Environmental, Social and Governance (ESG) Wrap

Welcome again to the Environmental, Social and Governance (ESG) Wrap, where our team share the latest ESG issues in the media and their implications on investment.This month the key ESG issues making headlines are:

Retail: Are Australian retailers ready for slavery laws?
Oil & Gas: Cities across the US sue fossil fuel companies for contributions to climate change
Grounds for ditching the daily coffee? (Yes, we did just use a pun on words)
‘Sin taxes’ to fight climate change and health risks

Retail: Are Australian retailers ready for slavery laws?

In December, the joint federal parliament committee implored the government to introduce a Modern Slavery Act which would include mandatory supply chain reporting for companies with annual revenue of more than $50 million. After two years the government would start to name and shame companies that failed to report.
Over 40 million people around the world are today estimated to be victims of modern slavery, including forced labour, bonded labour, and human trafficking.

In simple terms please…

This proposed Act would send a clear message to companies that eliminating modern slavery, enhancing transparency in supply chains and promoting good corporate practice is a priority.
These proposed new laws borrow heavily from Britain’s Modern Slavery Act introduced in 2015 which has been criticised because there are no penalties for companies that fail to report. However, just recently a woman and man who forced children trafficked from Vietnam to work in nail bars in the UK have been jailed under the legislation – The first successful prosecution since the laws were brought in.

So, what does that mean?

Our hope is that the act mandates standardised and simplified reporting in order to level the playing field for businesses in scope. It would ensure businesses were not using worker abuse and slavery to undercut competitors on price.
Australia’s Modern Slavery Act would also put company director’s and executive’s reputation, as well as that of their company, at stake and create more senior level accountability.
Some of Australia’s major retailers seem completely unprepared for the new laws so they better get cracking!

Oil & Gas: Cities across the US sue fossil fuel companies for contributions to climate change

The Mayor of NYC, Bill de Blasio, recently announced that the city’s five public pension funds would divest about $5 billion from companies involved in the fossil fuel business. The funds would also pursue a lawsuit against five major oil companies BP, Chevron, ConocoPhillips, Exxon Mobil, and Royal Dutch, seeking to collect billions of dollars in damages to pay for efforts to cope with the effects of climate change.
Late last year we saw a similar announcement from the county of Santa Cruz.

Can you break that down for me?

The filings aimed to hold accountable oil, gas, and coal companies not just for damages associated with sea level rise, but also for changes to the hydrologic cycle caused by greenhouse gas pollution from the companies’ products, including more frequent and severe wildfires, drought, and extreme precipitation events.
A statement by the funds said the current and future financial impact of climate change for New York included the cost of building coastal protections, upgrading water and sewer infrastructure and dealing with heat mitigation, as well financing public health campaigns to help protect residents from the effects of extreme heat.
The city lawsuit says that the oil companies were aware for years that burning fossil fuels caused climate change but hid the conclusions and intentionally misled the public to protect their profits.

So, why should I care?

A growing number of communities are standing up to polluting companies as they face mounting financial, environmental, and public health costs tied to global warming.
The huge trend in divestment from fossil fuel companies mirrors what happened with tobacco companies. While it is a step in the right direction, a lawsuit could take years to reach a successful resolution.
The results, however, could have massive implications for companies all over the world and could set a precedent for Australian investors to hold companies accountable for their contribution to pollution and ultimately climate change.

Grounds for ditching the daily coffee? (Yes, we did just use a pun on words)

The Environmental Audit Committee in the UK published a report recommending the government introduce a 25p “latte levy” to consumers who use a disposable coffee cup. The levy would be used to fund recycling.
The recommendation also asked the government to set a target to recycle all coffee cups by 2023, or ban them altogether.

Tell me more!

Around 2.5 billion plastic-lined paper cups are used in Britain each year, but less than one in 400 are recycled.
Coffee factories in Kenya have also hit the headlines recently for their environmental pollution. These factories are at risk of being closed down or slapped with lawsuits because of their water pollution and dirty waste management techniques.

Wow, so do I have to stop drinking coffee?

The recently introduced plastic bag charge in the UK (and more recently in many states around Australia) resulted in an over 83% reduction in use within one year. If similar success were seen with coffee cups, that would reduce the UK’s 2.5 billion cups to just 425 million: still a huge reduction in waste.
Another thing we have to think about is who, along the supply chain, would actually absorb this cost? Should it be café owners or consumers? There is also the risk that these costs result in lower wages for baristas or even further down the supply chain, to bean suppliers in developing countries.
Also, if the coffee industry has to pay for their waste, shouldn’t fast food outlets and other food and beverage retailers as well?
Would you be more inclined to skip your morning coffee run for a coffee in the office kitchen? But then there is the environmental impact of the coffee pod… I won’t get started on that!

‘Sin taxes‘ to fight climate change and health risks

There’s a good chance that meat will be taxed in the next five to ten years in an effort to fight global challenges such as climate change, deforestation, antibiotic resistance and obesity.
A report produced by the investor network, Farm Animal Investment Risk and Return (FAIRR), managing more than $4 trillion of assets, argues that meat is very likely to follow the same path as tobacco, carbon and sugar towards a tax in an effort to cut consumption.
Meat taxes are already on the agenda in Denmark, Sweden and Germany.

Please explain this to me…

Population growth has driven up global meat consumption by over 500 per cent between 1992 and 2016, a trajectory that is likely to continue in the future, especially in emerging markets. This massive growth has been linked to a range of environmental, health and social problems. For instance, meat consumption is now producing greenhouse gas emissions that exceed those from the transport sector. It is also connected to global food insecurity, reduced water availability, soil degradation and deforestation.
In terms of its health effects, meat consumption is linked to an increasing incidence of global obesity and associated type 2 diabetes and cancer. It is also contributing to rising levels of antibiotic resistance.

So, how will this affect the companies I invest in?

While meat taxation is not a short-term risk for investors, large pension funds and asset managers should be thinking about these issues.
We suspect a meat tax is probably a long way off but if meat does go the same way as some of the other nasties, then the first step will be some form of “eco-labelling”.
The report does highlight the growing demand for protein as living standards increase around the world. There are no easy solutions and for those thinking of going vegetarian and relying on soy – the increase in soy farming, along with cattle grazing, in Brazil has been one of the main causes for the deforestation of the Amazon.
You might have to think twice about ordering that double beef burger with bacon this weekend…

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Original Source AMP Capital Ltd on 06 February 2018