Investors around the world take environment, social and governance (ESG) issues into account when deciding where to invest, how to invest and how to measure returns.
The ESG issues most likely to come under the microscope this year include some old favourites and a few new ones.
1. Climate change
Three years after the Paris Agreement promised to cap global temperature rises to below two degrees celsius, there is little agreement among governments on how or what to do to lower carbon emissions
Nevertheless, businesses have started investing for a lower carbon economy and investors are calculating how exposed their investments are to changes in global temperatures. The investment risks can be grouped into four key categories:
|Physical risks||Indirect risks||Policy risks||Transition risks|
|Damage due to physical impact of volatile and extreme weather.||Secondary financial impacts of extreme weather, such as lower crop yields.|| The financial impact of regulators altering
climate change policies.
| The changing of the value of a business as
economies transition to renewables.
These risks are not clear-cut or easy to measure but investors in 2019 are asking companies to set goals around a transition to a renewables economy.
2. Regaining community trust
Following the Financial Services Royal Commission in Australia, investors are focusing more on issues at the core of the Commission: culture, remuneration and enforcement activities by the regulators.
Banks in other countries have faced similar challenges. In 2016, one of the largest banks in the US was accused of opening approximately two million customer bank and credit card accounts, in many instances without customers’ knowledge1, while in the UK, banks mis-sold insurance products known as ‘payment protection insurance’ for decades.2
Investors will consider processes and culture, especially where sales and profit targets rank against customers' best interests. Attention is placed on regulators enforcing breaches of the law through the courts, which may impact companies' profits and potentially their business activities.
3. The ethics of investing in social media
Social media users are typically happy to provide their personal information in exchange for free use of a platform. They provide this information assuming it will be handled and used in ways they expect. Trust is key. If user data is sold, stolen or mishandled, consumers question the safety of their information, undermining the social media companies’ business models.
The way social media companies respond in 2019 to laws and regulations being passed by governments to deal with privacy and the protection of users’ data will be critical to the success of the companies.
Most popular social networks, January 2019, ranked by number of active users (in millions).
4. Access to medicine
While some global citizens have access to affordable medicine, residents of many countries, both rich and poor, are not so fortunate.
Some investors have been supporting a right of access to medicine for many years. AMP Capital signed the Investor Statement on Access to Medicine in 2016, an initiative that ranks global pharmaceutical companies on their efforts to balance profit with purpose, acknowledging the tension between affordable access to medicine, the need to cover expensive research and development costs, and a financial return to shareholders.
5. Investing for impact
Impact investing, whereby an investor looks for a social return as well as a financial return, is one of the buzz phrases in the investment community right now. It is an exciting time - institutional investors are starting to look for investments that deliver a positive social impact as well as a financial return.
The Global Impact Investing Network reported in 2018 that there is now US$228 billion in impact assets under management globally, double the funds under management of the previous year, with the majority invested in food and agriculture, financial services and energy3.
Many projects are in emerging markets including Asia and Africa. But there are a growing number closer to home. The next frontier in Australia is set to include affordable housing.
6. Palm oil and deforestation
Palm oil is the most commonly used vegetable oil in the world because it has a long shelf life, can be used in everything from detergent to chocolate, and is higher yielding than most other oils. It is also the most controversial because it is produced in tropical rainforests and has led to some significant rainforest and biodiversity destruction in Asia.
Deforestation has led to a range of negative environmental impacts: carbon dioxide emissions, loss of pristine forests, soil erosion, air pollution, loss of habitat for animals including the orangutan, elephants, rhinos and tigers.
While some global initiatives have been put in place, challenges remain and investors are responding. They have started calling for better auditing and tracing of palm oil right back to the plantation.
7. The war on plastic
In 2018, waste became a key environmental issue in Australia. China stopped taking Australian recycling leading to huge stockpiles in warehouses all over the country5. Around the same time, the country’s largest supermarkets - Woolworths and Coles - banned single-use plastic bags. In Japan, the Ministry of Environment has, for the first time, set a specific target on reducing single-use plastic aiming for a 25 per cent reduction by 20306.
At current rates of urbanisation and population growth, global waste is estimated to rise to 2.2 billion tonnes per year by 2025, which translates into 1.42 kilograms of waste per person per day.
Waste management hierarchy
In response, businesses and investors are now talking about the circular economy - that is, a system without waste and pollution where materials are used and reused.
There have been some exciting initiatives. In 2017, Apple issued a green bond to fund the research and development of recyclable material for its iPhones7. Coca Cola has committed to collecting and recycling the equivalent of all its packaging by 20308 and McDonald’s claims that all of its packaging will come from sustainable sources by 20259.
8. Modern slavery and supply chains
Six years ago, the treatment of workers in clothing factories in Asia was exposed when a factory in Bangladesh burned down, killing 1,100 garment workers. Encouraging progress has been made on worker rights and safety in the country since then, partly as a result of investor engagement. But there is much more work to be done.
Workers are still not paid enough to live above the poverty line and there are many barriers to union representation and collective bargaining.
Minimum wage in A$/hour
Globally, some of the largest retailers and manufacturers have started auditing their lengthy supply chains and we expect even more attention on the treatment of the world's factory workers in 2019.
9. Child labour in cocoa
Cocoa production is labour intensive. Farm wages are low and the use of child labour is widespread. More than two million children are estimated to work on farms in West African countries Côte d’Ivoire and Ghana, the two countries that account for almost 70% of cocoa production worldwide10.
Chocolate producers first started committing to take steps to combat child labour in 2001 and in 2010 committed to reduce the worst forms of child labour by 70 per cent by 202011.
Our Responsible Investment Leaders funds have joined a global investor initiative, alongside investors that have been working with Nestlé, Mondelez, Hershey’s, Lindt & Sprungeli, and Cargill to identify and remediate cases of child labour.
10. Antibiotics in our food supply
This year, antibiotic resistance is estimated to claim about 50,000 lives in the US and another 50,000 lives in Europe. The numbers are much higher in developing countries with high rates of malaria, HIV or tuberculosis.
By 2050, it is estimated that 10 million people globally may die every year because of antibiotic resistance. This exceeds the number of people who currently die from cancer every year.
The potential health and economic impacts are enormous and likely to be key public health issues and a focus for ESG investors in 2019. We expect investors will increase their levels of engagement with companies in the food and agricultural industries, calling for better disclosure and the reduction, or in some cases abolition, of antibiotics use in farming and food production.
The relevance of ESG issues has never been greater. Investors want data on, and progress around, some of the biggest ESG challenges. Get ready to hear much more about it throughout 2019.
10 United States Department of Labor, Bureau of International Labor Affairs: https://www.dol.gov/agencies/ilab/child-labor-cocoa
11 Framework of Action to Support Implementation of the Harkin-Engel Protocol at https://cocoainitiative.org/wpcontent/uploads/2016/10/Cocoa_Framework_of_Action_9-12-10_Final-1-1.pdf
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