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Supplements » ESG Report October 2021

ESG roundtable: Darker shades of green


Funds Europe – How can firms ensure human rights standards are maintained, not only in direct supply chains, but indirect as well? Is enough being done to stamp out human rights abuses in supply chains?

Alexeyev – There is a lot of work that needs to be done. ShareAction assessed around 75 managers on their human rights approaches and found that at best, most of them ignore human rights and at worst, may contribute to the problem. They also noted that less than a third of them have commitments to engage with or exclude companies that don’t act in line with ILO [International Labour Organization] or UN conventions.

That said, screening for human rights in companies with complex and opaque supply chains can be extraordinarily difficult. The data’s often lacking. A qualitative approach is clearly needed – extensive discussions, research and, of course, knowledge-sharing with other financial market participants to understand, identify and manage these risks. Asset managers can engage not only with the corporate issuers but also with human rights organisations, labour unions, community groups to try to understand these issues a bit better.

It’s also worth noting that human rights are oftentimes intertwined with other ESG issues such as deforestation. Taking a more holistic view could help capture and manage some of these risks.

Barrie – There are still plenty of egregious human rights abuses in supply chains in very large companies that you can find in most diversified portfolios.

There’s a tendency to hold data as the most important tool, but there’s a risk that perfection can be the enemy of the good – if we wait for good data on supply chains, we might be waiting a long time. We’re never going to have perfect data no matter how well firms like MSCI do at producing ESG data for companies worldwide. So, I think we need to get comfortable with having just enough data to make better decisions and ask more questions.

In some cases, there are clear data gaps, and it’s obviously in our interest to develop questions and our data requirements. For example, after the Brumadinho mining disaster in 2019 – which killed around 270 people when a tailings dam failed [in Brazil] – we set up an initiative asking the entire mining industry to disclose on a dam-by-dam basis a set of details about their tailings facilities. That had never been done before, and disclosure was very patchy and hard to compare, let alone assess at a portfolio level.

Mining companies would tend to have something in their reporting around risks, but in the narrative part of the annual reporting, you’d very rarely get dam-by-dam disclosure. The request made some progress, and to date we have received full disclosures from more than 65% of the mining industry by market capitalisation.

Mahmood – There is a corporate responsibility to respect human rights and conduct human rights due diligence to identify, address and mitigate any adverse human rights impacts. In this respect, MSCI apply baseline controversy screening to many sustainable indexes that encompass human rights issues, including forced and child labour, some of the main concerns in supply chains. The screening criteria are based on a number of global standards including the United Nations Global Compact Principles (UNGC), the International Labour Organization’s conventions, and the United Nations Guiding Principles on Business and Human Rights (UNGPBHR).

However, data isn’t even the primary issue here; in many cases, from a company perspective, it can be challenging to conduct due diligence for the entirety of its supply chain, particularly where supply chain relationships may number into the thousands, tens of thousands or more. Because some companies will have difficulties identifying faults in their supply chains, the disclosures therefore won’t be there. That’s where there needs to be more development.

Where a human rights issue is identified, companies can apply leverage, seek to gain more leverage and engage with their supply chains, and that in itself can also be challenging, depending on the jurisdictions they operate in, as well as cultural differences and other factors. The end solution can come in the form of changes to the design of a product or to the volume of an order, etc.

The other uncomfortable issue to consider is consumers have to pay more as a result. It’s a balancing act, but at the very least, a company should know who is in their supply chain.

Firth – Covid has shone a light on the vulnerability and precarious employment status of some lower-wage workers, and there is a very real need for investors to support a broad-based recovery that is human-centred and focused on employment, income, workers’ rights and social dialogue.

With engagement at our core, we actively work with companies to encourage them to place labour practices and strategies at the centre of their corporate strategies, helping to put in place safeguards to mitigate risks, this can help combat abuses.

Companies depend on their people, and if the people are cared for, safe and well paid, this ultimately will deliver more sustainable outcomes for investors.

The ‘S’ of ESG should be as important to investors as the ‘E’.

© 2021 funds europe