In a major push targeting companies on the wrong side of climate change, the Active Ownership team will engage with the financial institutions funding high-carbon emitters as a focus area for 2021. Another program will seek urgent improvements at companies that are seriously lagging behind in the decarbonization transition.
Two other engagement programs will target labor rights, which have been adversely affected by the corporate shutdowns during the pandemic, and human rights abuses in conflict-affected and high-risk areas. A fifth theme will look at ethical problems within the videogaming industry.
The Active Ownership team chooses four or five new themes each year for engagement with companies over a three-year timespan regarding the financially material environmental, social and governance (ESG) risks and/or opportunities facing them.
Financing the transition
Many financial institutions have a significant exposure to the fossil fuel industry, and therefore face their own physical, transition and liability risks from the effects of global warming. Regulators are increasingly looking at the funding of climate change and how the sector should support the climate transition. Banks have to align lending policies with carbon targets that are being set by governments to meet the goals of the Paris Agreement.
“We know that many banks are still lending to high-carbon emitters without gaining any commitment from them to change to lower-carbon business models,” says Carola van Lamoen, Robeco’s Head of Sustainable Investing. “In this way, they are not aligning their lending activities with the Paris Agreement commitments.”
“We’re approaching this as a combined governance and environmental theme, because this is really about how climate change relates to allocation of funding and broader concepts of risk management.”
In line with this call to decarbonize, Robeco on 4 December 2020 committed to the ambition to achieve net zero greenhouse gas emissions across all its assets under management by 2050. Robeco had earlier moved to exclude fossil fuel users and producers from all its portfolios, subject to certain thresholds.
Accelerating climate change engagement
The other side of the coin is targeting the high-carbon emitters themselves. On the back of the net-zero commitment, Robeco will develop an engagement program targeting all companies in its investment portfolios falling behind in the transition. Companies that don’t meet these transition targets run the risk of exclusion after three years of engagement.
“In the past, we have engaged with a large number of companies on the need to transition to lower-carbon business models – but some are still not making sufficient progress in that process,” says Peter van der Werf, Robeco’s team lead for engagement.
“So, for this program, we want to further shift gears in our engagement on the climate transition and focus on the ‘worst of the worst’ companies that are falling behind in the transition. These are the ones that won’t be pushed with a little nudge: they really need fundamental change to transition towards lower-carbon business models.”
“Their business models are still geared towards a different kind of energy landscape that rely on fossil fuels, and they need to focus on making concrete investments – or at least planning for investments – towards this energy shift.”
Labor rights in a post Covid-19 world
Outside of climate change, labor rights have come under the spotlight after the Covid-19 pandemic worsened conditions that were already problematic in industries vulnerable to the shutdowns. Robeco’s engagement in 2021 will focus on risks related to labor practices in the retail, online food delivery and hospitality industries.
Essential workers in those retailers allowed to open during the lockdowns were more highly exposed to infection risks while facing low wages, longer working hours and insecure employment conditions. While online food delivery provided a lifeline for many, workers in this industry – also called the ‘gig economy’ – often do not have an employment contract, access to collective bargaining, or social protections such as pension schemes.
In the hospitality industry, workers have been severely impacted by the containment measures, and many lost their jobs when hotels and restaurants were ordered to close, with little to fall back on.
A proxy for shocks
“How companies treat their employees is a crucial proxy on how they can respond to other shocks,” says Van Lamoen. “Ensuring an adequate level of employee satisfaction and upholding appropriate labor standards are crucial components to having a competitive advantage once the hospitality and other Covid-19-affected industries start to operate normally.”
“The long-term viability of the companies in which we invest is inextricably tied to the welfare of their stakeholders, including their employees, suppliers and the communities in which they operate. Companies with strong human capital practices often experience lower turnover, and higher labor productivity.”
“This engagement theme is expanding into the three main industries where workers tend to be less well protected, and is building on our experience engaging on this topic in the agricultural supply chain and garments industry. In our dialogue, we will also focus on topics like health and safety, as well as diversity and inclusion.”
Human rights in supply chains
Related to this theme is the wider issue of human rights, and particularly where abuses occur along the value chain, often in conflict zones where protections are limited. This engagement theme will focus on the due diligence that tech, apparel and automotive companies in developed markets need to perform when they source from high-risk environments.
“By advocating for better human rights standards, we hope to decrease the risk that companies may become involved in, or exacerbate, ongoing grave human rights violations through their activities,” says Van der Werf. “This often happens in supply chains rather than at the company itself, such as by sourcing minerals from conflict areas.”
“Respect for human rights is strongly associated with value chain resilience and a stable business operating environment. In parallel, investors are increasingly aware of and concerned about the significant operational, financial, legal, and reputational risks portfolio companies might face when they fail to manage human rights risks.”
Downsides of gaming
Finally, the team will look at videogaming – an industry that provided many positive benefits to a growing number of gamers worldwide during the lockdowns. However, as an investor, Robeco has noticed several structural social impacts in the gaming industry affecting both gamers and game developers. Problems range from gratuitous violence to stereotyped representations of minority groups, and an increase in online abuse of young gamers.
The industry also faces labor problems due to the excessive use of overtime work by the game developers; some are forced to work long and unsociable hours. Managements of gaming companies will be asked to reflect on their product expectations – such as over-specification – their approach to design (which might be an all-or-nothing approach), and under-staffing.
Robeco’s annual engagement themes are chosen after consultation with investment teams and clients, who proactively share themes that are most material to them. Last year’s subjects included biodiversity and mining safety.
Carola van Lamoen, Head of Sustainable investing Robeco