Written By: Paul Myles
Paul Myles of BMO Global Asset Management explores the various ways asset managers can actively embrace ESG issues, and identifies five of the most important
Interest in (and acknowledgement of) the importance of Environmental, Social and Governance (ESG) issues continues to rise globally. Active engagement by asset owners and by managers with investee companies is an increasingly important response to this. The planned updates to the UK Stewardship Code, as well as the implementation of changes to the Shareholder Rights Directive, both provide additional regulatory impetus.
Engagement is a powerful tool that investors can employ as they work to tackle ESG risks and deliver sustainable long-term returns for investors. Bigger responsibilities come into play here too, and there is growing recognition that we can all work together to drive progress towards a more sustainable world by supporting the achievement of the Sustainable Development Goals (SDG). Indeed, managers are increasingly structuring their engagement activities around the SDGs and the five topics we discuss below are all material to investors and of critical importance to the SDGs.
Engagement can cover a wide range of issues but in this article, we examine five key themes that we believe investors should particularly focus on in 2019.
Protecting vulnerable workers
Inadequate wages, weak safety practices and modern slavery all contribute to poverty and inequality and undermine the achievement of sustainable development and the targets of SDG11 and SDG82, which call for safe working practices and an end to global poverty.
As a result, it makes sense to engage with businesses on how they are tackling modern slavery practices such as forced and child labour within their supply chains, particularly with new legislation shining a spotlight on this issue through driving better disclosure. Understanding context is key and asset managers should first gain an understanding of corporate best practice, and then use this to press companies to make improvements.
Looking forward, there are some specific areas worthy of focus. In the retail sector for example, allegations of poor staff treatment and the resulting impact on corporate reputations suggest that issues like the payment of a living wage are a potential area of activity. Other avenues require exploring, and this year for instance we will begin a new strand of engagement around apparel sourcing practices and their impact on the environment and local populations, including the emerging risks arising from shifts toward sourcing from Africa as companies seek to diversify their supply chains.
The world remains a long way from achieving the targets set under SDG5 – gender equality. One area where there has been intensive investor focus, with some degree of success, is board-level gender diversity. However, with equality issues still deeply entrenched throughout the labour force, board diversity is only the tip of a very large iceberg.
Much engagement has been conducted at board level so in 2019 there is scope to look more deeply at the representation of women at senior management level and below, linking to target SDG5.53. Based on an identification of best practices in areas such as mentoring, flexible working and pay, managers should work with companies to identify barriers and encourage the adoption of forward-looking approaches – which should ultimately benefit company performance through attracting and retaining high-calibre employees.
Climate change has been the subject of intensive investor focus over the past year, with the Climate Action 100+ initiative being one of the largest investor collaborations ever formed.
Perhaps unsurprisingly, engagement has particularly concentrated on the oil & gas and mining sectors, and to a lesser extent, energy-intensive industries such as utilities and automobiles. However, the impacts of climate change range much more widely, and there is a compelling argument for asset managers to widen their perspective and focus on the role of the finance sector, in line with the focus of SDG134 – climate action, which sets targets for climate finance. It is important to recognise geographic differentials here and focus engagement accordingly. For example, some banks in Southeast Asia have generally been slow to act on climate change but are highly exposed to the risks and may be missing opportunities to finance solutions. It seems sensible to prioritise some engagement activity here, as well as in other sectors such as marine transportation that have arguably been under-engaged by investors, despite accounting for approximately 2% of global greenhouse gas emissions.
Biodiversity and water
2018 saw a huge rise in public awareness of the impacts of single-use plastics and how plastic waste is impacting on ocean biodiversity, undermining the achievement of SDG14 – life below water and, in particular, target SDG14.15. There are some obvious candidates for engagement on this topic, and it is sensible to prioritise engagement with companies in the food and beverage sector, amongst others, on how they are responding, encouraging them to adopt a proactive approach to identifying more sustainable packaging, and to commit to phasing out single-use plastics.
Such activities should arguably sit alongside ongoing engagement with companies around water use in line with SDG66, as the impacts of climate change exacerbate existing stresses from population growth and intensive agriculture. Companies can no longer view water as a free, non-exhaustible resource, and companies in water-intensive sectors need to factor in water planning as an integrated part of their business risk analysis.
Antimicrobial resistance (AMR) jeopardises the effective prevention and treatment of infectious diseases and is widely recognised as an increasingly serious threat to global public health. AMR is a natural biological phenomenon resulting from genetic changes; however, the misuse of antibiotics is accelerating this process, and has led to the emergence of infections that do not respond to antimicrobial therapy. Given that AMR is a pressing and complex problem, governments and companies in multiple sectors need to take action. Asset managers should play a role here with scope to drive improvement by engaging with pharmaceutical companies, companies involved in meat and/or dairy production and food retailers – all of which can play a pivotal role in slowing down the development and spread of AMR.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
© 2019 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM19746 (04/19) UK.
1. https://sustainabledevelopment.un.org/sdg1 – SDG 1.1: By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day
2. https://sustainabledevelopment.un.org/sdg8 – SDG 8.7: Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its form SDG 8.8: Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment
3. https://sustainabledevelopment.un.org/sdg5 – SDG 5.5: Ensure women’s full and effective participation and equal opportunities for leadership at all levels of decision-making in political, economic and public life
4. https://sustainabledevelopment.un.org/sdg13 – SDG 13: Take urgent action to combat climate change and its impacts
5. https://sustainabledevelopment.un.org/sdg14 – SDG 14.1: By 2025, prevent and significantly reduce marine pollution of all kinds, in particular from land-based activities, including marine debris and nutrient pollution
6. https://sustainabledevelopment.un.org/sdg6 – SDG6: Ensure availability and sustainable management of water and sanitation for all