That makes it all the more complicated, having two Peters.
My name is Peter Chapman. I'm the executive director of the Shareholder Association for Research and Education. SHARE is a Canadian organization that helps institutional investors integrate environmental, social, and governance factors into the investment process. We do this through research, education, and the provision of responsible investment services. Our clients are pension funds, foundations, and endowments, with assets under management of approximately $12 billion.
I would like to speak this morning from an investor perspective about the risks associated with global supply chains such as those that became apparent in last month's tragedy in Bangladesh. In a recent public statement by 15 global pension funds and fund managers, the Rana Plaza building collapse was characterized—as well as earlier incidents—as illustrating the significant reputational, operational, and legal risks that are ubiquitous in global supply chains. It underscores the urgent need for companies to know their suppliers, ensure compliance with safety standards, and fully disclose their supply chains.
My comments will focus in three areas. The first is the importance of corporate disclosure about sourcing practices and monitoring of global supply chains. The second will be the constructive role investors can play in aligning corporate responsibility and long-term wealth creation when environmental, social, and governance factors are considered in investment decision-making processes. The third is the positive investor response to the Accord on Fire and Building Safety in Bangladesh.
Shareholders depend upon the companies they invest in to manage risks related to supply chains. However there's relatively little disclosure by companies today about how they manage such risks. Improvements in disclosure will reduce investor uncertainty and assist investors in managing risks effectively.
To lessen the uncertainty that exists today, shareholders are seeking assurances that the companies they invest in have adopted responsible sourcing practices in their global supply chains, including performing human rights due diligence; negotiating commercial terms with suppliers sufficient to provide for safe, healthy workplaces and a living wage; establishing robust oversight of suppliers; and disclosing information on supply chain practices and outcomes.
To achieve this, clear and comparable reporting requirements by public companies should be established, including reporting on human rights due diligence. The most widely used such standard is the Global Reporting Initiative's sustainability reporting framework. Precedents exist for environmental, social, and governance—or ESG—disclosure requirements in other jurisdictions. For example, the Danish Financial Statements Act requires that the 1,000 largest corporations in Denmark—and all state-owned limited liability companies—report on CSR in their annual reports.
In addition to initiatives by governments, stock exchanges are also playing a role in encouraging greater corporate disclosure of ESG information. For example, in South Africa more than 450 companies listed on the Johannesburg Stock Exchange are required to produce an integrated report including information on social, environmental, and economic performance alongside financial performance. If they do not issue this integrated report, they're required to explain why.
More targeted disclosure is required in some jurisdictions. For example, the Transparency in Supply Chains Act of the State of California requires retailers and manufacturers with more than $100 million in worldwide gross receipts to disclose information on their websites regarding their efforts to verify that slavery and human trafficking are eliminated from their supply chains. Disclosure under this act is intended to assist consumers and investors in distinguishing between companies that are taking adequate steps to address these risks from those that are not.
Forced labour and trafficking are unfortunately still serious risks in some countries and industries—for example, in the harvesting of cotton in Uzbekistan.
In addition to these general disclosure requirements related to ESG issues, investors are urging that apparel brands, retailers, and manufacturers publicly disclose the names and addresses of factories used in the assembly of consumer apparel goods. Some companies have already taken this step.
In recent months the retail giant H&M has voluntarily disclosed the factories it uses, saying:
...we can now incentivize our suppliers for taking ownership over their sustainability and recognize the progress they make. And we can take another step in making our industry more transparent and ultimately more sustainable.
The consensus is growing amongst institutional investors that ESG factors such as supply chain oversight are important components of risk management and a potential source of value creation over the long term. The draft high-level principles on long-term investment finance by institutional investors currently under discussion at the OECD are an example of the expression of widespread concern about the negative impacts of short-termism by institutional investors.
In spite of evidence that ESG factors can have a material impact on investment performance, some fiduciaries in Canada are reluctant to incorporate these criteria into their investment decisions because they fear doing so constitutes a breach of their duty to beneficiaries. Clarifying that pension fund trustees and other fiduciaries may consider environmental, social, and governance factors in their investment decisions will help align investors and publicly traded corporations in the pursuit of corporate responsibility, a step already taken in a number of jurisdictions internationally.
This position was supported in the 2007 “Capital Markets and Sustainability” report of the National Round Table on the Environment and the Economy, which states:
Clearly, pension fund trustees must be made aware—perhaps via regulators issuing guidelines or, where appropriate, enacting regulations and/or legal changes by government—that considering ESG factors in capital allocation decisions is not in conflict with established fiduciary duties and that, in fact, not considering them may actually be a potential breach of such duty.
Fiduciaries and asset managers that evaluate plan investments with a full range of risks and opportunities in mind, including those related to supply chains of companies in which they invest, are better positioned to prevent losses and enhance gains. Governments can assist this process by providing a positive policy environment in this regard.
Finally, I'd like to turn to investor support for the Accord on Fire and Building Safety in Bangladesh. Recently, several international investor groups with combined assets of more than $2.5 trillion have welcomed the decision by apparel companies sourcing from Bangladesh to join the Accord for Fire and Building Safety in Bangladesh, and to work with the International Labour Organization and companies under this collaborative program to conduct robust inspections of the factories they use. We commend Loblaw Companies Limited for its leadership in supporting the accord.
The accord, which sets out a regime of independent inspections, public disclosures of the results, mandatory building renovations to eliminate hazards, and union access to factories to educate workers on their rights, is a major step forward for Bangladesh and provides the conditions for greater investor certainty that occupational safety in Bangladesh will be realized.
We believe that the dispute resolution mechanism in the accord sets it apart from previous failed attempts at voluntary programs in Bangladesh without imposing undue risks for signatory companies. The binding nature of the dispute resolution mechanism in the accord ensures accountability to the commitments contained in it. This accountability gives investors assurance that the signatories are committed to managing the risks associated with sourcing from Bangladesh.
In closing, I would like to thank the committee for this opportunity to participate in your deliberations on the important questions raised by the complex global supply chains of today's economy.
Thank you.