Ethical Hub: Ethical Reviews - Ethical Investment Review September 2017

Principles of Responsible Investment (PRI)

We have again achieved top scores in the annual PRI survey of environmental, social and governance (ESG). PRI gave us the highest score of A+ for strategy and governance as well as for incorporating ESG issues into our listed equities investment process. The scores reflect the benefits to clients of our integrated approach and commitment to ethical investment.

Climate change

There were several Memorials on climate change to Methodist Conference again this year. The proposed replies to these memorials were amended by a Notice of Motion, following a close vote. This calls on CFB and the committee advising it on ethical investment matters to:

  1. Examine the pace of change in the extractive industry sector;
  2. In the light of increasing urgency for more global action, continue actively to consider disinvestment;
  3. Report to the 2018 Conference with the expectation that [for] any company that [has] not aligned its business with the Paris Agreement target, [there would] be a recommendation that the Church disinvest.

We have therefore accelerated our process of review and analysis in order to report in 2018, with a programme of intense work. This is a complex investment issue and we will report to clients on progress on a regular basis.

We have also joined a collaborative initiative facilitated by IIGCC that will engage with over 100 leading companies over the next 3-5 years. This will encourage companies to reduce emissions in line with the Paris Agreement and increase climate-related financial disclosures in line with TCFD (Task Force on Climate Related Financial Disclosures) recommendations.

Extractive industries

Cobalt mining has attracted significant attention given the increase in demand from electric vehicles and mobile technology. Cobalt is sourced, in the main, from the Democratic Republic of the Congo (DRC). Ongoing conflict in the DRC has resulted in grave human rights concerns in the extractives sector. We wrote to Vodafone to understand its approach to potential ‘conflict minerals’ issues. We have also asked Wespath as manager of our US holdings for its views on Apple.

We engaged with Rio Tinto regarding biodiversity protection in Madagascar, and the company provided us with a strong reassurance. Following engagement, Anglo American provided comprehensive answers to our enquiries after local community representatives expressed concerns over the safety of tailings management at the Minas Rio project in Brazil.

Human rights

Incidences of Modern Slavery affect nearly every country, and under the UK’s Modern Slavery Act companies are required to conduct sufficient due diligence to understand potential risks. We asked Tesco about supermarket car washes, where trafficking has been identified as a risk. The company provided a comprehensive response, confirming that a series of audits and checks revealed no incidences of potential trafficking. Tesco also set out its process to ensure thorough checks are carried out at all franchised car washes.

Water

On behalf of the Church Investors Group (CIG), we are once again leading an engagement process on water risk in high impact sectors. A universe of 20 UK and European companies has been selected for targeted engagement, principally in the chemicals, construction, retail, and housebuilding sectors. The results will be available in the New Year.

Labour rights

There is a growing body of evidence that supports greater awareness of how companies treat their staff. We have long engaged with business on the adoption of the Living Wage. A new initiative led by Share Action aims to secure improved disclosure on workforce reporting, modelled on initiatives such as the CDP. The Workforce Disclosure Initiative would target the FTSE50 and seek to enhance investor insight into a range of employment issues. We are liaising with Share Action about the initiative.

French oil multinational Total had been excluded from investment from the 1990s regarding allegations that its operations in Myanmar/Burma had become associated with government forced labour practices. Following progress in Myanmar/Burma we reviewed the exclusion and met with the company to discuss its overall human and labour rights practices. JACEI reviewed progress and recommended there was no longer an ethical bar to investment, since the company’s approach to human rights is seen as among the best in the industry and meets the criteria set out in our Human Rights and Conflict Policy. The company has no exposure to the current situation in Rakhine state.

Fair Trade

J Sainsbury responded to our questions regarding its decision to pilot its own ‘fairly traded’ tea mark. The company stated that “ethical and sustainable sourcing” remained at the heart of its approach, and that the pilot programme around tea sourcing was designed to meet “increasingly complex challenges” whilst continuing to guarantee existing financial benefits to farmers. We have since sold our holding on financial grounds not linked to this engagement.

We also engaged with Tesco and were heartened to learn that it remains committed to continuing to use both Fairtrade and Rainforest Alliance accreditation.

Corporate governance & executive remuneration

The third quarter marks the end of the 2017 UK proxy voting season and we voted at 26 UK meetings, opposing or abstaining 12% of resolutions including 22 remuneration reports and policies (61%). In Europe we voted at 11 meetings, and opposed 23% of all resolutions. During the quarter we published a revised Corporate Governance Policy that replaces several older corporate governance and voting policies. This is available on our website. We exercise our votes at company meetings in accordance with a template drawn up with fellow CIG members. We are reviewing the template ahead of the 2018 voting season.