News from the quarter

Industry initiative update: Future Asset alumni visit and Summer Celebration  

Future Asset encourages girls and young women to pursue careers in finance. We were delighted to host four Future Asset alumni in our Edinburgh office in June. Portfolio Manager Lorna Logan led a discussion on how we invest at Stewart Investors, the different types of roles the team have and what a typical day might look like. With our Investment Analyst Sarah Sheard, the girls discussed the sustainability pros and cons of a selection of companies. It was great to hear the girls’ ideas and we hope the visit fed their enthusiasm for the sector. In the evening, we attended the Future Asset Summer Celebration, where several alumni described their experience participating in the programme and the benefits for their confidence and skills development.

RIAA Certification

We are pleased to confirm that Stewart Investors is the investment manager of five Australian domiciled funds and one New Zealand domiciled fund that were recertified by the Responsible Investment Association Australasia (RIAA). The RIAA certification signifies that a product ‘has implemented an investment style and process that systematically takes into account environmental, social, governance or ethical considerations, and this investment process reliability has been verified by an external party. The product meets the operational and disclosure practices of Certification Program requirements.’

The certified funds are from our Global Emerging Markets and Worldwide strategies and the details for each are available on the RIAA website. https://www.responsiblereturns.com.au/providers/2922.

Collaborative engagement update: Tackling conflict mineral content in the semiconductor supply chain

Since our previous quarterly update, in which we explained our efforts to build a strong relationship with the Responsible Minerals Initiative (RMI), we were delighted to become the inaugural member of the RMI Investor Network in February.¹

Working alongside the RMI, we plan to develop this working group and connect both fellow investors and companies to build consensus around the need for the adoption of more effective due diligence frameworks across supply chains. We believe membership of the network will offer investors a deeper understanding of mineral supply chains and greater engagement credibility. Membership should enrich engagements and help to emphasise the importance of mineral traceability to company leaders.  

We are aware there is much still to be done in this space, but we look forward to continuing our collaboration with supporters and the RMI, and hope to see further progress in the coming months.

Industry initiative update: Future Asset

The aim of Future Asset is ’to inform girls in Scottish schools about the investment management industry, enthuse them about careers in the sector, and widen the talent pipeline to improve diversity in the industry.’

Stewart Investors founded Future Asset in 2017 and has supported it both financially and through involvement of our people since then. So far, Future Asset has engaged with over 1,800 girl students from over 220 schools in Scotland.

Their annual Growing Future Assets Investment Competition enables girls in Scottish schools to experience the role of an Investment Manager. In the first year of competition in 2020, there were 17 teams from 13 schools and 71 girls registered. In 2023/24 the participation has grown to 158 teams from 84 schools and 728 girls registered.

In the 2023/24 competition, investment team members Lorna Logan and Sarah Sheard were team mentors and Lorna was a judge in the Senior competition, presenting the winners’ award to the team from Preston Lodge High School in East Lothian. Many congratulations to them and to the Junior competition winners from Calderside Academy in South Lanarkshire, and everyone who took part.

We were delighted to be part of the competition and to encourage high school girls in Scotland to look at the world of investment and consider the industry for possible future careers.

Event update: Singapore Investment Forum

In March we hosted the first Stewart Investors Investment Forum in Singapore. It was a huge success, drawing on Stewart Investors’ 30-year track record and the expertise of our special guest speakers to tackle some of the critical questions and misconceptions surrounding sustainable investing.

Global Emerging Markets Sustainability Strategy 15th anniversary

This February marked the fifteenth anniversary of Stewart Investors’ Global Emerging Markets Sustainability strategy. 

Fifteen years ago, emerging markets investing was synonymous with resources, banks and telecoms. The most important companies were state-owned giants like Vale (Brazil), Gazprom (Russia), and China Mobile. There were relatively few genuinely innovative or globally competitive companies outside of materials extraction.

There has been a tremendous change in this regard. Emerging markets are now home to a raft of the world’s leading companies in fields as diverse as semiconductors, renewable energy technologies, software as a service, healthcare supplies, fintech and e-commerce.

Looking forward and on a bottom-up basis, the case for investing in emerging markets has never been stronger. The universe contains more quality companies than ever before and over the long term, this makes us very excited for what the next fifteen years can deliver in emerging markets.

Footnotes

¹ Responsible Minerals Initiative (RMI) Investor Network, launched in February 2024, RMI Investor Network (responsiblemineralsinitiative.org)

Collaborative engagement update: Tackling conflict mineral content in the semiconductor supply chain

We remain grateful for the continued support of our PRI collaborative engagement: Tackling conflict mineral content in the semiconductor supply chain, an initiative that first began in 2021. We are pleased to inform you of some recent developments and plans.

Recent achievements

• Strengthened relationship with the Responsible Minerals Initiative (RMI).¹
• Built trust with leading US electronics companies, who are also steering committee members of the RMI.
• Chaired and hosted a closed-door workshop in October 2023, endorsed by the RMI, with sixteen leading electronic companies.
• Became the first investor to speak at the RBA² and RMI’s Annual Conference in Santa Clara, California on the positive role of capital.
• Engaged with 21 electronic and industrial companies on mineral traceability.
• Commissioned Kumi Consulting Ltd (Kumi) to deepen our knowledge, contacts and engagements with companies, trade bodies and organisations like the OECD.
• Developed, with the help of Kumi, engagement guidelines for initiative supporters, and other investors, to improve their interactions with companies.

RMI Membership

Members of the RMI debated, over a number of months, whether they should allow investors to join their trade body. There were some initial reservations, however a number of company representatives and steering committee members of the RMI and RBA Board Liaison have been strong supporters. There is a growing feeling amongst RMI members that investors could bring a new and constructive perspective to help influence improvements along mineral supply chains. Representatives of the companies and other RMI members believe: “there is a big role for investors, they have a different point of leverage”.

We are pleased that the RMI has taken the significant step of allowing investors to become members of their trade body. This is one of the objectives we set last year.

We believe membership will provide initiative supporters and investors with a deeper understanding of mineral supply chains and greater engagement credibility. Membership should enrich engagements and highlight the importance of mineral traceability at the C-suite level (where we know, through our interactions with companies, that knowledge on this topic is weak). With the strength of collective voice, we must encourage CEOs not to cut corners and to invest more resources to achieve an untainted mineral supply chain, thereby minimising human rights abuse.

What more have we learned?

• The issue is grave. During a meeting, Fairphone³ explained that even they believe they are only 70% free of tainted minerals.
• Supply chain complexity means that even determined companies, such as Fairphone, can only map four out of the twelve tiers of companies in their supply chain.
• Accordingly, few CEOs have a deep awareness of the challenges in their mineral supply chain.
• Supply chain departments are often viewed as “cost drags” and are inadequately resourced.
• Many supply chain managers are ‘covert NGOs’ who are frustrated by the lack of impact.
• Upcoming EU regulations will pressurise companies and investors to focus more intently on human rights abuses in their supply chains.

What we plan to do next

• Join the RMI as an investor member and seek to establish an investor working group.
• Share details to initiative supporters and other investors to consider joining the RMI investor membership when it becomes available.
• Encourage more investors to collaborate on this initiative.
• Consider broadening the scope of the initiative beyond the 3TGs in line with EU regulations to include all minerals.
• Encourage initiative supporters to engage on this topic when meeting electronic companies.
• Engage with banks on lending practices to smelters or refiners (SORs) in the Asia Pacific region.
• Encourage companies to explore upstream certifications (IMRA⁴) in their supplier requirements.

Conclusion

We recognise that engagement on this topic will be a long journey, over a number of years, but we hope that by building a closer relationship with the RMI and influential companies in the electronics supply chain we are a step closer to effecting change.

Collaborative engagement update: Investor Initiative on Hazardous Chemicals (supported by ChemSec)

In line with our ongoing research into the risks of PFAS, polluting man-made substances known widely as “forever chemicals”, we became supporters of ChemSec’s Investor Initiative on Hazardous Chemicals (IIHC).

Prevalent in a wide range of consumer products for decades due to their non-stick qualities and ability to repel grease and stains, forever chemicals have proven toxic effects and do not break down in the natural environment, making them a threat to people and planet. We look forward to participating in this initiative, which will see 50+ investors representing over $10 trillion in AUM engage with major chemical producers to raise awareness of and therefore reduce the risk of these hazardous substances.

To learn more about the initiative, please visit the ChemSec website.

Footnotes

1 Responsible Minerals Initiative (RMI), a trade body with over 400 members, https://www.responsiblemineralsinitiative.org/

2 Responsible Business Alliance (RBA), the parent organisation of the RMI, and the world’s largest industry coalition dedicated to corporate social responsibility in global supply chain, https://www.responsiblebusiness.org/

3 Fairphone is a Dutch electronics manufacturer that designs and produces smartphones and headphones. It aims to minimise the ethical and environmental impact of its devices by using recycled, fairtrade and conflict-free materials, maintaining fair labour conditions throughout its workforce and suppliers, and enabling users to easily repair their own devices through modular design and by providing replacement parts.

4 IMRA: The Initiative for Responsible Mining Assurance. https://responsiblemining.net/what-we-do/assessment/

Access to Medicine Foundation launches report on generic and biosimilar medicine manufacturers

The Access to Medicine Foundation is an independent non-profit that seeks to mobilise companies to expand access to their essential healthcare products in low- and middle-income countries (LMICs).

On 26 September, we were delighted to help co-host a multi-stakeholder event in Mumbai, India to launch their landmark report assessing five generic and biosimilar medicine manufacturers’ actions on expanding access to their products in LMICs.

Generic and biosimilar medicines have the potential to be lifelines for millions, offering the same therapeutic and clinical benefits as the originator medicines, but often at significantly lower prices. However, even if a product is comparatively cheaper, payers may still be unable to afford it, which is especially the case for those living in low-income countries and those from vulnerable populations. Among the medicines listed on the World Health Organization's Model List of Essential Medicines, only 10% are under patent protection, highlighting the essential role of generic and biosimilar medicine manufacturers in ensuring their products reach those who need them the most.

To assess what is currently being done by the generics industry to expand access to medicine in LMICs, the report profiles five market-leading companies: Cipla, Hikma, Sun Pharma, Teva, and Viatris. Along with detailed company profiles, it identifies opportunities to strengthen manufacturing and improve the availability of generic and biosimilar medicines.

The report, which marks the first time that any generic or biosimilar medicine manufacturers have been assessed in-depth on their access-to-medicine efforts, reveals areas where companies can focus their attention as they step up efforts to expand access to their essential medicine, such as affordability, product registration, supply, local availability, and adaptive research & development. Given their portfolios and footprints, the five companies assessed can now work to significantly enhance their efforts by acting on the opportunities and the tailored recommendations set out in their respective company profiles.

As long-term investors focused on quality and sustainability, we think generics franchises built on providing access to high-quality medicines at affordable prices are set to benefit from continued growth tailwinds over the coming decades. While these companies create tangible benefits for end users, we recognise areas for improvement within the industry, which is why we support the Foundation’s work to help provide a roadmap of how access to generics can be enhanced.

We are excited about the opportunity for generics companies to continue delivering greater access to healthcare globally while operating sustainably profitable business models.

2023 Investor Statement on Tobacco Prevention

Along with 57 financial institutions, representing over US$2.9trillion assets under management, we co-signed the 2023 Investor Statement on Tobacco Prevention urging governments to accelerate implementation of the World Health Organization Framework on Convention on Tobacco Control (WHO FCTC).

Tobacco is fundamentally an unsustainable product given its profound detrimental impact on human and planetary health worldwide. The financial impact of smoking on the global community (due to health costs and lost productivity) is estimated at US$1.4 trillion per year¹.

We note that the WHO FCTC is a crucial tool in creating a future free from tobacco, and were delighted to attend the Tobacco-Free Finance Pledge High-Level side event on the sidelines of the 78th session of the UN General Assembly where the investor statement was launched.

1 Source: United Nations Tobacco Free Finance Pledge

Strategic partnerships and industry initiatives

In addition to collaborative engagements, we support a wide range of organisations, initiatives and industry bodies that contribute to the development of industry standards and improve best practice. 

Team updates

In January, Anya Prakash who joined the team in January 2021 as a graduate investment analyst based in Edinburgh, left the business. Please join us in wishing Anya all the very best for her future endeavours.

Pensions for Purpose – Best Client-led Innovation

We are delighted to have won the award for Best Client-Led Innovation in the UK Pensions for Purpose Content Awards for our interactive Portfolio Explorer tool. We developed this tool to provide our clients with greater transparency, directly mapping the companies in which we invest to climate solutions, human development pillars and the Sustainable Development Goals.

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.

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.

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, 3^rd 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.