Under the MAS Responsible Investment Strategy, for the responsible investing mandate of our international equities, we only buy shares in international companies that have sound environmental, social and governance (ESG) practices. And even if they have all the right ESG processes in place, we still won't consider companies who find themselves in serious controversies.
Not only do we believe that focusing on ESG practices is the right thing to do as a responsible investor, there's also increasing evidence that this helps reduce risk and improve long-term returns.
In assessing a particular company's ESG credentials, we rely on research produced by MSCI – one of the world's leading market index and ESG analysis firms. They update their assessments on a regular basis, which means that individual companies may move in or out of the MAS portfolio as these assessments are updated.
Below, we've given some examples of companies that currently MSCI define as not being ESG leaders and that consequently our responsible investment mandate has divested from. The explanation of why the companies aren't ESG leaders comes from MSCI.
- Apple: Apple's commercial success needs to be weighed against its approach to industrial relations. In addition, it faces significant cybersecurity risks and ongoing tax avoidance investigations. Apple is at significant risk of being implicated in industrial and human rights controversies and continues to face industrial management controversies as retail workers have sued Apple regarding late pay cheques and wage disparities.
- Coca Cola: There is evidence of governance risks in relation to accounting and financial reporting practices. The company has been involved in a number of minor controversies across its global business.
- Cisco Systems: Cisco Systems faces at least three major ESG-related concerns:
1) Cisco's multiple acquisitions and large staff numbers leave it vulnerable to employee-centred risks;
2) the increase in Cisco's software-based services may push up Cisco's exposure to data security risks; and
3) there are potential concerns related to Cisco's board structure. The chairman is also the CEO, and about a third of the directors and a significant portion of the audit committee have served on the board for more than 15 years. In addition, Cisco acquired a company that was co-founded by an ex-board member. These factors point to governance practices that are not necessarily well aligned with shareholder interests.
The ESG Leaders methodology applied by MSCI excludes companies that are mired in serious controversies, e.g.:
- Johnson & Johnson has faced a number of controversies and lawsuits in recent years. Asbestos-related cancer risks from talcum-based products and baby products pose an ongoing brand risk. Product recalls between FY 2016 and July 2018, as well as US Senate and state-level investigations over sales and marketing practices and lawsuits regarding unsafe products (for example hip joint replacements), means that Johnson & Johnson remains one of the worst performers among its peers on an ESG basis.
- Samsung Electronics is involved in controversies related to industrial rights, governance, customers and environment impacts. It faces significant concerns related to bribery and fraud, product safety and quality, health and safety, and anti-competitive practices.
- Nestle S.A. is involved in controversies related to price-fixing, industrial rights, governance, environmental and human rights standards. It faces significant concerns related to supply chain industrial standards, anti-competitive practices, child industrial, and marketing and advertising.
We recognise that many New Zealanders, including MAS, may use products and services provided by companies, such as Apple and Samsung, that don't make the cut to be included in the MSCI ESG Leaders strategy. Nonetheless, we believe that our responsible investing strategy will have a positive influence in helping lift the ESG practices of these companies.
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