We currently have groups looking at the potential investment implications of climate change and inappropriate executive remuneration, both of which are expected to complete their work soon.
As stewards of our clients’ assets, we have a duty to manage a wide range of risks on their behalf. Many of these risks – including permitted ranges and maximum tolerances – are outlined in mandate guidelines. Others can be more opaque, but cannot be ignored. Some RI-related risks, for example, are not easy to measure, but can have a significant influence on the performance of investments over time.
Working groups in our business are formed to develop guidelines for identifying, monitoring and managing some of these highly complex ESG related risks and opportunities.
Importantly, working groups that are established include members of our global investment teams. We are fortunate to be able to call upon some of the brightest minds in the industry; it makes sense to harness their collective insight and varied experience across asset classes. Involving investment professionals from the outset also helps ensure that frameworks and guidelines developed are practical and can be effectively incorporated into existing investment processes.
A notable example is the Stranded Assets Working Group, whose work on the assessment of risks associated with potential fossil fuel asset stranding was outlined in our 2015 RI Report. We currently have groups looking at the potential investment implications of climate change and inappropriate executive remuneration, both of which are expected to complete their work this year.
Human rights is another complex issue attracting increasing levels of scrutiny and which can affect multiple asset classes. Accordingly, a working group was established to research it thoroughly. Corporations have legal, moral and commercial responsibilities to respect human rights and manage the human rights impacts of their operations. They are not only expected to meet their human rights responsibilities, but may face reputational, legal or other consequences if they fail to do so. As an investor in these businesses on behalf of our clients, it is imperative that we fully understand the risks and seek to mitigate them.
During 2016, the working group developed a Human Rights Toolkit for all investment teams. This is now being used to help identify and manage human rights risks in our portfolios. More broadly, we hope to be able to make a genuine difference to vulnerable groups of individuals by influencing corporate behaviour. This can be via direct engagement with company directors and management, collaborative engagement with other investors on human rights issues, and proxy voting on resolutions relating to human rights.
"Some RI-related risks are not easy to measure, but can have a significant influence on the performance of investments over time..... Involving investment professionals from the outset also helps ensure that frameworks and guidelines developed are practical and can be effectively incorporated into existing investment processes."
"Corporations have legal, moral and commercial responsibilities to respect human rights and manage the human rights impacts of their operations. They are not only expected to meet their human rights responsibilities, but may face reputational, legal or other consequences if they fail to do so."
Why are human rights relevant for companies and investors?
Intense scrutiny is placed on human rights concerns around the world by the media and NGOs. Further, NGOs’ increasingly sophisticated approach to human rights campaigns has increased transparency and risk for companies and their investors.
In many countries, companies can be sued for human rights abuses that occur in any of their operations internationally. Sadly, slavery still exists in some parts of the world and human trafficking is big business with modern slavery impacting an estimated 70 million people and more than 150 million children in child labour. Companies found to be in breach of laws and regulations can have operations suspended, affecting their income, profitability and shareholder returns. As well as the potential financial impact of breaches of international conventions, reputational impacts associated with human rights abuses can be significant.
As investment managers, we face two main types of risk from human rights infringements. First, earnings and valuations could be impacted by a company’s poor performance in managing human rights issues. This represents a clear and significant risk to the performance of our portfolios. Second, when investing in a company, we can become exposed to the same human rights concerns that the investee business faces. This could result in reputational damage to individual investment teams or our business as a whole, jeopardising long-term relationships with our clients.
In addition to the risks to our clients’ investments, our business and sustainable development objectives, the tragic human costs should be of great concern to any responsible investor. However in addition to risks their also great opportunities. Investors using their influences can contribute to improvements in human rights outcomes which can benefit millions of people while underpinning sustainable investment returns. Acting on these opportunities are a core part of our stewardship responsibilities.
Despite these benefits, human rights issues are broad and often complex; developing guidelines to cover most likely eventualities was a challenging process. To assist, the working group welcomed external specialists. These experts were able to clarify best practice on how companies should manage human rights-related incidents and allegations. Their assistance was invaluable in the development of the guidelines. The guidelines have also been reviewed by an international human rights lawyer.
In an ideal world, we would never have to use the guidelines. But unfortunately, human rights abuses are happening around the world every day. As stewards of our clients’ capital, we must be aware of them, understand how they can affect our clients’ investments and be willing to engage with companies to influence their behaviour.
"In many countries, companies can be sued for human rights abuses that occur in any of their operations internationally. Sadly, slavery still exists in some parts of the world and human trafficking is big business with modern slavery impacting an estimated 70 million people and more than 150 million children in child labour."
"In addition to the risks to our clients’ investments, our business and sustainable development objectives, the tragic human costs should be of great concern to any responsible investor."
An overview of our Human Rights Toolkit
Our position at all times is that investee companies should respect human rights and have appropriate dispute resolution mechanisms in place within their businesses. As a guiding principle, investments in companies that have a record of persistent and unremediated breaches of human rights pose uncontrollable risks to our clients’ capital and should be avoided. In seeking to understand the potential impact of infringements, analysts must consider the severity, in terms of both financial risks to business and the physical and psychological impacts on the people affected.
The Human Rights Toolkit we have developed incorporates a five-stage process designed to help minimise human rights risks in our portfolios.
Identifying companies with human rights risks
To aid their research, our investment teams have access to multiple sources of ESG data from external data providers. The UNEP key risk assessment tool, Sustainability Accounting Standards Board Materiality Mapand Reprisk are particularly useful tools for identifying human rights risks. The Human Rights Watchassessment, Maplecroft Atlas and Transparency International Corruption Perception Index are also used to assess whether a company is operating in a high risk country. Where a company is deemed to be in a high-risk sector and operates (including through its supply chain) in high risk countries, further detailed assessment should be undertaken.
Assessing companies’ approach and current issues
Analysts should refer to our external ESG research providers’ ratings on social and human rights performance to determine whether companies are taking steps to manage potential human rights issues. Other sources, including controversy monitoring services and the Business and Human Rights website, are used to determine whether companies have experienced any current or historical human rights issues. If companies are found to have an inadequate approach and/or have current or recurring issues, formal engagement with the company should be undertaken and documented. Instances where serious breaches are identified should be escalated to the RI team.
Engaging with companies highlighted as being at risk of human rights breaches
If human rights are a risk/concern for an investee company, analysts or portfolio managers must engage with the company as soon as possible in order to clarify our understanding of the situation and risks. If an appropriate response is not received from the company, we will consider further actions based on the level of adequacy of response from the company. Some potential options include requesting a meeting with the chairman (or lead independent director), writing to the company, and collaborative engagement with other investors.
Internal Governance – Responsible Investment Quarterly ESG Assurance Process
In addition to investment teams conducting their own human rights risk assessments, the RI team produces a quarterly report on behalf of each of our active listed equity teams. These reports highlight the worst rated companies in a portfolio, in terms of their overall ESG ratings from Sustainalytics and MSCI and the most controversial companies from Reprisk.
Investment teams are required to check this information for validity and ensure they are across any ESG issues associated with companies held within their portfolios. The reports are also submitted to our Global Investment Committee (GIC), which includes the Chief Executive Officer and Chief Investment Officer (CIO). Serious issues raised in the reports form part of the GIC’s and CIO’s oversight responsibilities.
Responding after a human rights incident has taken place in an investee company
In order to fully understand issues and their associated financial and reputational impacts, analysts should immediately investigate the background of the issue using all ESG data resources available. These include Reprisk, the Business and Human Rights Resource Centre, Sustainalytics, online searches and NGO reports. The RI team is also made aware of the issue and can assist with engagement plans.
In all cases, the company should be contacted and a meeting requested to discuss the situation and remediation plans. If required following this initial dialogue, we will continue to engage with the company until an adequate response is received. If adequate responses are not received, we will consider wider engagement with other investors. In cases where insufficient progress is made over time, voting against directors will be considered, as will part or full divestment of the shareholding.