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What do the UN Global Compact Principles mean for investors?

UK and UAE: Suitable for retail and professional clients

Date: 08 September 2021

Marcus Cave explains:

With investors becoming increasingly concerned about the sustainability issues facing businesses, Marcus Cave, ESG fund research analyst at Quilter Investors, explains how the United Nations (UN) Global Compact is a useful tool when assessing the problems facing companies.
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With climate-related risks and environmental challenges seemingly at the forefront of investors’ minds, it’s important that all those involved in the investment industry adopt a broad approach when assessing the major risks facing corporate sustainability today. This should include human rights abuses and forced labour and corruption, as risks to corporate sustainability affect not only shareholders and bondholders but also other stakeholder groups including customers, suppliers and employees.

The UN Global Compact is one of the many tools that can help investors assess threats to sustainable business across the companies in which they invest.

The UN Global Compact – what is it?

Launched in 2000, the UN Global Compact is the world’s largest corporate sustainability initiative aimed at promoting corporate sustainability and encouraging innovative solutions and partnerships through 10 guiding principles.

The UN Global Compact supports companies in responsibly aligning their strategies and operations, in addition to helping them to advance broader societal change, through initiatives such as the UN Sustainable Development Goals.

It also sits alongside the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, which is another voluntary initiative to support sustainable business.

The UN Global Compact’s principle-based framework is broadly split into four key areas – human rights, labour, environment and anti-corruption – to help guide businesses in their activities in these areas. The framework is derived from numerous international declarations for companies and countries, such as the Universal Declaration of Human Rights and the Rio Declaration on Environment and Development.

The 10 Principles

Human Rights
Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights.
Principle 2: Businesses should make sure that they are not complicit in human rights abuses.

 

Labour Standards
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.
Principle 4: Businesses should uphold the elimination of all forms of forced and compulsory labour.
Principle 5: Businesses should support the effective abolition of child labour.
Principle 6: Businesses should uphold the elimination of discrimination in respect of employment and occupation.

 

Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges.
Principle 8: Businesses should undertake initiatives to promote greater environmental responsibility.
Principle 9: Businesses should encourage the development and diffusion of environmentally-friendly technologies.

 

Anti-corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Protection of human rights

Principles one and two relate to the importance of businesses to both support the protection of human rights and ensure that they are not complicit in human rights abuses.

A company that may be deemed to be in violation of the human rights principles could have revenue exposure to jurisdictions or authoritarian governments where human rights abuses are prevalent.

These companies are frequently flagged across emerging markets. For instance, an Indian port infrastructure company was flagged for being in violation of the principles given its financial ties to the Myanmar military.

However, a violation of the principles can be more explicit than this. For example, an Asian engineering and construction company was recently deemed to be non-compliant following a collapsed dam in Laos resulting in fatalities and the displacement of local communities.

Human rights is one of the main areas where investors can see which companies violate the UN Global Compact. It poses a higher risk across sectors such as aerospace and defence where businesses may be involved in the manufacture of controversial weapons.

The UN Global Compact is one of the many tools that can help investors assess threats to sustainable business across the companies in which they invest.

Labour best practice

Principles three, four, five and six are concerned with how sustainable businesses should uphold the effective recognition of the right to collective bargaining, eradicate all forms of forced (including child) labour and eliminate occupational discrimination.

Companies tend to fall foul of these principles less commonly. Following an investigation by Norway’s Council on Ethics, the forced labour risk has been particularly high in the Middle East over recent years. Migrant workers coming from India, Pakistan and Nepal face little hope of paying off the debt they owe to ‘recruitment agencies’ who have charged workers a fee for access to jobs in countries such as Qatar and the UAE.

As a result, there has recently been significant reputational damage to companies allegedly practicing forced labour in the Middle East.

Environmental responsibility

Principles seven, eight and nine provide guidance on how businesses should consider the negative impact of environmental damage, as well as the cost to a company’s reputation should a negative environmental event occur.

The principles also encourage investment in research and development around the long-term benefits of environmentally-friendly technologies.

Companies that are commonly deemed to be in violation of the environmental principles operate across the materials and utilities sectors.

For instance, an Indonesian aluminium business was found to be non-compliant given its interests in a mine that uses riverine tailings disposal (using rivers for mine waste disposal), a practice banned in many countries due to its severe environmental impacts.

Only four mines in the world engage in riverine tailings disposal, and in the case of this business, the mine in question has impacted one of the world’s most bio-diverse regions, Lorentz National Park, a UNESCO World Heritage Site.

Anti-corruption guidance

Principle 10 targets corruption in all forms, including extortion and bribery. The financial services sector is a particularly high-risk area of the market for exposure to corruption, specifically in relation to failings in anti-money laundering procedures.

Money laundering scandals have thrown the spotlight on the major Nordic banks in recent years, particularly those with exposure to the Baltic region, which has been beset by allegations of financial crime.

Integrating the principles into the real world

At Quilter Investors, we believe the UN Global Compact principles form a key part of how investors should assess sustainable business practices. By integrating the framework into our investment process, key risk areas are flagged, not just within businesses, but across sectors and regions as well.

We seek to understand how the managers we invest with consider and monitor the principles in line with our Responsible Investment policy. Where ESG integration or sustainability is at the core of a fund’s philosophy, we expect a commitment to the UN Global Compact principles.

At Quilter Investors, we have been using UN Global Compact insights from Sustainalytics, an ESG data provider, to flag companies that may be in violation of one or more of the 10 principles when screening third-party funds.

However, we are mindful that different ESG data providers may have differing assessments of corporate behaviour and different tolerances. Therefore, where we identify a fund that has caused us to have exposure to a company in breach of the UN Global Compact, we endeavour to engage with the manager to better understand the potential issue.

Through engagement with the manager, we may find the non-compliant company has resolved the issue and put in place adequate measures to avoid the violation from occurring again. However, we are prepared to challenge managers in cases where they have not engaged with companies in breach of the principles and to investigate ways in which future violations can be avoided.

These are the kinds of conversations we expect the managers we invest with to have regularly with companies to ensure that engagement is driving positive change and businesses can be put on a positive trajectory to improving corporate sustainability.

Marcus Cave

ESG Fund Research Analyst

Marcus is responsible for the analysis of collective investments for inclusion within multi-asset portfolios with a specific emphasis on the ESG characteristics of funds. He also carries out specific ESG research projects and develops investment ideas for implementation within the portfolios.

Marcus previously worked at PwC, in its ESG and investment management consulting team, providing investors with analysis of fund groups’ ESG integration as well as developing an ESG fund benchmarking service aimed at identifying relative risk exposures.