What is Newton’s approach to assessing supply chains?
Supply-chain issues are among a panoply of risks that are unlikely to manifest themselves from an interrogation of a set of financial statements. However, we think they are critical determinants in a company’s successful commercial strategy and to achieve the common goals of stakeholders, including shareholders. By integrating our environmental, social and governance (ESG) research into our investment process, we think we improve our chances of arriving at the best overall assessment of the ability of a particular opportunity to succeed for our clients.
Supply-chain issues, including child labour and forced labour (for example with the Uyghur), basic human rights abuses and the poor management of environmental risks, have the ability to tarnish important brand value, as well as having the potential to cause regulatory issues. We see good behaviour along the supply chain as being consistent with sustainable and ultimately good business.
Looking at this on an issue-driven basis is necessary, and we have policies and thinking established around each of these headline risks. However, consistent with our “bottom-up” approach to selecting stocks, our responsible investment team work with our global industry analysts and portfolio managers to identify the areas of concern in a particular business case, and work with the company where we feel that improvement is desirable.
How does this work in practice?
It’s important to recognise that this is an evolving topic, that not all risks are completely resolvable, and that the path to getting better can be a long one.
We think that it is also important to look at the topic constructively, as improvements in company behaviour can be value-accretive. Some companies will put big ticks in certain boxes, while being inherently weaker in others. Understanding what we are trying to achieve at the outset is important.
Samsung SDI is a Korea-based battery maker, and a good example. We identified the company a number of years ago as a potential beneficiary of the adoption of electric vehicles (EVs), and clearly also a business with great potential to assist in the transition to a low-carbon economy. After some issues with batteries supplied for use in mobile phones, one of our responsible investment analysts spent a week in February 2017 touring China and South Korea to look at the battery supply chain. This trip highlighted the problems that were surfacing around the involvement of child labour in cobalt mining. Cobalt is a key resource for batteries, and the complexities of the supply chain mean it is hard to verify the source of production.
How did you engage with Samsung SDI?
The facts around child labour in cobalt are stark, and link directly to the poor economic and security situation in the Democratic Republic of the Congo (DRC). When our analyst highlighted these points to the investment team, it was agreed that this was a material risk for Samsung SDI, and that it needed to be raised with management.
Our initial conversations indicated that Samsung SDI had been fairly active in assessing its involvement with child labour in cobalt and had produced an internal report on the topic. The company agreed to publish this report, and raise the issue’s profile.
Samsung SDI explained that it was working via the Responsible Cobalt Initiative (RCI) as the best way to drive real change. For the rest of 2017, our focus was on talking to other companies that were affected and supporting the RCI.
In 2018, we became part of the Principles for Responsible Investment (PRI)-supported Engagement on Responsible Sourcing of Cobalt steering committee with a global coalition of investors. We pushed specifically on the need for a supply-chain audit, as well as the need for surprise audit visits to give credibility to the programme. Samsung SDI has been very active in the RCI, and suggested that the auto manufacturers were the missing link in this work.
We also hosted a conference and have participated in industry initiatives on responsible cobalt, calling for greater action from the industry.
What has been the impact of Newton’s engagement?
Overall, we believe that Samsung SDI has taken a number of steps that will improve lives in the DRC, and we were particularly impressed when the company announced a joint initiative with BMW Group, BASF SE and Samsung Electronics to launch a cobalt pilot project, with the aim to improve artisanal mining working conditions, as well as living conditions for surrounding communities.
Samsung SDI has also released two supply-chain audits since we began our engagement.
Being a committed, significant shareholder has enabled us to bring our perspectives to bear, and we think this has helped bring forward important change. Good management of these important supply-chain issues enables us to have greater confidence in the company’s ability to execute, and should, we think, have a positive impact on its future performance.
This said, we do recognise that, as this example shows, we are often dealing with inherent conflicts, and that when you look deeply into these issues, answers are likely to be imperfect. There is always more work to do.
What we do
At Newton Investment Management, our purpose is to help our charity clients fulfil theirs. We are a trusted long-term partner to charities, and have a strong track record of supporting them in achieving their goals through active, thematic and engaged investment. We manage a range of strategies for charities, including charity-focused pooled funds, sustainable funds, and segregated portfolios. We invest in a way that seeks to deliver attractive outcomes to our clients, and helps foster a healthy and vibrant world for all. And we do not stand still. Innovation is a fundamental part of our service to charities.
Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
- Four decades of global investment experience, with particular expertise in absolute-return, income-focused, high-conviction and sustainable investing
- Clients include charities, pension funds, corporations and, via our parent company BNY Mellon, individuals
- ESG analysis fully integrated into our core investment process
Bhavin Shah is charity portfolio manager and manager – Newton Sustainable Growth and Income Fund for Charities