- April 23, 2014
In the January/February issue of the Financial Analysts Journal, Jack Bogle, founder and former chief ... [more]
Two more high profile investors have punished US retailer Walmart for its anti-union stance and poor labour practices by divesting their holdings in the company. AP Funds, Sweden’s cluster of state pension funds named AP1 through to AP4 and AP6 (there is no AP5) worth a combined $140 billion, sold its equity and corporate bond holdings in the company last week. In July PGGM, the Dutch asset manager that oversees €133-billion ($174-billion) also dropped Walmart from its equity portfolio after years of cajoling failed to change the company’s labour relations policy.
PGGM’s divestment, which amounts to 0.1 per cent of the fund’s assets under management valued at around $272 million, was the culmination of a process of dialogue and disappointment, explains Saskia van den Dool at PGGM. “It is regrettable that one of the world’s largest companies takes so little interest in the concerns of its shareholders and other stakeholders. The long dialogue with Walmart had both high and low points,” she recalls. “During the highs we received positive signals that the company was considering action upon our concerns. PGGM maintained the dialogue for as long as we thought improvements were feasible, but in the end we saw no option but to divest when it became clear that the engagement did not produce the results that we aimed for.”
Similarly, AP Funds’ decision to divest follows six years of pressure dating from before the different Swedish government funds had even coordinated strategy on ethical investment via their Ethical Council, set up in 2007. “AP Funds applied pressure on Walmart via direct dialogue, issuing shareholder resolutions and by collaborating with other investors,” says Christina Kusoffsky Hillesöy, chair of the council. “Our policy is to engage with companies that violate international conventions but if we can’t improve the company, we will divest.” Both investors believe that divestment, and with it the end of any ability to affect change at Walmart, doesn’t belie any failure in their ESG strategies. “We hope our decision sends strong a message not only to Walmart and its board members, but also to other companies. We take our role as an active owner seriously and we believe that abiding by internationally accepted standards is an important corporate responsibility that ultimately contributes to the long-term success of the companies we invest in,” says van den Dool. Christy Hoffman, deputy general secretary of UNI Global Union, which represents workers from around the world through 900 affiliated unions also believes that investors have to follow the threat of divestment through. “You have to hold out divestment as the ultimate act. If you don’t divest, they won’t take you seriously.”
Yet the impact of divestment hasn’t been felt immediately. European investors such as AP Funds and PGGM are already well known for their proactive environment, social and governance strategies. Last year PGGM voted at more than 3,100 shareholder meetings, was in dialogue with 746 companies and excluded 42 companies from investment. Most recently, the fund began a process to check the 2,800 companies in the FTSE All World Index, in which it is invested, against its own specific ESG index. Markets have factored in Walmart’s aggressive approach to labour relations ever since the retailer was dropped back in 2006, when Norway’s Government Pension Fund sold more than $400 million worth of shares citing labour issues, and Sweden’s AP2 fund became the fist in the cluster to sell its stake in the company. “Walmart will always come under pressure from unions because it provides low-paying jobs and is the biggest private employer in the world,” said one New York-based analyst who declined to be named. “But it’s hard to find such a stable company that is a better barometer of the world economy. There will always be an appetite for Walmart shares.” In contrast, he believes Walmart is more concerned with smoothing investor concerns over bribery allegations in its Mexican subsidiary. This “is more of an issue” than its poor record on labour relations, he said.
Yet both PGGM and AP Funds are influential investors and other pension funds in the region may follow where they lead. Walmart will take years to shake off the stigma of exclusion and divestment in Walmart may add weight to other campaigns particularly those around fossil fuels, where advocacy groups are pushing investors to better climate proof their portfolios. Swedish national pension fund AP4 has just announced plans to invest in a new emerging markets-equity fund, which excludes companies with high greenhouse gas emissions and extensive reserves of fossil fuels based on a new index. “With few exceptions, carbon dioxide is now widely recognised to have a negative impact on the climate. We believe that these companies will be valued differently in the future and that greenhouse gas emissions will be associated with higher costs in the long term. Hopefully, this will also increase the pressure on companies to lower their carbon dioxide emissions,” says Mats Andersson, chief executive at AP4.
At both PGGM and AP Funds, divestment was born from the belief that better governance helps returns but also that bad governance increases risk. The funds argue that investors that passively track an index still manage to deliver on their return objectives despite exclusions which only have a marginal effect on their tracking errors. “We are long-term owners and we saw a real risk in holding Walmart,” says Sweden’s Kusoffsky Hillesöy. “We are convinced that the issues we were concerned about at Walmart will eventually have a negative effect on the company’s performance,” concludes van den Dool.