Responsible investment: Time for more effective engagement
Investors need to do more to support the responsible business conduct in the companies they invest in as set out in the OECD guidelines, says Stephanie Maier.
While institutional investors are increasingly embracing responsible investment, the majority of them, and their advisers, remain unaware of the OECD Guidelines. These 40 year old Guidelines set out expectations for responsible business conduct and are applicable to both companies and investors. This may now be changing.
Additionally, with seemingly increased political and public scrutiny of companies’ working conditions, environmental practices and tax affairs the reputational risk from non-financial factors for companies is growing. Indeed, even arch proponent of free-market capitalism economist Milton Friedman saw profits and a social conscience went hand in hand when stating that the duty of company management to shareholders was to “make as much money as possible while confirming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”1.
Environmental, social and governance due diligence
The Organisation for Economic Co-operation and Development’s (OECD) Guidelines for Multinational Enterprises seek to enhance the contribution to sustainable development made by multinational companies. Institutional investors have their own responsibilities under the guidelines to carry out environmental and social due diligence on the companies they invest in and to use their influence to promote responsible business. But beyond that, it is their fiduciary duty to act as good stewards of investee companies for the benefit of their clients and to make a positive contribution to economic, environmental and social progress.
We expect investee companies to engage transparently and with due consideration for the OECD National Contact Points (NCPs), the key mechanism for holding companies accountable to the Guidelines. We engage extensively with investee companies on many issues covered by the Guidelines and specifically on cases that have been brought to the UK NCP for mediation. In two such cases, Vedanta Resources and SOCO International, we publicly challenged their response to the complaints and broader concerns.
In forty years of the OECD Guidelines, around 330 cases have been presented to the NCPs for mediation. While the number of cases being brought has increased over the years, it still seems low.
A well-functioning NCP network is critical to upholding the Guidelines. While there are some excellent examples of effective engagement, such as the UK NCP, this is not so with the majority of NCPs. In turn, this limits the ability of institutional investors to effectively engage. We would also urge the broker community to promote appropriate disclosure and assessment among the companies which they cover.
Time for action
We launched a pilot project designed to enable institutional investors, collectively, to strengthen implementation of the OECD Guidelines on 8 June 2016. During the pilot, we will sponsor an independent research provider, VigeoEIRIS, to conduct detailed research and analysis on a sample of selected cases and to develop engagement recommendations to enable high-quality, collaborative engagement with companies.
The OECD Guidelines remain the most complete single set of guidelines on responsible business conduct set out by a multilateral governmental institution. And, the only one with a monitoring process with the power to name and shame companies found to be in breach.
The Guidelines now look like a beautiful forty-year-old classic car, with an underpowered engine that has never been given enough fuel to go fast or far enough. We now need to apply modern responsible investing ‘technology’ so we can complete the journey of holding companies to account for their responsible business conduct.
1 Source: The New York Times Magazine, 13 September 1970
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- In forty years of the OECD Guidelines, only around 330 cases have been presented for mediation. While the number of cases being brought is increasing, it still seems low
- A pilot project was launched by Aviva Investors in June to help investors, collectively, to more effectively engage with companies
- Modern responsible investing ‘technology’ needs to be applied to complete the journey of holding companies to account for their responsible business conduct
- Increased political and public scrutiny of companies’ working conditions, environmental practices and tax affairs means the reputational risk from non-financial factors for companies is growing