Environmental, Social and Governance (ESG) Wrap 12 April 2018

Welcome to the Environmental, Social and Governance (ESG) Wrap, where our team share the latest ESG issues in the media and their implications on investment.

Francise model in the spotlight
Social Media: Should we trust it?
Proportion of women in NZ senior leadership roles hits rock bottom
Chemicals: Ban on bee killer pesticide

Franchise model in the spotlight

The Australian Competition and Consumer Commission (ACCC) is focussing its attention on the franchising sector, including the biggest players Retail Food Group, Domino’s Pizza, 7-Eleven and Caltex, after receiving 600 franchising related complaints last year.
The attention on franchising comes as parliament prepares for a inquiry into the $170 billion industry. The inquiry will focus on the power imbalance between the Franchisor and Franchisees and scrutinise the fairness of this relationship.
7-Eleven is welcoming the parliamentary inquiry. It is calling for industry codes to be amended to give “franchisors the right to terminate a franchise agreement in the case of serious non-compliance with workplace laws, such as deliberate wage underpayment.”
Former Caltex franchise owners gathered recently in Sydney to protest the termination of their businesses, which they claim was unfair conduct by the Franchisor. Franchisees alleged that their contracts were being terminated without any notice and required to pay thousands of dollars for Caltex to undertake an audit of their businesses. Caltex announced that it would shed all franchises by 2020, causing further frustration and anger.
The Caltex contract allows the Franchisor to seize a Franchisee business without paying the owner anything more than the current stock purchased, if it finds a franchisee has breached their obligations.

So what?

The franchise model is facing a mountain of challenges and will continue to, at least in the short-term. Fundamental to the challenge is the power of the franchisor to charge for costs and set prices in a way that it extracts the majority of the economic rent. This is forcing many franchisees to cut costs, and for some leading to the underpayment of employees.
There are doubts about the sustainability of Retail Food Group given the market’s focus on the franchise model and other trends impacting their business.
Caltex appears to be responding to franchise issues by taking responsibility and bringing service stations internal, where they have greater control. Unfortunately, this approach is allowing the Franchisor to use its power over franchisees to reimburse as little as possible and unfairly penalise those that may have had none or only minor non-compliance with the franchise agreement. This action appears to be disproportionate to the seriousness of the issues for some franchisees.
For some time, we have been looking closely at the financial conflicts and power imbalance between franchisee and franchisor, as well as levels of governance in the franchise model. As previously stated, examples of unethical behaviour covered in the news and the unresolved issues may continue to weigh on the share price of some franchise-model businesses.

Social Media: Should we trust it?

#ToxicTwitter…

Scotland’s three most well-known female politicians are welcoming an Amnesty International campaign, #ToxicTwitter which claims Twitter has become toxic for women and the company should clamp down on online abuse.
The company said it “cannot delete hatred and prejudice from society” and explained it had made more than 30 changes to its platform over the last 16 months to improve safety, including ramping up the action it takes on abusive tweets.

#DeleteFacebook…

It has been revealed that political analytics firm Cambridge Analytica paid to acquire the private data of more than 90 million Facebook users without their consent to support Donald Trump’s 2016 presidential election campaign.
The findings will be another blow to Facebook’s reputation, which is already under the spotlight for Russia’s use of the social media platform to sway American voters with “fake news” posts during the 2016 election.
Yes, it is shocking that Cambridge Analytica violated Facebook’s rules for political ends, but the far more troubling issue is that Facebook failed to adequately respond or inform users.
The company has faced a number of controversies over the last year and time spent on Facebook decreased by roughly 50 million hours every day in late 2017.

#DitchYoutube…

YouTube announced it would ban videos showing the sale or assembly of guns and gun accessories, as tech titans face growing pressure to limit the promotion of firearms.
The company has been criticised in the past for allowing certain types of videos on its site, including bombs and other controversial weapons. As well as for putting marketing from high-profile advertisers, like the Government and Marks & Spencer, next to extremist videos and other illicit content.
YouTube depends on algorithms to analyse and regulate its content and will use machine learning assistance to “quickly and efficiently remove content that violates the guidelines”.
The company also committed to publicly disclosing regular reports about the aggregate data concerning the flags it receives, and the actions it takes to remove videos and comments.

So what?

To be honest, we are not surprised. This is exactly how Facebook works and generates its billions in profits each year. The platform gathers data to profile people, uses this data to target people for advertising and then allows third parties to use the data to target users as well.
There has been a lot of attention on large tech businesses and whether these companies are fair trustees of the massive amounts of user data they collect. Washington and governments around the world are trying to decide how to regulate these giants because currently they are far too powerful.
The Australian Competition and Consumer Commission (ACCC) is also examining the impact of search engines and social media on competition in the media and advertising sector. Maybe the ACCC will also look into the impact of Facebook on local political advertising.
Do companies have a responsibility to protect their users from abuse, from a breach of their private data, from controversial topics? These are the questions faced by the tech giants that we use and interact with every day.
Many users seem to think that providing their private data, which can then be monetised, is a fair exchange for the free service of Facebook, Twitter and YouTube. With all the hype around cyber security and the lack of trust in these big service providers, this attitude may be changing.
People seem to be increasingly enraged and dissatisfied with these companies. The main concern is that more and more people will turn against these platforms, which will adversely impact the revenue they can bring in from advertising fees.
With all the publicity and anxiety surrounding these big tech giants, the government will have to do something to reign in their power.
How much influence do these companies have in your life?

Proportion of women in NZ senior leadership roles hits rock bottom

Globally, 75% of businesses surveyed this year now have at least one woman on their senior management team (66% in 2017). Unfortunately, the proportion of the team that is female has slipped from 25% to 24%, according to the Grant Thornton International’s annual Women in Business report.
In New Zealand this figure reached a record low of 18% since the report began in 2004 (31%), compared to 20% in 2017. There was also a significant jump in the number of businesses with no women in senior management roles at 56%, compared to 37% last year.
In Japan, women hold only 5% of senior management roles.
Evidence shows that at 30% women are no longer viewed as a minority and they can start to make a meaningful impact on decision making.
The percentage of businesses that have implemented gender diversity policies has also increased.

So what?

Unfortunately, policy alone does not create real progress. Companies achieving real change are those where policies have been created by leaders who genuinely believe in the advantages of diversity. This is about behavioural change rather than a check the box exercise.
Some policies, for example a non-discrimination policy, are simple to establish but much more difficult to measure, therefore, businesses can claim they are doing the right things, even if it isn’t for the right reason.
What we need are senior leaders who demonstrate a commitment to gender diversity and champion the change.
One of the things recommended by Grant Thornton and that we at AMP Capital have encouraged for some time now is to link progress to pay. What is measured is managed, so business leaders should make diversity and inclusion goals part of the leadership team’s compensation packages to encourage change.
Unfortunately, the slow pace of change on gender diversity means quotas may have to be looked at.

Chemicals: Ban on bee killer pesticide likely

The European Food Standards Agency (EFSA) recently released a report which revealed the widespread use of a controversial pesticide used on crops is harmful and potentially deadly for the bee population.
The EU agency reviewed over 1,500 previous studies and collected supplementary data. The report confirmed that the three types of neonicotinoids can cause memory damage in bees and a reduction in queen bee numbers.
The European Commission restricted the use of neonicotinoids in 2013, but the recent study is likely to lead to a complete ban on the toxin. EFSA will direct its recommendations to the European Commission and EU countries to make a judgement.

So what?

You may ask why should I care about bees? But bees are essential for the pollination of many crops, with honeybees pollinating $12.4 billion worth of directly dependent crops and $6.8 billion worth of indirectly dependent crops in 2010 just in the US alone.
Pollination is a freebie provided by nature. If the bee population is significantly impacted, artificial pollination mechanisms may be required, significantly impacting the cost and availability of many fruit and vegetables we take for granted.
In Australia, this insecticide is still widely used and sold by Nufarm both in Australia and other countries.

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Original Source AMP Capital Ltd on 12 April 2018