Outerblue Responsible Investment - Driving Action on Social Cohesion through Shareholder Engagement | Outerblue by Amundi - Market analysis, asset allocation views, investment convictions and expert financial research

Description

In the fourth episode of our five-part series on Shareholder Stewardship, Esther Law, Senior Investment Manager, Emerging Markets Debt and Responsible Investing Lead, and Luda Svystunova, Head of Social Research, engage in a dynamic conversation on shareholder engagement on social cohesion - linking human capital and human rights engagements to responsible investors financial considerations, as well as client and societal responsibilities of issuers.

The engagement agenda on social issues continues to expand as new challenges and opportunities for companies and investors emerge in response to societal, regulatory and technological shifts. In this episode, the discussion centers on Amundi’s stewardship on social issues, the materiality and interlinkages between human capital and human rights, as well as their relationship to climate. Additionally, it also focuses on the impact that technology, especially artificial intelligence, is having on the companies’ responsible conduct agenda and how this is factored into our engagement process.

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Transcription

Speaker
Welcome to our podcast series, Outerblue Responsible Investing. Over our five-episode series, we will dive into the power of responsible investing and the critical role stewardship plays in shaping the future of sustainability. In each episode, we bring together leading responsible investment experts to discuss how shareholder engagement and voting efforts are driving real impact in the economy. Whether it's influencing corporate behavior or fostering accountability, Amundi is here to explore the strategies that make a difference. So let's get started.
Esther Law
Hello everyone. We will discuss our engagement on social themes. My name is Esther Law. I'm a senior investment manager on Emerging Market Debt and responsible investing lead. Joining me today is Luda Svystunova. She's our lead for social themes. At Amundi, we engage with issuers on human rights and human capital. What is the relationship between these two broad themes?
Luda Svystunova
Hi Esther and glad to be here with you today. The two issues are very tightly interrelated. Human capital of course is pivotal to the performance and innovation of companies and businesses around the world. Respect for human rights in many ways supports strong human capital management and enables companies to more effectively manage material social risks. And this is why we engage with companies on both of these issues. So ex-ante to encourage robust overall governance of social issues and human rights, of course. And we also engage with companies that unfortunately encounter human rights, labor rights, human capital related controversies in their own operations and supply chains on remediation. So very often we engage with companies on remediation when a controversy has already occurred, but we do see that encouraging companies to develop stronger grievance procedures elevates worker voice and concerns that can lead to better risk management and prevention of human capital challenges or addressing human rights risks as they emerge and before they materialize into serious controversies. And we see that companies even in more tightly regulated environments are still some way away from having effective grievance mechanisms that would actually work to not only satisfy the workers in their own operations and supply chains, but also elevate those risks to senior leadership and boards.
Esther Law
And these issues cannot be more important for emerging markets. So zooming in on human rights in particular, how do we build our expectations for companies' human rights risk management? What are the key challenges in assessing companies' stance on human rights as opposed to climate?
Luda Svystunova
So in 2023, we introduced a human rights policy, which is built into our responsible investing policy. And our basic expectations are aligned with the UN Global Compact, and at the core are based on the UN guiding principles for business and human rights, which means that we expect companies to have at least those basic elements of a human rights framework in place to demonstrate that they adequately address human rights risks in their own operations and supply chains. For instance, human rights due diligence is, of course, an important element of the UN guiding principles. And it is important to demonstrate for companies in our portfolios that they conduct robust human rights due diligence, both in their own operations and in their supply chains. And these engagements really focus on making sure that companies have those strong fundamentals in place, be it developing a human rights policy aligned with UNGPs, introducing due diligence, strengthening due diligence, strengthening disclosure, introducing metrics that demonstrate that all of these processes actually work. So, for example, we engaged with a food manufacturing company whose main product is chocolate. And we know that unfortunately, the chocolate supply chain and the cocoa supply chain in particular is full of risks related to human rights, including, of course, unfortunately, child labor and hazardous working conditions. And the industry has been in the spotlight for many years and therefore faces significant reputational risks, but also potential risks of supply chain disruption and growing scrutiny from regulators. So the company we engaged had introduced a grievance mechanism over the course of the engagement, which started in 2021. But what we would really like to see going forward is a greater focus on traceability within its supply chain. And maybe to address the second part of your question, why is it perhaps more difficult for investors sometimes to address human rights risks at scale and to really make comparable analysis of how companies perform on these metrics. There is definitely a lack of comparable human rights data that is available at scale to us as investors. And inconsistencies in definitions, even of such concepts as human rights policy or human rights due diligence, makes it challenging at times to make this analysis more robust and to clearly identify risks in our portfolios. And this is why in 2023 we also started engaging with data providers whom we use to make sure that they are aligned on the definitions and the the scoping of key human rights metrics. This is a collective engagement that is conducted with a number of investors from Europe and North America.
Esther Law
Indeed, I think lack of data is not just for human rights, it's the same for a lot of sustainability issues. So let's switch back to human capital. As someone from emerging markets, I've observed there is a big need for improvement in diversity. So diversity is, of course, an important element of companies' human capital and talent management strategy. What are our goals and priorities when engaging with companies to promote diversity in leadership and workforce more generally?
Luda Svystunova
Indeed, a very exciting topic. We know that the relationship between diversity and corporate performance remains quite complex to evidence. But at the same time, we do see that increasingly with tighter labor markets, especially in certain countries, but also in certain sectors, that are for instance, knowledge intensive. Companies do need to tap into new talent pools and access new areas of talent. And therefore, we see diversity as, again, not only a matter of social justice, but an opportunity for companies to embrace those talent pools that they might not have been able to access previously. And also we see this as a chance to address demographic challenges in certain markets. So therefore, we engage with companies across a number of thematic streams within diversity and inclusion. And that includes gender diversity, disability inclusion, and also specific topics that might be relevant to a local area or a particular sector, for instance cultural diversity. Gender diversity remains a major engagement stream for us, of course. For example, in the retail space you see a lot of employees on the shop floor and of course customers still being female, but women's representation as you progress higher up across the levels of the organization remains limited and we think there are opportunities for companies to better connect with their employees and customers if they have greater representation at the top.
Esther Law
Diversity is indeed a very interesting topic and we all know that a country with higher female participation also results in higher economic performance. So in addition to their wrong operations, companies of course need to address the sustainability and resilience of their wider value chain. To what extent do we see companies maturing in their management of upstream social risks?
Luda Svystunova
Indeed, supply chain risks are diverse and investors over the past years have focused considerably on the topic of forced labor and modern slavery in the supply chains. But of course, there are other issues that we're looking at, for example, child labor and poor pay and working conditions. The reason why these issues have been in the spotlight and have received so much attention from policymakers around the world is, of course, that we have seen the significant economic impact of supply chain disruption that we saw, for example, during the COVID-19 pandemic. Therefore, creating robust supply chains, which are stable, where you have reliable workforces across your supply firms is very important for companies to ensure that their own operations are not disrupted and their orders are not delayed. So this is where we've seen European regulation, regulation in North America, being really pivotal in bringing this to the attention of companies and investors. And we definitely see some companies, especially in Europe, becoming more mature on the topic. But significant gaps still remain when it comes to supply chain due diligence. And we definitely see that companies are still sometimes struggling with identifying risks beyond their tier one suppliers, maybe still struggling to fully elucidate the risks linked to their specific supplier geographies and particular commodities. So this is where we have been working with a number of organizations and in particular with Human Resources Without Borders and the French Sustainable Investment Forum on developing a methodology for engaging with companies on forced labor, which really focuses on tracing risks to vulnerable population and high-risk areas. And that is something that we will continue to endorse in our work going forward. Then maybe I'll just highlight one more issue on which we have been working for a number of years and that relates to the living wage in the supply chain. And that, of course, ties with overall working conditions for supply chain employees. So we have been a member for a number of years of the platform living wage financials. We see the payment of living wages as a means of addressing those systemic risks, especially in countries where there are significant gaps between the cost of living and the pay that workers get. All in all, we want to see as robust an approach of supply chain risk management as we see for direct operations.
Esther Law
Yes, indeed, social risks are incredibly difficult to quantify. So thank you, Luda, for sharing with us your framework. Artificial intelligence has quickly moved from a relatively niche topic in the technology space to an integral part of our working lives. How are companies managing workforce and societal risks associated with AI? Are there differences in how we set expectations for managing those risks versus other digital rights issues?
Luda Svystunova
Indeed, Esther, this is a very exciting topic and it has really showed up to the top end of investors' engagement agendas, especially for technology companies in the last two years or so. So maybe just to start, we need to distinguish between what makes risks related to AI and AI ethics slightly different from the general digital rights issues. Digital rights are human rights in the digital space. If you think about, for example, user privacy, safety and security online, children's online safety, cybersecurity, those issues fall into the scope of digital rights. And privacy, of course, has been a major concern for users and governments alike, especially with the rise of monetized user-generated content and the exploitation of user data by technology companies, which has, of course, led to regulations such as GDPR in Europe, which can have substantial financial impacts on companies if they have to pay fines and can undermine trust in companies by users if they feel that their privacy is violated. Now AI has come in and introduced a whole host of new opportunities but also concerns. For instance, companies now have to deal on the one hand with the implications for their own employees. Will AI disrupt working lives, will there be opportunities for companies to upskill their workers, especially those in the technology space, in order to become more efficient and effective and make our lives more productive? Or will it lead to some major layoffs? And we're already seeing that, for example, some companies are prioritizing AI and therefore laying off workers in certain sectors. So these concerns are quite valid. And then at the same time, the use of AI to make decisions and the impact of AI on consumers is something that cannot be overlooked. So companies who use AI to develop and deploy their products, make decisions, for example, around consumer finance, for instance, will you get your mortgage or companies using AI to drive healthcare research. Applications of AI can have very significant effects, not only on companies themselves, but of course, also on the wider society. So in the absence of very clear regulation, with the exception of Europe, more recently, investors have been engaging with companies on AI ethics and risk management, and Amundi has been one of those investors. So, for example, as part of our work with the World Benchmarking Alliance, who has convened an AI ethics collective impact coalition, we have been engaging with companies on the deployment of ethical AI policies, which would involve risk oversight and board and senior management level. Now that some of those policies have been put in place, they are implementing and resourcing them to make sure that these policies turn into procedures that flow through all the way to, for example, the product teams. And maybe related to AI, I'll just highlight one other very important issue of content moderation and that, again, is a concern that has become much more important for investors in the past two years or so, but especially in the last 12 months with the advent of so many elections around the world. Managing misinformation-related risks is a very important issue for investors because of course misinformation can affect not only individual consumers but the broader markets and it can definitely undermine trust in social media companies who make money by selling advertising space and therefore ensuring good content moderation prevention of misinformation spread is important on multiple levels. We have been engaging with companies on this issue, including engaging with one of the largest social media companies in the world, where we had concerns given the company's scale and scope of operations and its global exposure about the quality of resourcing for content moderation. So last year, this was an issue that we raised with them. And we decided to submit a,d co-file a shareholder resolution to ask for evidence of, again, robust risk management, specifically through resourcing of these issues. Even though the resolution did not get enough support to pass, we did have a very good dialogue with the company, so increased disclosures, and we will continue working on this issue going forward, of course.
Esther Law
Misinformation is indeed also a problem for emerging markets, so thank you, Luda, for taking us through your thoughts. This gives us a nice insight into the broader topic of client and societal responsibility, and is one of our engagement pillars. How do we think about the links between companies, societal responsibility and material risks?
Luda Svystunova
Yes, another very important topic. How do we deal with risks that companies might not see as immediately material to their operations and bottom line and where they do have a potentially negative impact but might not be incentivized to act upon due to the lack of an immediately visible link. So maybe I'll illustrate this with the example of tax responsibility. So in 2023, the Tax Justice Network estimated that over 480 billion dollars were lost annually to tax evasion and corporate tax abuse. And over 300 billion dollars out of those were lost due to cross-border corporate tax abuse by multinational companies. So what this leads to is, of course, economies around the world being undermined as they're not receiving the taxes that should have been paid by multinational companies operating in those locations. That, of course, reduces the amount of money available to the public services and consumers and therefore creates significant economic, and then for companies themselves, Very aggressive tax policies can suggest the lack of robust and prudent risk management. And we also see that increasingly regulators are catching up and scrutinizing companies' tax records. Therefore, Amundi has been engaging on tax responsibility for a number of years. And we continued our campaign last year to encourage companies to provide country-by-country disclosures of their tax payments, elevate tax responsibility to the board as a matter of sustainability and not simply compliance. And also to develop responsible tax policies that would be global and not just specific to their home countries or countries like the UK where this is a regulatory requirement. And then maybe just to contrast systemic risks with an issue where companies can see opportunities inan issue that might not be immediately material to them or where they might not see immediate profits but if addressed systemically can generate long-term opportunities. And that is access to medicines and access to health companies can engage in formal access to medicine strategies in order to reach patients who would have otherwise not been reached and therefore build a more sustainable future for their business models as well as to generate innovation and new stakeholder partnerships. So one example here is our work with the Access to Medicine Index run by the Access to Medicine Foundation, a collective engagement where we're leading on one of the companies that the foundation ranks in its index. And this company made progress on rolling out its unique global health unit, which aims to provide access to medicine in 40 countries with highest medical needs.
Esther Law
Your point on health accessibility is very interesting and badly needed, I think, for many nations. Finally, it would be impossible to wrap up this conversation without looking at the intersection of social and environmental issues. Amundi has a long-standing commitment to a fair transition. To what extent are companies embracing just transition commitments and where do you see opportunities for improvements and for further investor action?
Luda Svystunova
A very important topic and this one really brings together our efforts on climate and transition to a more sustainable low carbon economy and social cohesion. We believe that committing to a just transition and providing a fair transition for all to ensure that no one is left behind as companies and nations move towards more sustainable business models and economic models is very important to ensure that the social fabric is not disrupted and we do not see opposition and delays that can affect the green transition. So it is very important for us that companies adhere to the principles of a just transition. And unfortunately, the topic of just transition is not a straightforward one. It requires a lot of sensitivity to the... local issues that are specific to companies, operations and supply chains, their business models, and the sensitivity and good understanding of their climate strategies, of course. So what we would really like to see from a risk management perspective and a sound human capital management strategy point of view is companies evidencing that they can support their climate strategy with a sensible approach to workforce planning and the planning of their relations with local communities, the impact on customers as they change their business models, potentially move towards new services and products. But we see that a lot of companies are not quite yet very mature when it comes to just transition. There's still a lot of work to do when it comes to the awareness of its key principles. And this is why we have been engaging with companies from especially those sectors where we see significant disruption to the business models as companies transition. So this includes, for example, high emitting sectors such as oil and gas and construction utilities and sectors such as automotives, where there is this significant change in the business model as companies move towards a greater focus on electric vehicles, which of course require... different workforce composition and a change in consumer base. So what we would ideally like to see is a formal just transition strategy elevated to the level of the board and senior management and very sensible resourcing and planning of the social aspects of transition, ideally supported with metrics that demonstrate how companies will track their progress and evidence to us as investors that these strategies are indeed working. For instance, we worked with the World Benchmarking Alliance again, this time on the Just Transition Collective Impact Coalition, to engage with a European oil and gas company who, despite its ambitious commitments when it comes to shifting towards a greater focus on renewables. nonetheless has not yet demonstrated very detailed evidence of how this transition will be resourced from a workforce perspective and where we would like to see greater disclosure of how the company manages its relations with workers and communities outside of its home country in particular. But we have also seen some very interesting examples of companies addressing some of those core just transition issues, for example, with the automotive sector where companies are innovating. For example, setting up corporate universities and re-skilling their workers. And we have also used our leverage. to engage with the financial sector, specifically banks, on integrating just transition principles into their work with clients, which is quite exciting because again, as financial sector participants, banks can have that multiplier effect on spreading good practices to their clients if they adhere to the principles of Just Transition and expect their clients to also do so. So this is quite an exciting engagement which we will again continue in the coming years.
Esther Law
Thank you, Luda. As an emerging market portfolio manager, Just Transition is a very dear topic to me. Thank you, Luda, again for this amazing podcast. This concludes our podcast for this time.
Luda Svystunova
Thank you very much, Esther. for your company and a very engaging discussion.
Speaker
Thank you for tuning into this episode of Outerblue Responsible Investing. We hope today's conversation has shed light on how stewardship, shareholder engagement, and voting can shape the future of sustainability. As we continue to navigate the path toward a more sustainable financial system, your role as an engaged investor is key. Tune in next time to hear more on Amundi's insights. Until then. Keep exploring the power of stewardship. This podcast is only for the attention of professional investors as defined in Directive 2014-65-EU dated 15th of May, 2014, as amended from time to time on markets and financial instruments called MIFID II. Views are those of the author and not necessarily aAmundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi products or any other security fund units or services. Past performance is not a guarantee or indicative of future results.

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