15 JUN.

2015

Temas , Isabelle Cabie , ISR

Is social performance the final frontier of competitiveness?

By Isabelle Cabie, Global Head of SRI at Candriam

Ethical or sustainable investment at first glance always seemed to go hand-in-hand with environment and corporate governance. Though present, the social responsibility aspect was underdeveloped at best. This situation changed dramatically with the Rana Plaza collapse in Bangladesh. This disaster served as a catalyst for the widespread recognition of the extremely harmful impact that a negligent attitude towards stakeholders on the production chain could have for a company.

There are three pillars to Socially Responsible Investment (SRI): environment, social responsibility and corporate governance. The first and third pillars are clearly defined and meet very current concerns such as global warming and defence of shareholder rights, and as such have been relatively well analysed. The same cannot be said for the social responsibility pillar, which is much more complex. The issues raised by social responsibility are generally more difficult to resolve and demand more time. You can't just apply a particle filter in order to stop polluting the “social” environment.

And yet, as demonstrated with the Rana Plaza collapse, and even before then, other incidents such as those that placed Taiwanese electronics contract manufacturing company Foxconn in the hot seat due to its unsafe working environment and poor labour conditions, can have serious repercussions on a company's reputation and, in the longer term, on its competitiveness and profitability. In both cases, the impact was long-lasting.

Take Foxconn for example. The first reports on problematic working conditions may have come out back in 2010, but the company is still rocked by the scandal. Just last September, its Brazilian factory was hit with a strike over working conditions. While the Group's 2014 earnings were excellent, some analysts are more reserved when it comes to its future: though Foxconn has long been the exclusive assembler of the iPhone and iPad, it has to share this market with other sub-contractors now that Apple has expanded its list of service providers.

How can all these factors be incorporated into a responsible investment approach? The United Nations Global Compact, whose primary objective is to promote the social legitimacy of companies and markets, is a good place to start. Companies that sign this compact undertake to align their operations and strategies with the ten universally accepted principles affecting human rights, labour, the environment and anti-corruption.

It is, however, when we take a macro and micro approach at the sector level that we can accurately determine to what extent each company manages its relations with stakeholders and takes their interests into account. The sector approach is critical when the objective is to map out an SRI universe consisting of Best-in-Class companies. After all, a consumer goods manufacturer tends to use an entire chain of sub-contractors and has a much different "social" risk profile than a bank, whose social risk is mostly internal. Sectors are also very important from a macro standpoint: a mining company is only somewhat exposed to social risk (for example related to the potential need to move people out of the area when a new mining site is opened), whereas a food producer has to wrestle with public health concerns such as obesity. Analysis of stakeholder relations primarily focuses on the micro level, however, and more specifically on relations with employees and suppliers. In addition to indicators such as staff turnover, absenteeism, number of accidents and number of days on strike, it is important to make sure basic rights are respected (abolition of child labour, freedom of association, etc.) and are, where applicable, codified in a charter.

Leading by example

In a recent study on the hospitality industry, we asked ourselves how the current model aimed at reducing capital expenditures (development of franchises, property disposals, etc.) might affect stakeholder relations, and more specifically employee relations. The development of the franchise system has been criticised in that it can be seen as a way for hotel groups to shirk their responsibilities to their indirect employees. As socially responsible investors, we concluded that by underestimating the importance of employee working conditions, hotel chains are exposing themselves to reputational risk and thus putting their economic value at risk as well. We would be very much in favour of any initiative that would allow better control over compliance with a hotel chain's working conditions. However, given the intense competition prevailing in this market as well as the strong legal barriers (constraints vary depending on the country), we think the only hope for improvement is a collective industry-wide effort.

This study, which we conducted during our most recent SRI analysis of the hospitality and catering industry, is a good example of our approach. Thanks to our dialogue with various companies in the sector, we were able to improve our analysis criteria and delve into the issue of sustainable relations with suppliers and similar stakeholders, which is an integral part of our micro evaluation of a company's stakeholder relations management. Through our discussions with these companies and their stakeholders, we were also able to show how important the potential repercussions of a capex reduction strategy were to SRI investors.

For another example of our approach, let's take the analysis of a company such as Sodexo, which defines itself as the "world leader in quality of life services." From a macro analysis standpoint, the Group gets high markets for its presence in emerging economies and service voucher business, which helps reduce the informal - or grey - economy. Furthermore, in its "Healthcare & Seniors" activities, the Group has established a strong position when it comes to taking on the global "Healthcare & Well-Being" challenge.

On the micro front, it is also very well-rated relative to its competitors, thanks in large part to its hiring programmes targeting young people and the social media. It also offers attractive career development opportunities. Overall, its human resources management has secured the highest employee retention rate in the sector. What's more, in terms of corporate social responsibility, the group applies a code of conduct to its suppliers and seeks to establish sustainable practices with them.

What are the current trends in CSR?

More and more companies are focusing on corporate social responsibility and are more open to dialogue on this issue. In the case of Rana Plaza, for example, a fund was set up to compensate victims and regularly published audits of workplace safety conditions were implemented. As a general rule, the number of collaboration initiatives is on the rise.
Meanwhile, investors are building their influence to encourage companies to adopt better practices by creating investor coalitions, which we regularly take part in as committed SRI players. Finally, governments are also recognising the importance of social responsibility, as demonstrated by the European Parliament's recent discussion on the obligation to publish ore sources in an effort to wipe out corruption and weapons sales.
And, last but not least, in practice the serious application of ESG criteria - even where the "S" calls for avoiding certain very large market caps - does not hurt investment performance in the least. Our SRI vehicles are clear proof of that!