News from the quarter
A round-up of news from the quarterly reports.
Q4: 1 October - 31 December 2022
B Corp Certification
In 2022 First Sentier Investors became a certified B Corporation (B Corp), following a two-year certification process. As a semi-autonomous investment group within First Sentier Investors, Stewart Investors is covered by this certification.
The certification means that we are now part of a community of more than 6,000 companies with a shared goal to transform the communities in which we live and operate for the benefit of the people and our planet.
Global Emerging Markets
The St Andrews Partners global emerging markets pooled funds have now been fully aligned with Stewart Investors sustainability approach.
Portfolio Explorer – climate solutions update
We use Project Drawdown - www.drawdown.org- to help us understand the role companies can play in climate solutions. We map investee companies to Project Drawdown’s collection of climate solutions, which if scaled up, can deliver the Paris Agreement’s 1.5oC temperature goal.
In mid-2022, Project Drawdown announced 11 new solutions to their collection related to ocean resources, food production, methane management, and materials manufacturing and use. Bringing the total numbers of solutions in their framework to 93.
We have reviewed portfolio companies for alignment to these new solutions and included them on the Q4 2022 Portfolio Explorer update. We have mapped 26 companies to 6 of these solutions.
Following client feedback, we have also simplified how we define company contributions to Project Drawdown climate solutions and have removed Indirect (companies that are involved in and around the solution) as a measure. Contributions are defined as either Direct (directly attributable to products, services or practices provided by that company) or Enabling/Supporting (supported or made possible by products, technologies or practices provided by that company).
For further information on the companies mapped to these new solutions please click below.
Collaborative engagement update: Tackling conflict mineral content in the semiconductor supply chain
“As a shareholder you should want us to care about conflict minerals … to address it”.
Brian Krzanich, CEO of Intel, 2014.
At the end of 2021 we launched the PRI collaborative engagement: Tackling conflict mineral content in the semiconductor supply chain. The initiative was supported by 160 signatories amounting to US$6.59 trillion of assets. Since then it has attracted more interest from a number of large financial institutions.
Our engagements with companies, and industry and civil bodies, highlights that more action is required to improve practices on the provenance and reporting of conflict minerals within semiconductors.
A brief recap of the conflict mineral issue
Tin, Tungsten, Tantalum, Gold and Cobalt1 are essential ingredients in the manufacture of semiconductors. The mining of these minerals is associated with human rights abuses. Five broad trends are impacting the sourcing, processing and demand of these minerals.
- Mineral mining continues to shift to central Africa. 70% of Cobalt originates from the Democratic Republic of the Congo.
- SOR2 capacity continues to shift to Asia. 90% of Cobalt is refined by Chinese owned SORs.
- Governance over mineral traceability is outdated. OECD & RMI3 guidance is 5 and 10 years old.
- Companies’ efforts to identify and trace the provenance of minerals has stalled, as demand rises.
- Demands for a greener future necessitates more semiconductors and therefore more mineral mining.
Meanwhile, the associated problem of human rights abuses with mineral mining has not improved. This was underlined by testimony to US congress by Ida Sawyer, Human Rights Watch4, in July 2022.
“The humanitarian and human rights situation across the country, and especially in the east, remains dire. Nearly 5.5 million people are displaced across the country, and one in three people are facing severe or acute food insecurity, according to the United Nations. Some 120 armed groups are still active in eastern Congo, including several groups that include fighters from neighboring Burundi, Rwanda, and Uganda … Many of these groups, as well as their backers among the Congolese political and military elite, control lucrative mineral resources, land, and taxation rackets. Many of them have also recruited children among their ranks”.
Over the last decade, electronic companies have made insufficient progress on tracking the provenance and integrity of minerals in their supply chain. We need to re-double our engagement with companies to encourage better mineral sourcing, tracking and reporting practices.
What have we done in the last 6 months?
- Continued to engage with companies, and we have met with nine companies in person.
- Engaged with industry bodies. We attended the Responsible Minerals Initiative (RMI) annual conference and understand we are the first known investor to have done so.
- Engaged with civil bodies. We have met with Global Witness to discuss the findings of field research they recently carried out and published in their report: The ITSCI Laundromat: How a due diligence scheme appears to launder conflict minerals. A summary of the findings is available in this short interview.
What have we found?
- The issue of improperly sourced minerals and the associated human rights abuses within the semiconductor supply chain is more severe than we first anticipated.
- Actions by companies to address the issue is generally poor and progress has stalled.
- Frustration is rising amongst industry body members with their lack of impact.
- Geopolitical tensions are increasing government’s focus on supply chain transparency to identify frailties. Many companies are focusing resources on supply chain mapping. This is beneficial.
Have we achieved anything?
- Raised the profile of investors’ concerns about this issue with key companies in the supply chain.
- One South Korean foundry published, for the first time, a full list of the SORs they use.
- One Japanese company has committed to improve their transparency on this issue.
- Highlighted to all companies that actions to address the issue need to be improved.
- Raised the profile of investors’ concerns about this issue with the main industry body, the RMI.
- The RMI highlighted growing investor interest in this issue in their introductory comments at their annual conference.
- Raised the profile on investors’ concerns about this issue with civil bodies.
- Supported Global Witness to bring this issue to a larger audience. This helps improve information exchange.
Conclusion
It is extremely early days for this multi-year engagement but it is clear that tracing mineral provenance is an extremely complex challenge for companies. Progress is slow. While there is a unanimous desire to improve practices, some companies are more eager and able to meet this challenge than others. Surprisingly, the strength of ambition to improve practices has been independent, so far, of company size or industry prominence. This may point to complacency within certain areas of the industry.
We will continue to update you on any progress we make and any challenges we encounter.
Footnotes & Reference Material
1 Collectively known as conflict minerals with the exception of Cobalt which technically sits outside that legal definition
2 SOR = Smelting and Refining
3 RMI = Responsible Minerals Initiative
4 Child Labor and Human Rights Violations in the Mining Industry of the Democratic Republic of Congo. US Congress 14/7/22. https://humanrightscommission.house.gov/events/hearings/child-labor-and-human-rights-violations-mining-industry-democratic-republic-congo
Q3: 1 July - 30 September 2022
Stewart Investors website update
Following First Sentier Investors’ decision to wind-down and close the St Andrews Partners investment team - which concluded at the end of the quarter - the Sustainable Funds Group will now operate as Stewart Investors. We have realigned the Stewart Investors website to reflect this change.
Q2: 1 April - 30 June 2022
For more information on the largest emitters and contributors to carbon emissions, information on company-level climate change targets, and contributions to climate solutions for the individual strategies we manage.
European SRI Transparency Code Compliance (Eurosif)
We are committed to transparency and believe that we are as transparent as possible given the regulatory and competitive environments that exist in the countries in which we operate. We meet the full recommendations of the European SRI Transparency Code, and for our clients in the UK and Europe we have updated our statement of commitment for the period to 31 December 2022.
Investor Support for Deforestation-free legislation
We have supported a bill put forward by the Fostering Overseas Rule of Law and Environmentally Sound Trade (FOREST) Act, which would provide investors with important information on material financial and climate-related risks to companies potentially linked to deforestation. This bill would help investors mitigate material risks facing portfolios and the companies in which they invest.
We believe it will effectively contribute to curbing global deforestation, thereby helping reduce climate risk and protecting investments in vulnerable sectors. Moreover, the procurement piece of this bill would help investors identify companies that are adequately mitigating climate and forest risk by fulfilling their commitments to net-zero emissions and zero deforestation.
Team changes
Mohan Gundu is retiring from the financial services industry and will be leaving Stewart Investors on 24 July 2022.
Mohan has had a long, successful career that began in the late 80s with roles at various brokerage firms such as Jefferies and CLSA, following his Bachelor of Technology in Civil Engineering and MBA from the Indian Institute of Management. Mohan joined Stewart Investors, Sustainable Funds Group in December 2016 as a senior analyst, and now plans to spend his retirement with his family and pursuing his planned book on the history of capital markets within India.
Given Mohan’s decision to retire, we have undertaken an internal search for some additional research capabilities. With the First Sentier Investors decision to terminate St Andrews Partners in March 2022, we had the opportunity to interview the outgoing investment team prior to their departure. We are pleased to communicate that we have offered existing St Andrews Partners’ analyst, Tyler Thomas, a permanent role with Stewart Investors. Tyler commenced this role on the 27 June 2022.
Tyler was a graduate investment analyst with the St Andrews Partners team at Stewart Investors. He joined the team in September 2021. Tyler graduated with First Class Honours in Economics from the University of Durham in 2021. Prior to joining the team, Tyler gained internship experience with the St Andrews Partners team in Edinburgh.
Q1: 1 January - 31 March 2022
Collaborative engagement: Tackling conflict mineral content in the semiconductor supply chain
“As a shareholder you should want us to care about conflict minerals … to address it”.
Brian Krzanich, CEO of Intel, 2014.
We were overwhelmed with the support this initiative received, totalling 160 investors with collective assets under management of US$6.59 trillion1. It is clear that the investor community recognises the challenges of mineral sourcing within the semiconductor supply chain, and believes more action is required in order to develop conflict mineral-free supply chains and improve industry practice.
A brief recap of the conflict mineral issue
There have been five broad trends impacting the sourcing of Tin, Tungsten, Tantalum, Gold and Cobalt (known as conflict minerals (CMs)):
- The mining of these minerals has shifted from Australia and Canada to central Africa.
- Smelting & refining (SORs) capacity has moved to Asia. SOR ownership is increasingly Chinese.
- Frameworks on mineral traceability have stagnated. The OECD guidance is over five years old.
- Regulation and public opinion are forcing greater scrutiny of complex supply chains.
- High demand for semiconductors could encourage corner cutting in the sourcing of minerals.
Examination of a small sample of conflict mineral statements suggests that progress has been disappointing since an academic study of 1300 companies in 2015 found:
“The reports ultimately reveal shallow, almost cynical, compliance with poorly crafted rules built on a regulatory paradigm better suited to simpler contexts”. The Conflict Minerals Experiment. Jeff Schwartz. P133.
Despite valiant efforts, some conflict mineral statements show that progress is slow and that confidence in companies’ ability to track the provenance and integrity of minerals is low.
To this point, a central and candid sentence in the conflict mineral statement of one large American equipment manufacturer in 2021 has not meaningfully changed since the company started producing their SD form² for the SEC in 2014:
“For the significant majority of smelters reported by the Surveyed Suppliers, there is inadequate information available to assess the source of the conflict minerals they process. Therefore, for Covered Products manufactured in 2020… concluded in good faith that it lacks sufficient information to trace the chain of custody of any conflict minerals contained in its Covered Products up through the supply chain to a specific smelter or, in turn, to a country or mine of origin”.
The problem has not gone away and the associated human rights abuses are still evident. Only at the beginning of April we became aware of a crowd funding initiative to help finance legal proceedings against large technology brands by families from the Congo³. This points to intensifying reputational headwinds.
What have we done so far?
With the support from signatory investors, on 30 November 2021, we wrote to 29 companies. In the letter, we have encouraged the companies to:
- Develop and invest in technological solutions to improve traceability, possibly blockchain.
- Increase transparency and reporting on minerals from mine to product.
- Encourage and participate in industry wide collaboration to improve industry practices.
- Impose and enforce harsher sanctions on non-compliance.
- Reduce demand for new materials by improving recycling initiatives.
To date we have received a response from 21 of the companies. We have requested meetings with all the companies that have responded to the letter, and to date we have had meetings with eight companies.
What have we found?
- The industry made an early decision to trace minerals in the downstream from smelters or refiners (SORs) and not in the upstream, from the mines. This means that the problem of mineral mixing before the minerals arrive at the SORs materially hinders the tracing of mineral provenance from mine to product.
- The industry places a heavy reliance on the processes and assurances provided by the Responsible Mineral Initiative (RMI). Yet the RMI states clearly: “This assurance process does not result in a material certification nor does it determine that material at the company is “conflict-free” or is otherwise free of human rights abuses in the supply chain”.
- Despite relying on suppliers for information, there is little industry collaboration. One foundry said fears of collusion, as with price fixing, was an issue and an explanation.
- The RMI is considered to be the pinnacle of industry collaboration and yet some companies had little knowledge of the RMI. We note the RMI represents ten industries and is not dedicated to semiconductors.
- Conflict minerals remain an issue still to be integrated into many senior executive committee agendas.
- Few companies appear to be going beyond the requirements prescribed by OECD framework, as adopted by the RMI.
- No company interviewed, so far, has committed budget for research on conceptual/unproven technological solutions, like blockchain. A chicken and egg scenario was commented on here.
Have we achieved anything?
- Many companies have asked for suggestions on how they could do more and we have been asked to share any good ideas/better practices we may identify during this engagement.
- One company, which was previously unfamiliar with the RMI, now plans to pay for RMI services.
- A foundry stated that this letter, with the weight of interest from investors, will raise the prominence and profile of the conflict minerals issue to the board level.
- Another foundry suggested they would consider committing budget to research on conflict minerals tracing.
Conclusion
It is extremely early days for this multi-year engagement but it is clear that tracing mineral provenance is an extremely complex challenge for companies. Progress is slow. While there is a unanimous desire to improve practices, some companies are more eager and able to meet this challenge than others. Surprisingly, the strength of ambition to improve practices has been independent, so far, of company size or industry prominence. This may point to complacency within certain areas of the industry.
We will continue to update you on any progress we make and any challenges we encounter.
Footnotes
[1] As at 30 November 2021
[2] An SD form is a specialised disclosure report used for investment disclosure reports outside the typical filing categories for the U.S. Securities and Exchange Commission (SEC) forms. SD reports include Conflict Minerals Disclosures and Responsible Sourcing reports.
[3] International Rights Advocates. Multinational companies are liable for human rights abuses within their supply chains
Reference material
- Capturing conflict mineral trade in DRE. https://www.youtube.com/watch?v=jjVkNxT8Zsg
- Conflict minerals: The truth behind your smartphone. https://www.youtube.com/watch?v=yrcTxCOkuWA
- Congo Stories, Battling Five Centuries of Exploitation and Greed, 2018. John Prendergast and Fidel Bafilemba.
- The Conflict Mineral Experiment, 2015, J Schwartz. https://www.hblr.org/wp-content/uploads/sites/18/2016/06/HLB103_crop.pdf
- OECD Due Diligence Guidance, 3rd Edition.
- https://www.responsiblemineralsinitiative.org/
- The Rare Metals Wars, Dark Side of Clean Energy and Digital Tech, 2020, G Pitron
Morningstar awards
We are delighted that Stewart Investors Sustainable Funds Group has won the inaugural Fund Manager of the Year – Sustainable Investing category at the 2022 Morningstar Australia Awards; as well as the Best Asset Manager - Sustainable Investing category and the Best Global Equity Fund for the Stewart Investors Worldwide Leaders Sustainability Funds (USD ACC) at the 2022 Hong Kong Morningstar Awards for Investing Excellence.
First Sentier Investors announcement
On 1st March 2022, First Sentier Investors announced their decision to proceed with the closure and orderly wind-down of the St Andrews Partners investment team. This does not lead to any significant changes to the Sustainable Funds Group.
Q4: 1 October - 31 December 2021
Collaborative engagement: Tackling conflict mineral content in the semiconductor supply chain
During the quarter, we launched another collaborative engagement effort, supported by 160 investors with collective assets under management of US$6.59 trillion, focused on conflict minerals within the semiconductor supply chain.
Tantalum, tin, tungsten, gold and cobalt (referred to collectively as conflict minerals) are vital materials and building blocks of the semiconductor industry. The poor traceability of these minerals along complex supply chains, including smelting and refining, can obscure the provenance of these minerals. This can lead to the inadvertent financing of armed conflict and the abuse of human rights.
We are long-term investors who believe that sound labour practices and good environmental management go hand in glove with shareholder returns. As regulators and consumers pay increasing attention to the challenges of mineral sourcing within the semiconductor supply chain, we believe there is an opportunity for companies to take a lead in the development of conflict mineral-free supply chains. Specifically we wrote to 29 companies involved in the manufacture of semiconductors encouraging them to:
- develop and invest in technological solutions to improve traceability, possibly blockchain,
- increase transparency and reporting on minerals from mine to product,
- encourage and participate in industry wide collaboration to improve industry practices,
- impose and enforce harsher sanctions on non-compliance,
- reduce demand for new materials by improving recycling initiatives.
We are in the early stages of this engagement and intend to provide further updates on progress and company responses in due course.
UNCTAD Sustainable Fund Awards 2021
In October, at the World Investment Forum 2021, UNCTAD (United Nations Conference on Trade and Development) launched the Sustainable Fund Awards to recognise companies' commitment to Sustainable Development Goals (SDGs) funding and the achievements of high-quality, high-impact sustainable funds.
We are honoured that one of our Global Emerging Markets Sustainability funds was one of two winners awarded the UNCTAD Sustainable Emerging Market Fund Award 2021.
Further information on the awards is available online as well as the awards ceremony where Sujaya Desai, Co- Portfolio Manager, makes an acceptance speech on the team’s behalf.
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