Our team conducted 209 conversations with companies last year alone, cast 216 votes at general meetings and sent out several hundred inquiries and requests. All with the aim of mitigating environmental social governance (ESG) risks before they arise and taking advantage of opportunities that are currently not sufficiently addressed. Since our first sustainable fund launched back in 1989, more and more corporate debates have come to the attention of ESG experts.
Two types of conversations
These discussions can be conducted in two ways: reactively, to discuss specific incidents, and proactively, to improve risks and opportunities. It is in the interest of companies to deal with shareholders openly and take their feedback into account. Last but not least, the EU tax law, the Green Deal in the wake of Covid-19, is helping to increase transparency.
The intensity of the commitment is usually based on the size of the equity investments in the companies and strategically important topics. As a major shareholder, we often work directly with the companies; as a small shareholder, this is done primarily through cooperation with investors.
Key ESG topics
This year, we are focusing on nine ESG key topics: Climate change, water management, human rights, gender/diversity, deforestation and land use, oceans, biodiversity, supply chains in emerging markets, product safety & quality. As part of the focus on supply chains in emerging markets, a framework for cooperation with companies in the textile industry was developed. There are numerous proposals that are being discussed at the country level, such as the current draft of the Supply Chain Act in Germany. There are similar proposals in Great Britain. We have been increasingly addressing this particular issue since 2017, with the ESG team based on international standards and norms.
In the first quarter, our team partnered with Nike to learn how the company is addressing risks and opportunities in its operations. Although the company has a good overall ESG score, it faces some risks within its supply chain in relation to raw material sourcing and human rights issues. This is not a specific incident or controversy, but rather a proactive engagement with a company operating in a sector that is highly exposed to human rights and labor issues within its supply chain. In the meetings earlier this year, living wages and issues of working practices were discussed. We encouraged the company to define concrete goals and to exert its influence through sector cooperation.
Application of new technologies
Nike is one of the largest textile companies in the world and has the ability to influence standards in the industry. It is currently pursuing ideas on how to design more environmentally friendly products and how to establish an approach focusing on circular economy. In particular, new technologies should help to produce more sustainable textiles and shoes. During the Covid 19 pandemic, Nike is proactively engaged in supporting local communities in their supply chain. A subsequent discussion will take place later this year, where progress in key areas will be reviewed and analyzed. Furthermore, it will be explored how Nike plans to integrate the UN goals for sustainable development into its strategy.
Demand for sustainability
Such an exemplary engagement offers portfolio managers a larger platform of information for company analyses and investment decisions. Understanding how companies deal with significant ESG risks and opportunities can influence share selection and portfolio construction. Often, portfolio managers engage in corporate debates. In addition, they receive comprehensive protocols and reports. ESG and carbon data is integrated into the portfolio management system and is available to all our investment professionals. It is used to assess the level of risk with regard to companies, create financial models and make investment decisions.
Maintaining dialog with companies is resource-intensive, but also effective, so it will continue to be a high priority. After all, sustainability is now increasingly anchored in institutional, but also increasingly in private investments.