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Responsible Investment

ESG Wrap December

By AMP Capital

This month the team takes a look back over 2018 - key themes are

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Social media and data privacy

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Climate change

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Wage underpayment and franchise sustainability

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Plastic and waste

Social Media, Data & Privacy

A few key events 

  • In March, a story broke that the political consultancy firm Cambridge Analytica was paid to acquire the private data of more than 50 million Facebook users without their consent to support Donald Trump's 2016 presidential election campaign. Facebook privacy concerns continued throughout the year.
  • Google was also in the firing line. In August, it was hit with a federal lawsuit for invasion of privacy – one week after the tech giant was caught tracking iPhone and Android users’ location in spite of enabled privacy settlings.
  • Regulation and inquiries were rife throughout the year to try to combat the threat of cyber security concerns. The Australian Notifiable Data Breaches (NDB) Act came into effect in early 2018 which regulates the reporting of data breaches. 
  • Later in December, the Australian Competition and Consumer Commission delivered the Digital Platforms Inquiry Preliminary Report which revealed it believes Facebook and Google are manipulating the Australian media and generating filters which may give more authority to less reliable news sources.
  • Social media companies continued to face criticism over the amount of tax they pay and in which jurisdictions they pay tax, reflecting existing company tax regimes around the world are yet to adjust to transformation change of these company business models.

So what does this mean for my investments?

  • How social media and tech companies handle privacy and data security are critical elements to their business success – companies must balance monetising the data they gather and retaining the trust of their users.
  • Whether by accident or by illegal activity, data breaches hurt businesses in terms of fines and/or sanctions by regulators and compensation sought by damaged parties but also in terms of reputation. Ultimately people feel less inclined to do business with those companies that cannot keep their personal information secure.
  • Companies stand to lose a lot if they have poor cyber and data security. Companies not only have to understand their risks, but also understand their obligations under new regulations and schemes. Under the NDB Bill, companies that are repeatedly breached and don't take steps to remedy issues can be penalised even if they do notify as per the obligations.
  • Being aware of these issues and how companies are managing them will help users make better, informed decisions about which platforms to invest their time in. Similarly, investors will be able to make better, informed decisions about which to invest their money in



Climate change

A few key events

  • At the start of the year, the Mayor of NYC, Bill de Blasio, announced that the city’s five public pension funds would divest about $5 billion from companies involved in the fossil fuel business and pursue a lawsuit against five major oil companies BP, Chevron, ConocoPhillips, Exxon Mobil, and Royal Dutch, seeking to collect billions of dollars in damages to pay for efforts to cope with the effects of climate change.
  • In April, Lloyd’s of London, the world’s oldest insurance company announced it would no longer finance coal-related projects.
  • Also, in the UK, the Environment Audit Committee called on top pension funds to disclose information on the risks that climate change poses to pension savings.
  • In Europe, numerous countries and cities announced the phase out of the sale of diesel and petrol driven cars by 2030, reflecting the decrease in cost and technological improvements in batteries. The move to Electric Vehicles is the next era of disruption caused by the need to address climate change.
  • Meanwhile in Australia, shareholder resolutions were filed against Rio Tinto and Origin Energy to review and report on their membership of industry associations, and whether the industry associations approach to climate change was consistent with the companies espoused climate change position. Both resolutions received strong votes in favour.
  • The shareholder resolutions in Australia, and elsewhere, highlight the growing level of shareholder activism on climate change. Climate Action 100+ is a five-year initiative led by investors to engage systemically important greenhouse gas emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Agreement. Investors are calling on companies to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.
  • The Australian government struggled to pass the National Energy Guarantee and policy uncertainty continues in the lead up to the 2019 election.
  • HSBC released a report called Fragile Planet which revealed Australia was one of the countries most exposed to climate change.
  • The Intergovernmental Panel on Climate Change also released a landmark report estimating the need to keep global warming to a maximum of 1.5 degrees Celsius if we are to avoid the major impacts from climate change.
  • COP24 in Poland elevated the risks of Climate Change for investments, which was met with criticism from some coal industry representatives in the room.

So what does this mean for my investments?

  • The shareholder resolutions in Australia, and elsewhere, highlight the growing level of shareholder activism on climate change. Climate Action 100+ is a five-year initiative led by investors to engage systemically important greenhouse gas emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and help achieve the goals of the Paris Agreement. Investors are calling on companies to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.
  • The trend to withdraw of investor capital trend through divestment from fossil fuel companies mirrors what happened with tobacco companies. There are inherent risks to investing in companies that aren't sustainable and contribute to climate change, which will likely be phased out in the next couple of decades.
  • Secondly, while it is a step in the right direction, shareholders and wider stakeholders want companies to be more transparent and consistent in their approach to climate change
  • The policy uncertainty in Australia is causing many companies, including those in the fossil-fuel industry, to call for policy certainty and a price on carbon, so informed capital investment decisions can made.

Wage Underpayment & Franchise Sustainability in Australia

A few key events

  • Australia’s Fair Work Commission ruled that Uber drivers were not considered employees in January but more recently in November the FWC reversed its thinking by deciding that a Foodora delivery rider was classified as an employee and not as a contractor.
  • The Fair Work Ombudsman (FWO) released a report which found a petrol retailer had a workplace non-compliance rate of 76 per cent of the franchises that were audited.
  • The FWO also reviewed 33 franchise pizza stores across Sydney, Melbourne, Brisbane and Adelaide and found only four fully complied with workplace laws.
  • Many more stories broke throughout the year about the rampant underpayment of workers across a vast array of industries including retailers, telcos and supermarkets.
  • Many more stories broke throughout the year about the rampant underpayment of workers across a vast array of industries including retailers, telcos and supermarkets.

So what does this mean for my investments

  • For some time, there has been focus on the financial conflicts and power imbalance between franchisee and franchisor, as well as poor governance levels in the franchise model. We have been carefully monitoring the allegations of underpayment of wages and the way these companies are handling the complaints. As we have noted in the past, it is not only unethical behaviour but the unresolved issues that continue to weigh on the company’s share price.
  • With the rise of the gig economy many people are enjoying the flexibility that such work provides, especially students and those who might otherwise retire. Yet problems have emerged. Gig economy workers typically miss out on the rights that employees have, such as paid sick leave and protection against unfair dismissal. Legal changes will be required to devise a definition of employment status that does not give undue advantage to companies.
  • Going forward we hope to see better transparency and greater encouragement of those workers who have been underpaid or have unfair working arrangements to come forward so that the issues can be detected and resolved. Also, if franchisees are finding it difficult to make a living by paying workers their legal entitlements, a revised franchise model is likely necessary.
  • Companies in other industries should use the recently passed Modern Slavery Act as an opportunity to dig deeper into their supply chains and ensure all workers are being paid fairly. As we have noted before, poor working arrangements are not only unethical, they also carry significant investment risks over the longer term to brands and business operations.


Plastic and waste

A few key events

  • The United Nations Environment Programme (UNEP) released another report on one of our planet’s greatest environmental challenges – plastic. It shows that governments and companies globally are finally starting to take action and a lot can be learnt from their trials, errors and successes
  • Microplastics were found in the human gut for the first time ever and were also found in 90% of the world’s sea salt.
  • Coles and Woolworths ban the bag… and then reversed the decision… and then banned it again. So far, this ban has reduced the number of bags used by 1.5 billion over 3 months. An 80% reduction in the consumption of single use plastic bags across Australia.
  • At the World Economic Forum in Davos, 11 companies announced that they will work towards using 100 percent reusable, recyclable or compostable packaging by 2025 or earlier. The companies include well known, international brands: Amcor, Ecover, evian, L’Oréal, Mars, M&S, PepsiCo, The Coca-Cola Company, Unilever, Walmart, and Werner & Mertz.
  • A pilot whale died in Thailand after washing up on a beach with 80 plastic bags in its stomach.
  • The ban on imported plastic that China announced last year sent ripples throughout the globe, with countries struggling to redirect waste and pass effective legislation to counter the waste problem.

So what does this mean for my investments?

  • There are a few key learnings from 2018. With consumers more engaged about plastic than ever before, there is clearly a PR opportunity for brands. The fantastic increase in conversation around plastics is helping to focus both businesses and consumers on this important subject.
  • Companies which make the pledge early may be able to use their sustainable manufacturing, waste disposal and recycling as a competitive advantage. It could also be an opportunity for big brands to work with suppliers to investigate new options to replace plastic packaging and find more sustainable solutions. Especially with the push for greater transparency in supply chains, companies will be increasingly holding their suppliers to account.
  • Secondly, it is increasingly recognised that there is an external cost associated with packaging and the use of plastic and this needs to be internalised into the market. It is likely that more and more countries pass legislation which aims to hold companies to account for their waste. Therefore, many parts of the value chain, in particular producers and retailers, will have to turn their focus to initiatives which minimise plastics and packaging use and facilitate recycling.

 

  • ESG Wrap
  • Environmental Social Governance (ESG)
  • Opinion
  • Responsible Investment

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors (UK) Limited, Registered Office at Companies House, 4th Floor Berkeley Square House, Berkeley Square, London W1J 6BX (no. 05524536) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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