Cherie Blair CBE, QC, is one of the UK’s top barristers and an international specialist in human rights law – as well as being married to Tony Blair, the former UK Prime Minister.
Her involvement with institutional investors is not new: she was linked to a UK version of a US class action lawsuit for investors over the RBS accounting scandal: Read the RI story here.
Her latest work with investors, which she will address at RI Europe, is to examine how investors promoting better business practices could improve long-term returns.
Blair will look at the benefits of incorporating human rights and ESG criteria into the investment decision process, and the risks of not doing so. Founder and chair of legal firm Omnia Strategy, Blair advises business on how to integrate social, environmental and human rights issues into their core strategies.
She talks to Responsible Investor on how investors have a key part to play in this, and why this will help businesses improve long term returns.
Responsible Investor: We are delighted that you are speaking at RI Europe and I understand that you will talk about the role of investors in shaping better business practices. Why is this topic of interest to you and how has your thinking developed on the responsibility of investors as part of the chain of influence on companies?
Cherie Blair: I’m really looking forward to being at RI Europe this year and particularly delighted that the topic of good business practice is steadily gaining interest and new converts among investors. More and more of them are realizing that good practice is beneficial for business generally and certainly for shareholder returns. In fact, the evidence has never been clearer that social returns and market returns really do go hand in hand.
As a lawyer I’ve been interested in this issue for some years, and part of my role at Omnia Strategy is to advise businesses on how to integrate social, environmental and human rights issues into the core of their strategies. We also advise how, if not managed properly, these issues can cause huge damage to businesses, not only from a legal perspective but also because they can damage a company’s reputation, its ability to retain its customers and its social licence to operate.
Obviously investors have for a long time played a key role in shaping better business practices. We all remember the campaign of selective disinvestment from South Africa in the 1970s, aimed at undermining the apartheid regime. But the scope and intensity of investor involvement has increased markedly in recent years, and it’s no longer just about those kind of ethical considerations but also about environmental and social topics such as carbon emissions and executive pay.RI: What are the benefits to investors of incorporating ESG and human rights factors into their decision-making processes and what are the risks of not doing so?
CB: I think the most important benefit – one that benefits all of us – is how it encourages investors to break the cycle of short termism and to take a longer term view of how a company is managed, its approach to risk and its wider culture. But for investors there are other benefits. As shareholders they have a direct financial interest in embracing ESG, as studies increasingly show how a company that incorporates social responsibility significantly outperforms other companies over the long-term, both in terms of the stock market but also in accounting performance. And more and more investors are clearly aware of this.
As for the risks of not incorporating these factors, they can be significant. It’s not only the financial penalties for human rights or environmental abuses, which can of course be severe. But it’s the damage to reputation, which is far more harmful over the long term. Obviously this will affect different companies in different ways but for those selling goods or services directly to the public, the risk is huge. We can all think of well-known companies that have endured a customer backlash against perceived unethical practice, a backlash that can be felt on a global scale and within a very short timeframe, given modern media.
And companies are all too aware of this. A recent report by The Economist on ‘Business and Human Rights’ found that what motivates the companies that have a human rights’ strategy, aside from ethical concerns, are: building sustainable relations with local communities, employee engagement, and protection of their brand and reputation. This broad range of factors can’t be built successfully over one financial quarter or even a couple of years. They need long-term engagement.
RI: Do you think these risks/benefits are financially material to investors, or should they just be part of good corporate citizenship? If the latter: how can that be promoted?
CB: They can be both. Investors can and do want to increase the value of their investment, and they can also be keen to promote good corporate citizenship for its own sake. The fact that promoting the latter can increase the former makes it pretty irresistible in my view.
But there is often a difficulty for asset managers in establishing a link between the information included in ESG reports and a company’s valuation. Which is why corporate social responsibility programmes are often linked to a company’s image and communication strategy rather than to their financial benefit. So clearly more needs to be done to improve that.
RI: Investors are probably still most likely to approach social and human rights issues as a financial factor from a risk-based perspective: how much would complicity in, or negligence surrounding, a human rights abuse cost?
CB: There is still a lot to be done on financial measuring. Investor relations and social responsibility functions need to work closer together and make sure that they speak the same language. Companies also need to provide more data on how addressing social, environmental and human rights issues has a positive impact on their operations and commercial performance. There is, as well, a real need for harmonized standards in terms of financial reporting, and the 2014 EU Directive on disclosure of non-financial and diversity information seems to be a move in this direction.
RI: We recently covered investor concerns about Spanish private security firm Prosegur. Do you see investors engaging more on these issues?
CB: Absolutely. Investors are increasingly engaging on these issues, which is unquestionably down to the escalating media attention and heightened interest in general around institutional ethical investment. We don’t have to look far for a recent very high profile example, with Harvard law students taking legal action against the University, as part of the international drive to promote carbon emissions divestment. And of course not long ago there was the “Shareholder Spring” that saw investors – on an unprecedented scale – question executive pay.
RI: We also recently spoke to Professor John Ruggie who was very clear that the UN Guiding Principles on human rights clearly apply to institutional investors. Though some investors, notably Norges Bank Investment Management (NBIM) have argued they shouldn’t apply to minority shareholders. Are you familiar with these cases and what is your view?
CB: Yes, I know NBIM has long been a leader in the field of responsible investment and has, based on ESG analyses, recently disinvested 114 companies. This issue dates back to 2013 when NBIM refused to cooperate with the Norwegian National Contact Point on the way it assessed the human rights issues surrounding its ownership of 0.9% in the mining company POSCO. NBIM argued it was simply impractical for such a large diversified investor to undertake this with a minority holding.The international system does recognise there are practical limitations in such circumstances, which is why the official NCP response made clear that if conducting extensive, time-consuming due diligence into every target company is not realistic, then investors needed to have strategies in place for assessing how the impact of abuses of human rights can be applied more broadly.
I think investors can make this process easier and more effective by compiling the data they hold on specific sectors, in order to identify risks particularly associated with them, and then to create strategies based on these models. This of course requires a significant degree of forward planning and clear communication between different departments. And, particularly for investors with a large number of minority holdings, it makes sense for them to co-operate with other investors, organisations and NGOs to improve their approaches.
RI: The UK Stewardship Code, which is promoted by the Financial Reporting Council, is seen by some as a box-ticking exercise on shareholder activity on ESG issues. The FRC has admitted it is not working as well as it should. This seems like a key way to shape better business practices. What is your view on improving it?
CB: A comply or explain based system like that of the Stewardship Code naturally has its limitations and there is a risk that asset managers simply “sign up to tick a box” without following through.
I know the FRC hopes to encourage institutional investors to avoid mere box-ticking by explaining to them the benefits of effective stewardship. This strikes me as a very sensible strategy. But it’s equally important to show both the financial benefits and the risks associated with a company’s level of attention to ESG factors and human rights. Asset managers should be encouraged to stop viewing stewardship as a cost-inducing compliance issue, either to avoid or rush through half-heartedly. Once the fundamental connection between effective stewardship and financial benefit has been clearly communicated and is widely accepted, more companies will want to comply.