The S in ESG comes of age

It’s no secret in the responsible investment world that progress on the S in ESG has been weakest and many investors continue to give it less attention than it deserves. But recent developments give us hope that things are changing, and we’re committed to playing an active role.
The cases of Rio Tinto and boohoo this year provide different and important examples of both the materiality of S issues and the emerging willingness of investors to really challenge companies over them, but also some of the issues that remain.
The destruction of the Juukan Gorge caves in Australia by Rio Tinto has focused more attention on the importance of stakeholder relationships. Insiders suggest that this is an area where Rio Tinto used to be better, but its focus drifted. The firestorm that has engulfed the company subsequently has cost the CEO his job. While not a first for an S issue, and it seems that it took pressure from shareholders and others to achieve, it is significant. And we know from talking to other resource companies that the lesson has not been lost.
It’s important for investors to have some humility. When we talk about stakeholder engagement, we mean that companies and investors should talk to affected stakeholders directly, and individually. It’s not up to highly-paid cadre of investment staff to fly in to put a watered-down, corporate-friendly version of the community’s views across to the board on their behalf. It’s better for investors to encourage real dialogue between the company and its other stakeholders. Similarly, it’s much better for investors to talk to affected stakeholders alone rather than rely on the company’s interpretation of their position. This is exactly what went wrong at boohoo. We’ve said this before, but is deserves restating: it is not possible to credibly engage with companies over workplace issues and not talk to workers and their representatives. Boohoo is a stark example as the Levitt Review is clear that the company knew that there were serious problems in its supply chain, even as it made bold claims in its annual report and showed investors around certain sites.
If investors had spent just a little time talking to the right people we believe they would have had many questions for the management of boohoo about labour practices. For now the major question is whether, as with Rio Tinto, any board members will accept that their own stewardship was sufficiently lacking that they step down. If they don’t it would not be surprising if they were actively encouraged to do so.
And finally, let’s look forward. We remain in a serious pandemic, with many employees risking their health by simply going to work. Last week we sent clients our report on the food processing sector, where we have concerns about the reporting of Covid-19 cases. If investors are going to make the S in ESG meaningful then they need reliable data to inform their stewardship activity, and currently we’re not confident we have it. If investors work together to encourage reporting by companies the situation could be greatly improved, and quickly.
It’s sometimes argued that the reason for the lack of progress on S issues is because they are harder to quantify. There’s a nugget of truth there, but bigger problems are a lack of investor attention and an unwillingness to go beyond a conception of engagement built solely around getting access to board members. We have an opportunity to show that investors are now willing to take action and there is a better way of doing it. The era of anti-social investing is over.

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