Engaging companies on ESG issues improves their sustainability, their management and their risk/return profiles
Joining forces to drive change
When investors work together to engage companies, and pool their resources and influence on ESG issues, they can effect real change. Being an active owner is key not just to being a PRI signatory, but to having a positive impact on companies: by reducing risks, maximising returns and having a positive impact on the environment and society.
The PRI Collaboration Platform – the online forum that allows signatories to do just that – was a hub of activity this year.
333
POSTS
added to the platform
282
SHAREHOLDER RESOLUTIONS
added to the platform
22%
OF SIGNATORIES
active on the platform
333 posts added to the platform – 7.4% up on 2017
282 shareholder resolutions posted – a 21% increase on 2017
Top five issues on the platform
Climate change and emissions reduction
Boards, and shareholder rights
Employee relations and diversity
Lobbying and political donations
Human rights
This year, just over a fifth of signatories were active on the Collaboration Platform. To improve on this, we have started to redesign the platform, which will be launched in 2019, and are working to drive greater signatory participation.
KEY TARGETS
22.3% of signatories were active on the Collaboration Platform (PRI target: 27%)
Taking the lead on active ownership
Actively engaging with investee companies is one of the most effective mechanisms to reduce risks, maximise returns and have a positive impact on society and the environment – for both passive and active investors. Not only that, but it makes financial sense: a recent academic study we commissioned found that successful engagements create value for both investors and companies.
However, while lots of investors have been active owners for many years, little is known about current leading practices, processes and success across markets. That’s why we launched A practical guide to active ownership in listed equity. It provides suggestions to investors interested in building a fruitful dialogue with investee companies.
KEY TARGETS
65% of signatories reported actively engaging with their listed equity investee companies via individual or collaborative engagements (PRI target: 70%)
We also published ESG engagement for fixed income investors: managing risks, enhancing returns. It provides the investment case for engaging as a fixed income investor and gives practical recommendations, including how to embed engagement into the investment process and measure the effectiveness of an engagement.
Working to address ESG issues
We work with signatories and produce a number of podcasts on on E, S and G issues across markets.
KEY TARGETS
85% awareness and 78% acknowledgement scores for all companies included in PRI-coordinated engagements (PRI target: 72%)
Environmental issues
We've been working with investors on investor-company engagements on a range of topics such as cattle-linked deforestation (in partnership with Ceres), palm oil, climate change for oil and gas companies, methane and water risk.
What's the issue? Water risk
The World Economic Forum highlights water as a top global risk with associated climate, weather, economic, social, competition and infrastructure repercussions. As the impacts of climate change become more prominent, the demand for freshwater grows, driven by population and income growth. This results in higher demand for food, energy and water, all of which need stable water supplies. Companies with direct operations and supply chains dependent on agriculture, the world’s largest use of water, are exposed to risks. Companies that appropriately mitigate risks and demonstrate good stewardship with companies create value for shareholders.
What have we done?
Following a PRI-coordinated engagement with 32 companies, we launched, in partnership with WWF, the report Growing water risk resilience: an investor guide on agricultural supply chains. It provides an engagement framework, structured around four categories (foster water awareness; promote internal and supply chain action; encourage collective action; influence governance of water) and gives indicators investors can use to assess companies on their water management.
Read about our climate work on the 'Champion climate action' page.
Social issues
What's the issue? Human rights in the extractives industries
Companies operating in the extractives sector face a multitude of complex human rights issues, such as bonded labour, hazardous working conditions and lack of collective bargaining. Investors are increasingly concerned about the significant operational, legal and reputational risks companies could face including project delays and cancellations, lawsuits, fines, negative press coverage and reputational damage.
What have we done?
We wrapped up a two-year engagement between 51 signatories representing US$ 7.3 trillion and 32 companies – one of the PRI’s largest engagements. It focused on enhancing implementation of the UN Guiding Principles on Business and Human Rights and enhancing the level of human rights disclosure. One hundred percent of companies acknowledged the issue and 91% had at least one engagement meeting and/or call. After engagement, improvement was noted across all focus areas.
What's the issue? Labour rights in the apparel industry
Labour rights are particularly at risk in the apparel industry – this was brought into stark focus after the Rana Plaza disaster in 2013, where over 1,100 people lost their lives after the clothing factory collapsed. There is a consumer expectation that companies will respect the human rights of their workers. From an investor perspective, working practices can impact business and negatively influence investment and financial returns.
What have we done?
We launched An investor briefing on the apparel industry: moving the needle on responsible labour practices. The report, informed by PRI engagements and interviews, highlights eleven red flags investors should look out for which may indicate negative human rights practices in investee apparel companies. It gives eight recommendations for effective investor-company engagement, including providing concrete questions investors can ask in engagement dialogues. It also highlights relevant tools and resources for signatories.
What's the issue? Human rights violations and child labour in the cobalt industry
Cobalt is a building block to many smartphones, electric cars and laptops. However, human rights violations are rife in cobalt mining; miners have little or no protective equipment and are exposed to high levels of toxic materials. Thousands of children also work in the industry.
These issues could expose investors and companies to material risks such as brand damage, impact to company share value, a negative impact on operations and production capacity and potential strikes and disruptions.
What have we done?
Following an engagement with 23 investors and 13 companies, we launched Drilling down into the cobalt supply chain: how investors can promote responsible sourcing practices. It gives an overview of the risks associated with poor cobalt sourcing practices and gives concrete questions investors can ask to respond to and remedy human rights violations, as well as questions to ensure companies take solid due diligence steps to ensure responsible cobalt sourcing practices in their supply chains.
We have also considered the role investors should play in addressing human rights and inequality, as well as how they can consider communities in the transition to a low-carbon economy.
Governance issues
What's the issue? Tax
Aggressive tax planning should seriously concern investors. Not only has public outcry over companies such as Starbucks avoiding tax brought the issue into the mainstream conscience, it is also a material issue for investors. Companies managing risks associated with tax could eschew increased costs associated with fines, earnings risk and reputation and brand value damage.
What have we done?
We launched a collaborative engagement on tax with 35 institutional investors representing US$2.9 trillion in assets. The engagement aims to enhance corporate tax transparency among multinational companies in the healthcare and technology sectors across policy, risk management and reporting areas.
The engagement led to an investor guide on the topic that will enable investors to identify areas for further evaluation when assessing corporate data on tax and structure engagement questions based on reporting trends.
What's the issue? Cyber security
Companies’ cyber security and data management are under more scrutiny than ever before. Following high-profile breaches at TalkTalk, Sony, and more recently, Facebook, investors should be primed to engage on the issue. If not, they risk damage to reputation and brand value; earnings risk and governance problems; and legal and regulatory costs.
What have we done?
Last year, we started a PRI-coordinated engagement on the issue with 53 institutional investors representing over US$12 trillion in assets and global companies in sectors such as healthcare, consumer goods and telecommunications. Engagement dialogues focus on enhancing cyber security governance and processes including board oversight, expertise, audits and industry collaboration, as well as improving the quality of disclosure around these measures.
