Boards can make the world a better place

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By Carola van Lamoen – Head Active Ownership at Robeco

 

 

 

In a global effort to ensure ‘the future we want’, the United Nations (UN) released the sustainable development goals (SDGs) in 2015, explicitly inviting the private sector to contribute as well. Since then, the private sector has embraced this invitation, setting goals and making concrete plans. For investors, active ownership is an important way to encourage companies to follow through.

The agenda for sustainable development was adopted by 193 countries, who agreed to contribute to the realisation of 17 SDGs by 2030. The goals range from ensuring the availability of water and sanitation for all, ensuring food security and achieving gender equality, to providing access to affordable and sustainable energy within 15 years.

Embracing the sustainable development goals

To achieve these goals, the UN explicitly invites the private sector to make a measurable contribution. The private sector can back many SDGs directly. A good example is SDG Goal 9: industry, innovation and infrastructure. It can be achieved by investing in power generation, renewable energy, transport, water and sanitation projects. A PwC study estimates that SDG Goal 9, SDG Goal 8: decent work and economic growth and SDG Goal 13: climate action are the most actionable goals for the private sector to tackle.[1]

A win-win for business

By contributing to the goals, companies can have a positive impact on society and the environment. But it doesn’t stop there. It can also be a business opportunity, providing companies with a future competitive advantage by being a source of innovation, process improvements and operational efficiencies. Companies that embed SDGs into their business strategy will be more likely to align this with governmental policies and regulations, thus avoiding the risk of losing their licence to operate or encountering high costs resulting from structural change.

We encourage company boards to identify the most material SDG(s) for their business and identify the associated risks and opportunities. By linking the strategic vision to desired impact through material SDGs, the board can develop measurable targets to enhance both the financial and non-financial performance of the company.

In this way, we as asset managers can help companies in which we invest to contribute to the SDGs in a way that is beneficial to the bottom line as well. In doing so, we have various tools at our disposal, such as impact investing to make a measurable social or environmental impact, the integration of ESG (environmental, social and governance) information into the investment decision-making process, exclusion of companies or sectors and active ownership.

As a sustainable asset manager, Robeco uses all these tools, although we tend to focus less on exclusion. We have a primary duty to obtain a good performance for our clients and want to achieve this in a sustainable way. Consequently, we prefer to have a constructive dialogue with companies to encourage them to improve their sustainability performance. Excluding companies means we can no longer influence them.

Active ownership: a powerful tool

In our view, active ownership is a powerful and direct way for asset managers to make a constructive contribution to the SDGs. We use our influence as an investor to encourage companies to contribute to the realisation of these goals. By actively engaging with companies on the most material sustainability issues, we enhance their competitiveness and profitability and hence the investment performance.

The two main ways to exercise active ownership are engaging in an active, structured dialogue with companies and voting at shareholders’ meetings. We will give an example of both.

Engagement: constructive dialogue between company and investor

We engage in a constructive dialogue with companies, encouraging them to take action on the SDGs.

For our engagement theme ‘ESG risks and opportunities in the biopharmaceutical industry’ we have stimulated companies to report on their contribution to SDG Goal 3: good health and well-being. Financially, this is material since the biopharmaceutical industry is exposed to risks such as lack of societal trust and vulnerability to negative media exposure. Alternatively, pharma companies derive a competitive advantage from consistent investment in R&D that is aimed at the development of innovative drugs, which in turn contribute to SDG 3. We see that the first companies have started to include concrete showcases in their sustainability reports and have created internal working groups to find ways to report quantitative impact.

Aligning voting activities with the SDGs

In recent years, the number of shareholder proposals on SDG-related topics filed at companies’ shareholder meetings has risen substantially, gaining ever greater levels of investor support. An important topic is SDG Goal 5: gender equality. Companies should be prepared for this.

“An increasing amount of studies point to broader diversity, including gender diversity, as not only a societal issue, but also a financially material issue for investor”

An increasing amount of studies point to broader diversity, including gender diversity, as not only a societal issue, but also a financially material issue for investors to consider. For instance, Robeco’s own studies[2] indicate that companies with more diverse boards are better positioned to outperform, while research by Morgan Stanley[3] found that the stocks of American companies with the highest scores on diversity beat those that scored the lowest by 2.3 per cent on an annualised monthly basis over the last five years. Earlier, McKinsey & Company[4] had found that companies with highly diverse executive teams boasted higher returns on equity, earnings performance and stock price growth. We therefore believe that assessing diversity in the board and total workforce is important.

This is an example of how the SDG Goal 5: gender equality relates to a financially material sustainability issue and we will therefore support these proposals, unless the company already offers disclosure on the issue, such as diversity policies and pay data demonstrating that no gender gap exists. It is important for company boards to develop diversity policies, not only at board level, but for the broader workforce as well and to increase disclosure on this topic.

Conclusion

In the two years since the presentation of the SDGs, we have seen multiple publications by companies on how they expect to contribute to the SDGs. A common language is being developed that helps us as investors to compare companies and select the winners in the market. Still, progress can be made on the relevance and accuracy of disclosures and the measurement of impact.

The financial industry has a special role to play, having the ability to direct capital towards companies and sectors that offer the largest opportunities to contribute to the SDGs. The SDGs set clear goals for 2030 and as an active investor with a long-term focus, we are particularly interested in the strategy companies are developing for their most material issues.

A growing number of investors expect company boards to show leadership in the realisation of SDGs. We expect the SDGs will become a standard part of the dialogue between boards and shareholders soon. It is therefore crucial for board members to discuss how they wish to contribute.

 

About the Author:

Carola van Lamoen is Head Active Ownership at Robeco. In this capacity she is responsible for Robeco’s global engagement and voting activities. The Active Ownership department enters into constructive dialog on environmental, social and corporate governance (ESG) issues with the companies in which Robeco and its clients invest. The primary aim of this dialogue is to increase long-term shareholder value. The department votes at 5,000 shareholder meetings per year.

Carola is co-chair of the Board Governance Committee of the International Corporate Governance Network (ICGN) and chair of the Investment Committee of Eumedion, the Dutch corporate governance platform. She has been active in the field of corporate governance since 2001 and joined Robeco in 2007. Previously, Carola worked for the Ministry of Finance as governance policy advisor. She implemented the Dutch Corporate Governance Code in state-owned companies. Carola holds a Master’s degree in Business Administration from the Erasmus University of Rotterdam

Footnotes:

1.PwC (2016). Make It Your Business: Engaging With The Sustainable Development Goals.

2.Robeco (2015). Do Companies With Diversified Boards Have Higher Stock Returns?.

3.Morgan Stanley (2016). Putting Gender Diversity To Work: Better Fundamentals, Less Volatility.

4.McKinsey (2007). Women Matter: Gender Diversity, A Corporate Performance Driver.