Case study by Union Investment (Florian Sommer, Janne Werning)
Signatory type: Investment Manager
Operating region: Germany
Assets under management: EUR 326 billion (as of March 2018)
Why engage with companies on the SDGs?
The UN Sustainable Development Goals (SDGs) enable us to align our sustainable investment strategies and our active ownership approach with a broader goal. Our motivation behind SDG engagement is to use our position as an investor to influence investee companies to positively contribute to the SDGs. Our objective is twofold: SDG products and services-related engagement, which target the transition towards sustainable products, and SDG corporate behaviour-related engagement, which targets the improvement of business conduct and processes. Importantly, we take into consideration the entire value chain of a company so that the positive impact of our engagement approach can be maximised. We firmly believe that sustainability can have a substantial impact on a company’s performance in the long term. Businesses with inadequate sustainability standards are significantly more susceptible to reputational, regulatory, event and litigation risks.
How we engage with companies in general
Our engagement process comprises voting at AGMs and maintaining a constructive dialogue with companies. To maximise impact, our strategy consists of three stages: pre-engagement, actual engagement and post-engagement. The entire process relies on our internal ESG systems for analysis, implementation, monitoring and documentation of engagement activities.
The pre-engagement stage and associated research lay the groundwork and identify all relevant issue areas for Union Investment’s engagement activities. In close cooperation with our sectoral analysts, Union Investment’s ESG team discusses relevant topics and/or weaknesses relating to the companies in question. External data providers are also brought in to help. Union Investment’s engagement approach is a combination of company dialogue and the active use of our voting rights at AGMs. Company dialogue focuses on speaking at AGMs, talking to companies directly and holding discussions at platforms provided by external institutions. The engagement process has a long time horizon, with results sometimes only becoming apparent after many months or even years. Our activities and their results are evaluated at regular intervals.
When deciding which SDG and investee companies to prioritise, we consider a wide range of factors, such as the relevant holdings in our funds, SDG risks and opportunities, and the general extent of our influence. The appropriate SDG for our engagement projects can be identified from specific incidents of misconduct on the part of the company, as well as from the findings of our own pre-engagement analyses.
Example of an SDG engagement
Targets of focus: Strategy for transitioning to electric vehicles and for dealing with human rights risks in the cobalt supply chain
Companies targeted: German automobile companies, specifically Daimler
Start of engagement: 2015
The issue and intended impact:
With our product-based engagement, we are targeting SDG 9 (industry, innovation and infrastructure), as well as SDG 13 (climate action). We asked and encouraged Daimler to improve its fleet’s CO2 emission efficiency by placing a stronger focus on the development and introduction of electric vehicles (EVs) to facilitate the transition to EVs. Currently, EVs account for less than 1 per cent of the company’s total revenue.
As regards corporate processes and behaviour-related engagement, we have focused on SDG 8 (decent work and economic growth), as well as SDG 12 (responsible consumption and production). We have urged Daimler to focus on the risks associated with cobalt sourcing for battery materials. Cobalt is an important component in the development of battery technology, and is used in electric vehicle batteries as a key cathode material. Whilst it is not a conflict mineral per se, cobalt is most often sourced from the Democratic Republic of Congo, where serious and systemic human rights violations are commonplace, including child labour, exposure to health hazards from high levels of toxic metals, and a lack of the most basic safety equipment inside and outside the mines.
Moreover, demand for the mineral is expected to continue its strong growth in the near future. We are convinced that human rights violations in the cobalt supply chain can potentially cause severe brand damage, create a negative impact on operations and increase the probability of strikes and disruptions. Our aim is therefore to reduce the reputational, operational and regulatory risks for our investee companies and encourage them to focus on more sustainable products.
Measuring the impact and consequences of the engagement:
Given our significant holdings in Daimler, we have engaged in an intensive and steady dialogue with the company over the past three years on the issues in question. Both the sustainability and the investor relations departments have been involved in this process. In the final stages of our dialogue, we also had engagements at the CFO level. The process included conference calls, in-person meetings and speeches at AGMs. During the period of the dialogue, the company faced various critical NGO and media reports on the issue of human rights risks in its supply chain.
As a first success in terms of achieving SDGs 9 and 13, Daimler set a target to increase the share of total revenue accounted for by EVs to 25 per cent by 2025. Having criticised the CO2 strategy previously at Daimler AGMs, thereby gaining broad public attention, we also initiated a dialogue to address the issue of human rights risks in the cobalt supply chain three years ago. We publicly criticised the company for the fact that the UN Guiding Principles on Business and Human Rights (UNGP) were still not firmly anchored in day-to-day business practices, and reiterated our view that an urgent adaptation of its internal ESG management processes was needed.
In general, we employ the tactic of making public speeches at AGMs as a last resort, preferring to address issues with the supervisory board and executive committee. In this case, however, it proved to be a success, since in the aftermath of our last speech, Daimler publicly committed to becoming more transparent regarding its cobalt supply chain due to persistent human rights concerns. Furthermore, it announced that it will integrate into its business practices the UNGP and investigate its cobalt supply chain from its factory all the way down to the mine, including launching a human rights due diligence system with integrated on-site audits.
We believe this to be a first but highly positive step towards making progress in SDGs 8 and 12. This holds true for SDGs 9 and 13 as well, with a focus on sales targets for electric vehicles.
 See the PRI’s Digging deeper: human rights and the extractives sector report