Get the right experience for you. Please select your location and investor type.
There is no such thing as a clean supply chain...all cobalt sourced from the DRC is tainted by various degrees of abuse, including slavery, child labor, forced labor, debt bondage, human trafficking, hazardous and toxic working conditions, pathetic wages, injury and death...
- Siddharth Kara, Cobalt Red: how the blood of the Congo powers our lives (2023)
Why and how we engage
At Stewart Investors we aim to generate strong long-term, risk-adjusted returns by investing globally in the shares of high-quality companies that both contribute to, and benefit from, sustainable development. If we own a company for ten years, we must understand how that company is positioned relative to the inevitable shift the world must make to a more sustainable form of development. Our engagement approach contributes invaluable insights into our bottom-up assessment of company quality and our understanding of the sustainability headwinds and tailwinds they face. We play an active role but are not “activists”. The purpose of our engagement and voting is to mitigate risks, enhance returns and improve sustainability outcomes.
Genesis of our engagement on conflict minerals
Our engagement on conflict minerals began in 2020 when we identified the issue as a serious human rights risk. This risk is frequently overlooked by governments, companies, investors and consumers. Tantalum, tin, tungsten and gold, collectively known as ‘conflict minerals’, are vital materials for the semiconductor industry and are powering the green transition. Poor traceability along complex supply chains can lead to the inadvertent financing of armed conflict and the abuse of human rights. Technically, cobalt is not a conflict mineral, but some estimates indicate that there may be as many as 40,000 children engaged in artisanal cobalt mining in the Democratic Republic of Congo (DRC)1.
We have significant exposure to semiconductors in our portfolios. We engaged with one semiconductor company on the issue and were disappointed by their response. We felt the company could be doing more to use their status as a leader to drive improvements in supply chain management across the industry. In 2021, we commissioned two research reports2 on conflict minerals within the semiconductor supply chain to gain a better understanding of the issue and the potential opportunities for improvement.
Research tender findings
The reports highlighted three broad trends seen over the last decade:
1. Despite legislation introduced in the US in 2010 (Section 1502 of the Dodd Frank Act3) and in Europe (EU Conflict Minerals Regulation4) in 2017, which require companies to implement due diligence on their supply chains, company efforts to identify and trace the provenance of minerals stalled as demand increased. We are yet to see a company prosecuted under the Dodd Frank Act. In Europe the regulation is expanding to include all minerals and encompass human rights more broadly rather than just mining practices. Things are slow moving as recently demonstrated by the delayed Corporate Sustainability Due Diligence Directive (CSDDD).
2. The mining of these minerals has shifted to central Africa from Australia and Canada. 70% of cobalt originates from the DRC5. Ownership of smelting and refining capacity has shifted to Asia, particularly China. 90% of Cobalt is refined by Chinese owned Smelters or Refiners (SORs)6. This creates geopolitical risk. China could leverage their significant position in ownership of smelters and refiners to retaliate against The CHIPS and Science Act introduced by Biden which aims to boost semiconductor production on American soil. If China decided not to certify any of their refiners, it would result in companies breaching the Dodd Frank Act.
3. Demands for a transition towards a lower carbon economy require a large increase in the mining of these tainted ingredients.
The Minerals Intensity of the Clean Energy Transition7
More can be read about the problem today in our previous article on the topic – Beyond Due Diligence: A multi-stakeholder approach to responsible mineral sourcing8.
Escalating the engagement
These trends encouraged us to escalate the engagement to improve disclosure and raise standards of traceability through the supply chain. The bulk of the existing investor initiatives we were aware of were focused on the upstream, engaging directly with the miners rather than the downstream, beyond the smelters and refiners. We launched a collaborative engagement using the Principles for Responsible Investment platform to try and improve communication between these different silos along the value chain. The initiative was supported in November 2021 by 160 signatories representing US$6.59trillion of assets under management.
In December 2021 we sent a letter to the management of 29 companies requesting that they:
- Develop and invest in technological solutions to improve traceability.
- 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.
Since the letters were sent, we have met with many companies, attended conferences and become more involved with industry bodies and Non-governmental organisation’s (NGO’s) such as the Child Labour Forum and Global Witness and commissioned additional research from KUMI Consulting9. Most significant perhaps, is the evolution of our relationship with the Responsible Minerals Initiative (RMI).
The role of the RMI
The RMI is the largest industry association in the minerals and electronic sector which provides companies with a full ecosystem of tools and resources that help its members make responsible sourcing decisions globally. The industry places a heavy reliance on the processes and assurance by the RMI, even though the RMI clearly state, “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”.
In 2022 we attended the RBA10 and RMI annual conference in Santa Clara and believe we were the first known investor to have done so. There was some scepticism around our attendance. Fast forward a year and in October 2023, we became the first investors to speak at the same annual conference on the positive role of capital and we had the opportunity to host an RMI endorsed, closed-door workshop. 16 leading electronic companies attended the workshop, which was facilitated by KUMI.
RMI’s Investor Network
It has become clear that conflict minerals remain an issue still to be integrated into many C-suite agendas. They are not involved directly with the processes and decisions behind company supply chains and are therefore distanced from potential abuses. To bridge this gap, we believe investors can play a key role in increasing the attention dedicated to supply chain issues by company CEOs.
One way we are trying to bridge this gap is through collaboration with the RMI. Members of the RMI debated, over a number of months, whether they should allow investors to join their trade body. There were initial reservations that investors would disrupt what the RMI considered a ‘safe space’ for members. However, there were some strong supporters who canvassed on our behalf as like us, they believe investors could bring a new and constructive perspective to help influence improvements along mineral supply chains. In February this year, we were delighted to became the inaugural member of the RMI Investor Network.
Alongside the RMI, the plan is to develop a working group and connect both fellow investors and companies to build consensus around the need for the adoption of more effective due diligence frameworks. We believe membership will offer investors 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. To support these conversations, we also commissioned Kumi to develop engagement guidelines for initiative supporters, and other investors, to improve their interactions with companies.
Supply chain complexities
The issue of irresponsibly sourced minerals and the associated human rights abuses within the semiconductor supply chain is more severe than we first anticipated. Supply chain complexity means that even determined companies, such as Fairphone11 can only map four out of the twelve tiers of companies in their supply chain. In our conversations so far, some companies have been open about the issues and successes have already been achieved with Korean producers. Unfortunately though, many companies seem content with fulfilling minimum credible reporting standards and taking a basic compliance approach. Most semiconductors are produced in parts of Asia and Asian companies are the most underrepresented members of the RMI so raising awareness and encouraging them to become members will be an essential part of our future engagement plans.
Looking forward
We recognise that engagement on this topic will be a long journey, but we hope that by building a closer relationship with the RMI and influential companies in the electronics supply chain, this collaborative engagement is a step closer to effecting real world change.
Subscribe to our updates
To get regular updates and content from Stewart Investors, please register here.
Important Information
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners, all of which are part of the First Sentier Investors group.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
- Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
- European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI reg no. C182306; reg office 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; reg company no. 629188)
- Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors, FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited.
- Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B), FSSA Investment Managers (registration number 53314080C), Stewart Investors (registration number 53310114W), RQI Investors (registration number 53472532E) and Igneo Infrastructure Partners (registration number 53447928J) are the business divisions of First Sentier Investors (Singapore).
- Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)
- United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (reg. no. 2294743; reg office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB)
- United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167)
- other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group