right overall framework to operate in so that they can deliver the most innovative solutions in partnership with our business partners. And so what we're doing is we've got an ongoing and a rolling 3 to 5 year plan for our people to make sure that we are getting the right people into the right parts of the business. And all of that is aligned to the road maps that we have with our partners for technology development. So we're very closely aligning our recruitment and retention policies and the way that we essay, the way that we motivate and inspire our people with the way that the business sees the future of the technology industry and the future markets. We think that sorry. But yes, we think that, that approach together with the whole principle of being a responsible business will drive all of those positive outcomes. Okay. So that brings me nicely to my next question, which is how you decide on your priorities for corporate responsibility? Yes. Yes. And well, all of that is very much aligned with all of the emerging best practices around the Global Reporting Initiative, all the principles being used and applied by the Dow Jones Sustainability Index. And that's really founded on a materiality based approach to corporate responsibility and constant and ever more important stakeholder engagement. So I'll start off with sort of that stakeholder engagement process. And what we've done over the last 12 months is really seek to bed that down a little bit, sort of develop it a bit further, increase our documentation, increase the way that we record through record our interactions with stakeholders and start to understand better what their needs are, what their expectations are and really what they're interested in. And so hopefully that process it's ongoing. I'd say it's not new. We've just saw over the last 12 months to improve it a little bit further and to develop it. So that's stakeholder engagement with a whole range of stakeholders. And we seek stakeholder inclusivity here. So we're looking across internal stakeholders, external stakeholders and those sort of external but once removed type people. So we're looking at our local communities. We're talking to investors. We're also trying to talk and seek engagement with future investors. We're working constantly with our partner companies and we're seeking to engage widely with the industry as well so that we're understanding their issues and responding to industry trends as well as those which reflect directly on us. So this process of stakeholder engagement allows us to start to map material issues, those issues which are material to our partners and material to us and go through a process really of review, realignment and really just make sure that we are actually focusing on the material issues. Now that has enabled us this year to really to refine, I suppose, and tighten up on what our objectives are. And we have objectives in Corporate Responsibility in 4 broad areas. First is education. And we seek to look at education here as probably our priority amongst those 4, this is about supporting the educational needs of young people, helping teachers and society to inspire the next generation of engineers. And that's really the fundamental part there is that we need the industry to have a growing pool of talented engineers, not just for ARM but for the industry as a whole. And in fact, it's all our users. The people who end up using our technology, we want them to be more literate when it comes to understanding technology and not just how to use it, but what goes behind it. So that's a focus for us. Health is also a major focus for us. And we see within Health to use our technology to drive innovation and collaboration to improve access to affordable health care systems everywhere. And affordable health care is really an area where we see that we have a huge opportunity to make some of the greatest impacts. Our technology is affordable. It can make access to information much easier and very much at low cost, so it can be scaled very easily. And in Health, that's exactly what we're seeking to do working with our partners. And this is a sort of it's in response to those engagements we have through stakeholder engagement to make this a material issue. In terms of environment, this is a 3rd focus area for us. And we're looking at the environment from 2 perspectives. The first one is very much about managing our own impact. That's our own impact across energy use and carbon emissions, but also any of water use and our waste streams. Now we're environmentally low impact as a business. We don't manufacture any physical product. So our emissions are generally and our general consumption is limited to office waste, office consumption and air travel. So we've got a relatively low impact there, but we do seek to proactively manage that. But our biggest opportunity around environment and where we're responding to stakeholder interest here is, as I've mentioned on the call, how can our technology be used to achieve global scale, high impact emission reductions, conservation of natural resources and extension of supply. So there are huge opportunities in environment. And the 4th of our pillars is our communities. And this includes the way that we look to acquire and retain the best talent. But it also is very much what we might describe as old fashioned community work. It's what can we do to make a difference to the communities in which we have offices, where our people live and also what can we do to help communities around the world. So it's not just about where we've got an office, but it's what can we do to make a tangible difference on the ground at a community level. And so I'd say that's sort of that's our priorities. It's all based on stakeholder engagement as a fundamental process, then an understanding of materiality. And then there are a number of other things that we do which are I would describe as CSR or ESG best practices. So these are things which where there may be a compliance element, but certainly where there are important positions that we must take and principles we must follow and good practices we must demonstrate across the way that we run the business. So that can be from our approach to ethics to anti competitive behavior to human rights to conflict minerals to labor rights right through to the way that we communicate our board structures, remuneration policies, reward structures. So there's a whole range of things there that we do, which we've which are both sometimes compliance based but largely driven by our own desire to be as transparent as we can and to set the best practices and to communicate that and to lead by example I suppose. Okay. I know that you need to have a growing pool of talented engineers and that the engineering industry is concerned about small number of women coming up through the ranks. I wonder if you could talk about ARM's diversity policies and their impact on the business. Well yes ARM is also worried about the small number of women coming through the engineering ranks as is the industry. And as you alluded to there, I think it goes beyond that. We support a number of government initiatives here in the U. K. But also globally and that includes the U. S. One of those initiatives in particular is or independent government, but it's the Global STEM Alliance which works together with governments as well to just encourage more people into STEM. There are active programs that we participate in there which are focused on getting more girls into engineering. And this is with a view not just as I said not just for arms benefit but for the industry as a whole that we need the industry to be more representative of girls as we do representative other of different ethnic mix and generally give everybody the opportunity whatever their background to get involved in engineering and to contribute to the industry. So yes, we're actively involved in pursuing that to try and just push those numbers up. Okay. And you also mentioned remuneration policy. I wondered what changes you've noticed since the 2012 review of Arm's executive compensation plans? Well, the sorts of changes were evolving all the time. There were the changes where we were required to do to report on certain things in certain ways by the legislation. But actually what we've always sought to do is to be as transparent as we can around executive reward and pay about the motives behind our policies and in communicating those policies. I think we've been quite effective in doing that. Last year in 2014, 97% of votes cast at the AGM were cast in support of the Renewal Motion policy and our implementation report. I was very pleased actually to note that in the recent Dow Jones Sustainability Index criteria or methodology which was in fact published and released today, there are certain additional criteria around remuneration and executive pay where we're already following best practice. So we're not in any way responsive or reactive to those issues. We're actually ahead of the game in many areas. Okay. And changing gears slightly, could you describe Arm's approach to benchmarking community investments? And what benefits would you say community activity brings to the core business? Okay. A lot of the benchmarking is well, some of the benchmarking is integrated into our approach to stakeholder engagement. Think that there are public benchmarking organizations such as the London Benchmarking Group of which we're a member. There are other forums around the Global Reporting Initiative and Dow Jones Sustainability Index and other sorts of ways in which we can benchmark. But it's also really important that we are not just relying on those, but we're doing some direct benchmarking. We're actually engaging with peer companies. We're engaging with industry bodies to make sure that we are aligned with their expectations and we're reporting on what they're interested in, but also making sure that we're keeping ahead of we're tracking trends so that we keep ahead of those trends and we're not just being responsive to a new requirement in the Dow Jones Sustainability Index for example or new additional indicators in the GRI, but actually that we are tracking expectations and responding in advance of those changes. And I'd say the core benefits of actual benefits of that is that as intended is that we are meeting the expectations of stakeholders. We're responding to their needs. And when it comes to the local community, those needs can be very tangible on the ground. It's what are we actually doing to make their lives better, to contribute to their access to the art, to contribute to access to improved education. So I think it is quite tangible and it is I mean, I'm hoping it's noticeable demonstrable impact. Okay. That's great. Thank you. Can you just tell me what ARM's stance is on contract Minerals? Yes. Well, we manufacture a very small amount of physical product. So we're not it's not considered that we're at risk of conflict minerals directly. For those items that we do physically produce or have produced on our behalf and that's just debuggers and development boards. We work very closely with the people that are manufacturing those on our behalf. We recommend the or we do use the EICC template and that's the Electronics Industry Citizenship Coalition template for recording on conflict minerals and the avoidance of the use of conflict minerals. So I would say it's been assessed and it's continually assessed on an annual basis that whether we are at risk in this area. We know the industry that we're part of is at risk, but we don't consider ourselves directly at risk because we don't manufacture any significant amount of physical product. Okay. Understood. And moving on to a slightly different question. How would you say the 2010 U. K. Bribery Act affected ARM's approach to business conduct? It didn't affect I would well, I wasn't with ARM in 2010, although I understand how ARM was operating then and how it's operated across its 25 year history. And that's with the highest the very highest standards of ethical behavior right across the board from anti corruption, anti competitive behavior and of course anti bribery. The bribery act was useful for industry as a whole to get a common understanding of what was necessary and what documentation needed to be maintained and what evidence needed to be provided. But actually it didn't affect the way we operate because we were operating in an ethical way and we continue to be and we continue to be very transparent around our policies on that. And also in our detailed disclosure in our CR supplement, we report on the number of instances of whistleblowing and of other related, I suppose, anti compliance issues. And the number this year is 0. The number last year was 0 as well. Okay. And on a different slightly different risk topic, how is on approaching the global issue of cyber security, which we keep hearing about a lot in the press at the moment? Yes. We do hear a lot. And sometimes because we're hearing it in the press, we're not always hearing a very realistic picture of both the risk that some companies face or the, Cybersecurity is a risk to arms business. And it's also it's very much something that is relevant to the industry we're in. But security is actually an inherent part of many of the products that we design. There's security built into the chip, which means that it doesn't exist or won't exist at the software level, at the user interface level. And actually, it's very nearly impossible to actually to hack into the integrity of our technologies and therefore the devices that they're in. So and that in some cases. So yes, we're aware of the risks. But I think what we're providing and particularly in some of the services we're providing around Internet of Things, it's an emerging part of our business. It actually represents an opportunity for us actually to be able to provide trust to users ultimately to our customers and then to their customers that ARM technology is a secure technology and therefore it's reducing the risk. And then internally, we are as vulnerable as any other company or business or government agency I suppose. We do have very strong internal practices around security. We do have a Chief Information Officer and a Chief Security Manager. So we've got the roles and the responsibilities set up. We've got the policies set up and I believe that we've got the physical security necessary as well. Okay. Thank you. So just stepping back and recapping a little bit on what we've been talking about. I heard that you have 4 main areas of focus for your corporate responsibility strategy and they were education, health, environment and community. Is there anything else you want to mention on any of those that you see is particularly important for ARM? I think I will touch quickly on just to add a little bit of context and color to our approach is just talk about some of the projects that we've been supporting over the last few years. I mentioned Literacy Bridge and the talking book. So this is a talking book with the where trials have been undergone in Ghana and it's been demonstrating quite impressive impacts on agricultural yields pushing them up by 50%. And that's having a direct impact on those farmers using it currently. Those trials are nearly being concluded now. And we believe that we can roll out that the talking book at scale across Ghana and then more broadly again in the developing world. The sort of impact that that actually has in real terms is that this is an ARM technology where the chip has been developed by in conjunction with the University of Michigan and ARM Engineers and the Charity Literacy Bridge to develop a chip for the developing world. And so this is a very sophisticated ARM based chip. It's available for less than $1 And it means that, that can be really truly rolled out at scale having quite a significant impact. It's called Literacy Bridge because it's designed for those that are illiterate. And the idea is that if you can improve agricultural yields in these countries, then that will allow for the subsistence farmer to become the entrepreneur and for the excess crop to be sold at market. Now there is a lot of very reliable evidence which says that when this happens and when you increase the incomes in these developing countries in those rural areas, that money is then spent on education. Now that education then the additional money that you're putting into education there will then improve literacy for future generations. So this isn't a one off impact project. This is something that will over a number of years improve literacy and then improve people's ability to develop and build careers for themselves perhaps outside of subsistence farming. There are other projects that we deal with in Health. One of them is with Simprince and this is a biometric scanner, which again is a very truly affordable technology to help provide identities to young children. And this will help them to undergo effective immunization programs and other basically track their medical history in a very secure way, in a way that respects privacy, but in the way that provides them with an identity that they may not otherwise have had. And we're talking here that Simprints are providing a biometric scanner with ARM technology and developed in conjunction with ARM and our engineers, which is available for around $30 which is around a tenth of the current cost of any other alternative biometric scanner. And I touched we touched on cybercrime and privacy just now. But actually what's really important about that technology that we're working with Simprints on is that it really does safeguard patient privacy, while at the same time giving them access to health opportunities that they wouldn't have otherwise had. In environment, we have projects which range from those which are about promoting energy efficiency in our yes, promoting the use of our technology to save emissions, whether that's in data centers or whether that's in the use of our technology in smart grids, smart energy systems. But we also support projects like Flora and Fauna International, which is a conservation labs project that we support. And here we're trying to work with the charity a number of other partners. So it's not just it's partners in the technology sector and partners in the conservation charity sector as well to look at problems that exist in the field and actually implement technology based solutions which will affect and can prevent poaching, can track and improve the forest fire risk, can have all sorts of other positive impacts on via degradation and also on water use and water consumption. So there are projects there. So I'll talk I'll give you a couple of environmental projects as well. Some of these are actually very quite exciting because they can be scaled. And this is really about what can we do to encourage more 9 to 11 year olds into coding. Now we've got projects in the U. K, but also we're supporting projects at a global level. And through the work with the Global STEM Alliance is going to is really starting off the journey for these young people, getting them inspired so that they can go on to build a career in engineering or at least a career in any subject. I mean there's evidence that actually over half the jobs in 2020 in the developed world will require someone to have a decent level of qualification in maths. Now through coding and through physics and through encouraging young people into the sciences, we can start to meet that need. And it's through a combination of ARM technology but also engaging with partners to actually grow and scale these sorts of projects. There's a lot more information on our individual projects in our corporate responsibility report. But I think that sort of hopefully gives variety actually of where our technology can be used and the impact that it could have. Okay. Thank you. And what are your corporate responsibility objectives for 2015? Well, we set some KPIs and some performance targets in our and we published them in our annual report this year. We continue to seek to reduce our carbon footprint based on an intensity level. So we'll be continuing that in 2015 and exploring where we may be able to offset or use our technology in a way that can directly be can lead to direct reduction in carbon emissions. So we're looking at innovations there, not just going off the shelf on our offsetting approach, but looking at innovative approaches where our technology can lead to carbon reductions. We also have objectives just around bedding in and really refining some of our processes. So I mentioned the stakeholder engagement earlier on. I mentioned materiality. Both of those are processes where there is an ongoing and an annual review in order that we keep up to date with stakeholder expectations that we adjust materiality appropriately and that we deliver on those things. So they're constant objectives. And we've also got a couple of new programs in place. 1 that we announced in our report this year in that we have we now have a 3 year plan for non financial assurance. And I think this is really important that we don't just talk about trust and we don't just present detailed reporting, but actually that we do seek external assurance so that the stakeholders in the wider community can have trust that what we're reporting is in fact true. So that's something we're doing this year. And we're also the other thing was to better measure and report on our impact. So this is a process for not just reporting on outcomes and outputs, but actually looking at the impact of these projects. And when we say we're affecting 1,000,000 or we're providing education to thousands of young people that actually we can prove and demonstrate that. So hand in hand with our approach to assurance and external verification, we're going to be increasingly reporting quantitative data against our KPIs and targets, so that we can actually measure the impact to communicate that impact with our stakeholders. Okay. Thank you. So Simon for my last question. From the perspective of 18 months with Arm and obviously longer in the sustainability field, What would you personally identify as the best of Arm's corporate responsibility strategy? I would say and then the thing that makes it it makes me feel quite motivated and excited about what we're doing is that actually our strategy is very well aligned with our business strategy. So we're actually while we are we're doing some corporate responsibility things independent of corporate strategy, so some of the things that we need to do to meet best practices, Just about everything else we're doing is very well aligned to the business objectives. And this is a company that's about getting its products to scale. There are 12,000,000,000 ships last year. I mean it does that through quite a simple business model but a business model built on partnership and collaboration. And it's those same principles that we're applying through corporate responsibility to not because I'm in a very small team here. But actually what we're able to do is deliver impact on quite a large scale. So I think that's what excites me most is that ability to scale on some of these projects to demonstrate the business value of these projects as well. And then what we've been we're very pleased to see is that by being able to do that and communicate that effectively, we're getting greater buy in from the business. So we're getting greater levels of understanding from our executive committee, from the Board and generally just from colleagues and people around the business, a greater understanding of what we're trying to achieve and therefore greater support from them and a greater buy in. And of course that just makes everything else easier. And then once we've got their buy in and once we've got their support and once we have their enthusiasm, it just helps that process scaling. It really does. And so it's quite an exciting place to be, I would say, at the moment in armed and corporate responsibility because we're doing great best practices. But also I can see so much opportunity in how we're going to demonstrating real impact and actually having real impact and making a and demonstrating real impact and actually having real impact and making a difference. So I would just like to conclude then by saying thank you very much indeed Simon for a really interesting call. Thank you. Great. And thank you Julie for leading that call. And thanks everyone for listening. As a reminder, if you'd like to learn more about ARM and our CR strategy, you can visit ir.arm.com to view Simon's online presentation along with links to our 2014 CR report. And if you've got any follow-up questions for Simon or myself, you can e mail us at investor. Relationsarm.com. The next investor event for Arm is our Q1 earnings release, which will be out on April 21. So until then, goodbye.