Environmental awareness took long enough, but is the investment community developing a social conscience?
Long-disinterested in the climate change debate, investors everywhere have been slowly waking up to the realisation that environmental impacts equal poor corporate returns and increased exposure to risk on their investment.
Impetus will no doubt come from the Financial Stability Board’s Task Force on Climate Related Financial Disclosures, a newly established group set up by G20 nations. It offers a voluntary framework to help business disclose the financial impact of climate-related risks and opportunities, drawing on the support of 100 companies worth a collective $11tn.
It is yet another tool to help investors, lenders and insurers better understand how firms manage climate risk – and help companies work out how to present the right information that will best explain their climate strategy.
It seems to be working. In June, Sweden’s largest national pension fund identified six companies it said had breached the Paris accord, ditching them from its portfolio.
Picking out – and dealing with – the climate laggards appears to be getting easier. But what about investor requests for information on how companies deal with social impacts? A new coalition
of 79 institutional investors with nearly $8tn in assets under management, set up by ShareAction, is keen to put the issue on the table. It plans to put pressure on companies to disclose more information on how they manage their global workforce, including their suppliers.
According to Kelly Christodoulou, governance manager for investments at AustralianSuper, integrating workforce issues into the investment process “will improve long-term value and returns”.
But for investors to take such an approach, they need to be able to measure how companies are managing their workforce, which is an altogether more complex task than even establishing carbon-related impacts.
This is where ShareAction’s Workforce Disclosure Initiative (WDI) comes in. Essentially, it is a survey that all companies will be able to complete, disclosing how they deal with workforce issues, how their global workforce is made up and how stable it is, how they train and develop people, and how they engage with those workers.
Of course, legislation such as the UK’s Modern Slavery Act and the EU Non-Financial Reporting Directive is already asking companies to disclose these types of details. And for many, it is less about encouraging more disclosure, rather better. “What we need is quality not quantity when it comes to environmental, social and governance reporting,” says Seb Beloe, partner and head of research at WHEB Asset Management.
But the WDI represents the first time investors have asked for a process that helps companies to report on workforce issues across their direct operations and supply chains.
News that 13 major fashion brands, including Primark, H&M and Zara, have agreed to improve conditions for up to two million Bangladeshi garment workers
as part of a revamp of the accord signed in the wake of the Rana Plaza factory collapse is a reminder that corporate responses to social ills often only come in reaction to disaster and the associated reputation damage.
The fact that some of the largest investment houses are supportive of greater disclosure on workers’ rights and workplace practices is a big shift – and the best companies will be proactive in responding.