ESG Investing: Engaging With Companies on Human Rights and Diversity

Oct 7, 2022 1:45 PM ET

Active ownership plays a central role in managing risk and performance in ESG investing. Global Head of Sustainable Investing and Stewardship Julie Moret highlights examples on how active ownership works with human rights and diversity.

We believe that companies who purposely manage environmental, social, and governance issues are well positioned for long-term success. When poorly managed, they can detract from financial performance and create risk. Importantly, direct engagement with companies on these issues can be supportive of financial performance, and potentially reduce investment risk. Let's take a look at two quick examples related to human rights and diversity.

Companies should ensure sound human rights practices not only for their own employees, but also of those of their suppliers. Otherwise, they face the risk of supply disruption and reputational damage. A 2020 study by the World Benchmarking Alliance showed very low marks for the automotive sector on this issue.

We followed up with German automaker, Daimler, now Mercedes-Benz, because the company scored relatively high versus competitors. Among all their sustainable practices, we learned the company identified and audited high risk suppliers, such as cobalt miners. As a result, the company required an industry recognized certification for more responsible mining. Learning about these practices helped us with similar future engagements with auto firms.

We believe that a company can achieve more success when it encourages a diversity of talent, perspectives, and backgrounds. In fact, a 2020 McKinsey study found that top quartile companies in terms of ethnic and cultural diversity outperform those in the fourth quartile by 36% in profitability. Diversity starts at the top, so we set a standard that all boards globally be at least 20% female and boards in the US additionally have at least one ethnically or racially diverse director. Otherwise, we withhold support from the chair of the nominating committee or the highest tenured director on the nominating committee.

To encourage sustainable business practices, we think investors should take an active stewardship role through engagement with companies and purposeful proxy voting. By integrating sustainable investment and stewardship, investors can manage risks and improve performance in their portfolios.