ESG investment specialist takes more direct approach to tackling responsibility

We believe investors can play a role in combatting both climate change and modern slavery through a number of means, such as engagements with corporates as well as proxy voting. Ausbil has a preference to engage constructively with companies. The importance of such engagements comes down to the protection of invested capital. As flagged in our investor statement on slavery in 2016, the investor relevance of an issue such as modern slavery, and other human rights issues, relate to earnings sustainability, brand risk, supply chain disruption and increased regulatory focus.

Simply put, a business model or a supply chain that relies on underpaid workers, weak regulation or illegal activities like slavery will not produce sustainable earnings in the long term. Brands are a key asset, particularly for consumer-facing companies. Brand damage can be costly and time-consuming to repair, in some case it can be terminal for a business model. Ausbil's engagements and advocacy work on modern slavery relates to both engagement with Government, corporates and at industry level. Corporate engagement focuses on encouraging companies to adopt what we believe is best practice on labour rights and other human rights risk management in the supply chain.

Ausbil was the investor voice on a panel of experts assisting Government in writing the guidance for the Modern Slavery Act (MSA) in 2018-19. This new panel of experts assisting Government in the implementation of the MSA is a continuation of that work. We believe it is important to have an investor voice on the panel for a number of reasons. First, the Modern Slavery Act (MSA) applies to investors as well as companies. Second, investors can have a role to play through engagements with corporates on ensuring they are following the spirit and law of the MSA. Third, Ausbil has built up expertise in the area of human rights in supply chains through years of engagement and primary research, including factory visits in South-East Asia where we have spoken to a wide range of stakeholders, such as workers, unions, NGOs and leading international retailers to better understand the complexities of supply chains.

We hope to achieve implementation of the MSA in a way that truly combats modern slavery in an effective way, rather than simply as a compliance exercise and reporting for reporting's sake.

Ausbil has developed a proprietary human rights risk assessment tool that draws on a multitude of resources, such as the Global Slavery Index, human rights indices. and more, which can help with analysing country-specific risk. However, in addition to global databanks on slavery in supply chains, investors need to examine the industry dynamics themselves, such as the reliance on migrant workers and other vulnerable groups, the impact of price pressure and length of supply chains. For example, oligopolistic industries where a small number of players put downward pressure on pricing and lead times often sees subcontracting, which is where some of the worst supply chain issues are found.

While the risk assessment is important for investors, Ausbil is of the opinion that it is through effective engagement that investors can truly move the dial and contribute positively to combatting modern slavery and other human rights issues. The risk assessment assists investors, such as ourselves, to prioritise those engagements.

Ausbil's proprietary human rights risk assessment tool also assesses and scores the maturity of a company's risk management on human rights and modern slavery risks in their operations and supply chains. This is a dynamic tool that is regularly updated after company engagements, and in response to company disclosure.

The outputs from this risk assessment tool, assessment of both the risk and the risk management, are components of our broader proprietary Environmental, Social and Governance (ESG) analysis which is integrated in Ausbil's investment process.

I have been involved in responsible investments since 2007. I started on the buy-side as an analyst working for a Nordic investment bank covering Scandinavian equities. ESG issues have always interested me on a personal basis and, as a trained financial analyst, I have always believed that companies with strong ESG profiles perform better over time. In the area of human rights, I believe there are no long-term trade-offs between strong human rights risk management and strong financial returns. Rather, it is the opposite.

Human rights is one of many topics that interests me personally and having visited factories in places like China, Bangladesh, Cambodia and Thailand, that supply global brands, I want to utilise that experience to assist companies to improve their supply chains and ultimately build more sustainable supply chains, which creates a win-win situation for companies, workers in the supply chains and investors alike.

To successfully pursue a career in this field, first I believe it is important to understand investments and how corporates operate. That helps with effective engagement in a constructive and non-confrontational way.

Second, I believe it is important to think of ESG in a way that is aligned with your investment philosophy or else you run the risk that ESG will be something separate or just an overlay. Alignment with an investment philosophy ensures proper ESG integration.

Third, I believe you need to have a passion for ESG topics and you need to get your hands dirty with primary research. Investment analysis and decisions based on company disclosure on ESG alone does not suffice. Real ESG analysts must go beyond that to achieve insights that are genuinely meaningful from an investor perspective.