The issue of forced labor is one of three new themes that will launch in 2023, along with engaging on the Just Transition – addressing the social cost of moving to net zero carbon emissions by 2050 – and the issue of tax transparency.
In addition to the three specific themes that will run for the usual engagement period of three years, two wider themes will run on an evergreen basis: climate change and biodiversity. This aims to reflect their long-term importance to investing at Robeco and its commitments to addressing global warming and biodiversity loss.
Choosing the annual engagement themes is done in close consultation with clients and Robeco’s investment teams on topics of most interest. Academic research has shown that successful engagement improves the sustainability of companies, which makes them more attractive investments in the long term.
The modern slavery theme follows earlier work trying to raise living wages in notoriously low-paid industries where the poverty trap effectively forces people to work in sometimes dangerous conditions. It also follows engagement themes to improve labor practices in the post-Covid world, and to detect human rights abuses in conflict area supply chains.
The theme will focus on sectors where forced labor has been a concern, including consumer discretionary, consumer staples, technology and health care companies, predominantly in the Asia-Pacific region. The companies with whom the team will engage have yet to be selected.
The deaths of migrant workers building the stadia for the World Cup in Qatar has highlighted how workers can be vulnerable to onerous working conditions, a loss of freedoms that prevent them from leaving their jobs, and a lack of health care.
Taking corporate responsibility
“Engaging with investee companies to respect human rights is not only a clear obligation for investors, but also an opportunity to identify and mitigate risks that companies may face in the future,” says Yumi Fujita, the engagement specialist responsible for the theme.
“Globally, regulators are increasingly paying attention to modern slavery and forced labor risks, as part of a broader shift to take corporate responsibility for human rights and investor exposure to ESG risks more seriously.”
“Our engagement seeks to achieve enhanced visibility into companies’ supply chains and labor practices, embedding responsible sourcing and human rights due diligence processes. We also expect companies to continuously monitor and work with suppliers and stakeholders on corrective actions and remediations.”
The Just Transition theme aims to mitigate the social costs of moving to a low-carbon economy, particularly in phasing out fossil fuels. The phrase was originally coined by the EU to make sure that workers such as coal miners were not left permanently displaced by the move to renewables. It focuses on greening the economy in a way that is as fair and inclusive as possible to everyone impacted by it.
Engagement specialists will work closely with investment teams in defining the framework to assess performance on the Just Transition, as the portfolio managers are absorbing Just Transition factors into their investment process.
While the Just Transition concept is still developing, the engagement will initially focus on sectors directly affected by net zero, such as energy, utilities, mining, manufacturing and construction.
“The issues of transition are most acute in emerging markets like Africa and Asia, with growing affluence and rapid urbanization alongside the urgent needs of poverty alleviation,” says engagement specialist Ghislaine Nadaud.
“The private sector – including investors – has a central role to play in achieving a Just Transition. Supporting the transition in emerging markets involves considerations that differ in nature, scale and complexity from developed markets, and that’s why we have chosen to focus our engagement on emerging markets.”
The third theme is trying to improve the transparency of companies over their tax status, and what they actually pay to the governments of the countries in which they operate. Many companies have been criticized for paying little tax on revenues, using varying loopholes to avoid it in jurisdictions outside their domestic base.
Key to the theme is analyzing tax reporting on a country-by-country basis. Regulatory developments including the EU’s Sustainable Finance Disclosure Regulation (SFDR) make greater tax transparency a requirement for both companies and investors.
As companies face much greater scrutiny on disclosing the effect they have on wider society, partly through increased regulation, this topic is seen as being particularly timely.
“Tax often is overseen as an ESG topic because it seems like a conventional topic of financial analysis,” says governance specialist Michiel van Esch. “However, investors that are trying to make an impact for society at large should also realize the negative impact of companies that are shifting profits away from governments that are seeking to invest in better education, health care and infrastructure.”
In the long term: climate change and biodiversity
Aside from the three specific themes, another two broader engagement themes will now run indefinitely, given the strategic long-term importance of these topics.
Tackling climate change includes engagement with both the high carbon emitters and the financial institutions that fund them. It expands existing work on Robeco’s core commitment to achieve net-zero emissions by 2050, in line with international agreements.
Engagement on biodiversity began in 2020, and was originally focused on deforestation among companies exposed to high-risk commodities. The engagement program has since been extended in both time and scope to accommodate other drivers of biodiversity loss, from pollution to overfishing.
Nature Action 100 launched
With the launch of Nature Action 100 at the COP15 summit in Montreal, Robeco has contributed to developing a global collaborative engagement program on biodiversity, and will commence engagement in the course of 2023.
“The Global Biodiversity Framework, negotiated at the COP15, gives investors a solid foundation to start collaborative engagement with systemically important companies to biodiversity,” says Peter van der Werf, Senior Manager, Engagement, at Robeco.
“Target 15 of the Framework specifically calls for better disclosure of impact, dependencies, risks and opportunities of biodiversity loss to global corporations, and this will be an important driving force for improving corporate practices.”
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