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Responsible Investment: the need for corporate transparency

Covid-19 has put ever more focus on responsible investment and ESG. But as it hits the mainstream corporate transparency will be key.

By Ishaan Dalal, Corporate Engagement Intern, Workforce Disclosure Initiative

While many asset prices were hit hard by the Covid-19 pandemic, ESG investments have performed relatively well.

Between January and September, ESG investment funds globally saw £7.1 billion injected into them. In the UK new investments in ESG funds has doubled since March.

It’s positive to see ever more focus on responsible investment.

As it become mainstream, corporate transparency will be key.

The role of corporate transparency

In six months working in Corporate Engagement with the Workforce Disclosure Initiative (WDI) I observed the important role of corporate transparency in driving responsible investment.

The WDI aims to improve corporate transparency and accountability on workforce issues, and provide companies and investors with comprehensive and comparable data.

It was founded in response to a want – and need – from investors for more detailed and sophisticated understanding of how companies manage their staff and suppliers.

This information is rarely found within the plethora of tick-box sustainability reports produced by companies annually. Without access to it, investors struggle to make informed capital allocation decisions.

The need for transparency

The efficacy of a responsible investment system depends on transparency.

Let’s consider the recent case of Boohoo.

Following allegations that the company’s UK-based factory workers were being paid £3.50 an hour and working in ‘sweat-shop conditions’, Boohoo’s largest shareholders dumped their shares.

The company’s share price fell by 42% in just three days. As I write, it is still 20% lower than its June 2020 peak.

That Boohoo passed multiple ethical screening processes was a cause of particular concern; very few investors appear to have spotted these risks in advance.

The global supply chain: a complex web

The complexity of the global supply chains of large businesses results in a lack of visibility.

This can lead to poor working conditions and other salient risks remaining undetected.

In 2017 the Charted Institute of Procurement and Supply found that just 6% of managers of British companies were sure their supply chains were free of modern slavery.

From an investor perspective, a company unaware of its exposure to human rights abuses represents a riskier long-term investment than one able to map out its exposure.

Investors understand that modern slavery exists throughout global supply chains – and they want companies to acknowledge these issues.

As leading ethical investment manager CCLA points out in its ‘Find it, Fix it, Prevent it’ programme: ‘we want to see more companies proactively identify problems in their supply chains, help improve the lives of those affected and work to prevent it from happening again’.

The rise of the ‘S’ in ESG

Until 2020, given the understandable attention paid to the climate crisis, the ’S’ of ESG was often been left to the wayside.

Some 77% of companies anonymously admit they believe modern slavery exists within their supply chains.

Despite a burgeoning of annual sustainability reports, it's clear that current reporting practices and traditional auditing responses aren't going far enough.

The scale of the Covid-19 pandemic and the catastrophic impact it has had on employment globally only strengthens the case for greater corporate transparency around working practices.

It builds confidence between investors, companies and consumers.

Disclosing data mitigates risk, builds reputations, enables a company to identify and strengthen its competitive advantage and is directly linked with employee satisfaction and engagement.

More companies are waking up to these benefits. It’s encouraging to see that, this year, more companies than ever before disclosed, with all key sectors represented.

More details will be published in the new year as we continue to promote corporate transparency as an essential tenet of responsible investment.

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