Two of the world’s largest asset owners are putting pressure on Amazon to reveal exactly how it is protecting its workers from COVID-19. It’s a move indicative of the investor mood to focus attention on human and labour rights among investee companies, with a particular spotlight on the tech sector.

The giant Dutch pension provider, APG, and the New York Comptroller’s office, which looks after the five New York City retirement funds, have put together a shareholder proposal calling on a sub-committee of Amazon’s board, the Leadership Development and Compensation Committee, to release details of the company’s efforts to protect workers’ health and safety in the pandemic. It comes on the back of a report by the Center for Investigative Reporting which shows that some Amazon warehouses were COVID-19 hotpots and the turnover rate for frontline workers was double the industry average.

Anna Pot, APG’s head of responsible investment Americas, says the COVID crisis has highlighted the importance of human capital management, and social issues, in the successful running of businesses.

“Last year and the COVID crisis has further emphasised the importance of this. Things like paid sick leave and effective communication with employees is so important in handling the pandemic,” she says. “The COVID crisis shows if your workers get sick then they are off work and it impacts the business, it’s a no brainer. It is important companies have processes in place and they are effective, it’s just good business.”

Collectively NYCERS and APG have $6.3 billion invested in Amazon, and have been engaging with the company for a long time. For ABP, APG’s largest client, Amazon is its largest equity holding with EUR3.3 billion.

Pot says the company has been responsive to engagement and has stepped up in terms of creating human rights policies and addressing supply chain issues. However the next step, which the investors are now asking for, is for the company to show the impact of those policies and procedures.

“In the context of COVID they have made numerous adjustments in their work practices and are open to their investors to engage much more significantly than a year or two ago. But for us as an owner that cares deeply about RI we want to see impact,” she says. “It’s good to have a policy and a program but at the end of the day it’s about impact. We want to see how many people are impacted. Can people go to work and be safe? That is the focus of this engagement.”

In October last year Amazon released a report that acknowledged 19,816 of its US workers had tested positive for COVID-19.

“We want to call on those responsible for this, what is the effectiveness of these programs? Show me. A one-off report on infection rates doesn’t tell us,” she says.

Pot says while asset owners were now asking companies about human and labour rights issues, it is important that the focus is on outcomes.

“The role for asset owners is to push this forward, more and more investors are asking about these issues, but we need to push for the impact of their procedures. We want to inspire other investors to do the same – ask companies to show the evidence of impact of their procedures and policies.”

 

Amazon’s sustainability performance

Even before the pandemic, long-term investors had expressed their concerns about the sustainability of Amazon’s business model, which emphasises productivity in spite of reports about the negative effects of that on worker health and safety.

A 2019 report by the Center for Investigative Reporting analyzed Amazon’s OSHA reporting from 22 fulfillment centres found extremely high injury rates – more than twice the national rate.

Amazon also performed poorly in the recent Test of Corporate Purpose initiative. Founded by Mark Tulay and co-chaired by Bob Eccles, Hiro Mizuno and Sacha Sadan – the TCP assessed how companies respond in a time of severe global crisis, and tested if they truly “walk the talk” in delivering to their stated corporate purpose.

“My experience working closely with Amazon on the ‘Test of Corporate Purpose’ initiative proved that financial might does not equate with right as Amazon was one of the worst performers, justifiably so,” Tulay says, adding the company had the resources to do more, better and faster.

“Instead they ducked and dodged the hard-truths and cut corners whenever possible to safeguard the fortress of their miscalculated reputation.  Amazon bullied not only me, but also fired six front-line employeesthat had the courage to speak of the so-called ‘vein of toxicity’ that ran through the company.  It was clear that employee safety and well-being took a back seat to profits at any cost.  It was all puff and fluff and profits.”

According to Tulay, who says he was bullied by the company to speak false truths, Amazon misled and misinformed the public and investors about the true toll that COVID-9 took on its employees and continues to do so.

“They cut benefits at a time when the front-line employees needed it most and they threaten to sue and intimidate truth-tellers like me that do not shirk from the truth.  The company should be ashamed,” he says. “And astute institutional investors should be held accountable for ducking and dodging their fiduciary obligations.  Amazon is the new Exxon of the sustainability movement and so-called responsible investors that turn a blind eye to these hard truths do so with clairvoyant myopia where profits trump truth.”

In evidence of other investor engagement on social issues, The Council of Ethics of the Swedish National Pension AP funds, has produced a document for the tech sector outlining its long-term expectations of how the sector should work strategically on human rights.

Developed in conjunction with the Danish Institute for Human Rights, a larger group of investors has also engaged in the development of the document and has begun to engage with tech companies about these expectations. They include APG, AXA, Church of England Pensions Board, Church Commissioners of England, COMGEST, Kempen, Legal & General, LGPS Central, New Zealand Super Fund, Robeco, Royal London Asset Management and USS.

For NZ Super this engagement began back in March 2019, following the Christchurch terror attacks. At that time it coordinated a shareholder engagement calling on the giant tech companies – Facebook, Google and Twitter – to take more responsibility for what is published on their platforms.

 

In October last year Marisa Hall painted a compelling challenge to asset managers of all types: adopt system-level thinking to create a more sustainable world. She painted a pathway for how this could be achieved, with culture and measurement key enablers. However, I found myself pondering the role of government policy as enabler or inhibitor.

The playbook of defining events is updating in real time

Hall began by detailing issues which shaped the present views of the Thinking Ahead Institute (TAI), where she is co-head. The first was Davos in January 2020, where a broad economic forum was dominated by the issue of climate change. The second was the coronavirus outbreak, and the third the unlawful killing of George Floyd in May.

While each is individually important Hall contests that in aggregate, they form a mosaic of a world in need of strong leadership to become more sustainable. This playbook is updating all the time and it would be easy to update this with a new but similarly impactful set of recent events.

TAI promotes “ESG 3.0”: a framework of system-level investing whereby investors seek to change the system in a way that delivers long-term financial benefits and a more sustainable world.

Hall cites culture and the ability to measure and implement as the two key enablers.

TAI has a long history working on the development of investment culture and finds culture to be integral to enduring success. Hall highlighted the importance of shared language and a narrative, while identifying intentionality, authenticity, and transparency as features of cultural leaders, both individuals and firms. All of this helps to break away from the tactical (short-term) and focus on the strategic (long-term). Hall’s observation that inclusion and diversity are part of maximising collective intelligence in strong cultures resonates.

From there the challenge is to integrate measurement with purpose and vision.

For a long time, TAI has espoused the benefits of a total portfolio approach (TPA) compared to an SAA (strategic asset allocation) approach. Hall believes it lends itself to meeting the challenges of ESG 3.0. Specifically, TPA more naturally lends itself to the complex task of integrating multiple objectives (financial, sustainability and impact). Measurement is a difficult area and can be improved in many areas including participation and standardisation.

The multi-faceted role of government

How important is the role of government in generating a more sustainable world? Utmost in Hall’s view. If one could allocate influencing power using 10 units, then TAI’s view is that four would go to public policy, three to corporations, two to investment organisations and one to individuals.

The interactions between influencers in a framework such as this are immense. Positive feedback loops generate a momentum effect which elevates the possible contribution of all influencers. By comparison, negative interactions constrain the potential impact of each influencer.

Consider the role of public policy: direct impact comes in areas such as how it spends tax-payers money (e.g. into projects which contribute to a more sustainable world) and the policies it sets (e.g. policies to price externalities). Additionally, public policy has the potential to magnify or constrain the potential of other influencers. Relevant to my reflections on Hall’s Big Ideas session is the impact loop between government and investment organisations. The example of governments’ influence on how pension capital accounts for sustainability is pertinent.

Presently there are no examples of pension systems which value anything other than financial outcomes. For many countries ESG is viewed as a risk and an opportunity.

This acts as a ceiling to the aggregate contribution that can be made by investment organisations. Functionally there is no need to establish the complex trade-off between sustainability impact and financial outcomes. The cultural challenge relates to fostering talent in a constrained environment. There is also a flow-on to the loop between investment organisations and corporations: if funds are not required to measure impact (positive and negative) then there will only be limited pressure on corporations to participate in collective standardised data provision activities.

Floor or ceiling?

Investment organisations are approaching a crossroads. The risk / opportunity view of ESG will persist as a minimum standard (assuming ESG policy changes in the US change following Biden’s election win). So, should this represent the floor or the ceiling for investment organisations?

Attempting to do more carries multiple risks – regulatory and career are obvious examples. But letting the risk / opportunity view be your ceiling also carries risk in the areas of culture and staff retention.

Let’s not forget the positive feedback loop that investment organisations have into government. Being able to clearly explain the benefits of a more sustainable approach to the use of capital may assist government to mandate sustainable investing more explicitly. A higher floor and a higher ceiling!

Marisa Hall and TAI present a clear pathway for asset managers to invest sustainably: culture and measurement / implementation. My reflection is that while globally government policy has enabled (through acknowledging risk and opportunity associated with ESG) the acknowledgement of ESG-based risk and opportunities, there is another round of enablement: accounting for sustainability in the measurement of outcomes. There is a challenge for investment organisations to explain this opportunity and devise workable solutions for effective government policy which preserves accountability. Such an outcome has the potential to set in place a significant uplift in the contribution that investment organisations can make to a more sustainable world.

David Bell is executive director of The Conexus Institute.

From the catastrophic Australian fires at the beginning of 2020, to the extraordinary events in Washington this month, and the many pandemic missteps in between, the issues that occupy responsible investors grow ever more pressing. But as Kermit the Frog sang, it is not that easy being green. And when he called rainbows ‘only illusions’, he may have foreseen the illusory, but insubstantial connection between many responsible investment products and the Sustainable Development Goals.

Individual consumers can engage in the wishful thinking underpinning these and perfunctory responsible investment can suffice for commercial purposes, fiduciaries lack these luxuries. Differentiating responsible investment quality among products, services and provider capabilities is mission-critical for investors dependent on the ‘real world’ outcomes that underpin future investment opportunities.

For the institutional-grade analysis required in a field where activities can range from shareholder engagement to short selling; and reasons from religious observance to risk management, a robust model of responsible investment is needed.  Regnan introduced such a model in its working paper, On Purpose.  It proposes that principled (versus opportunistic) responsible investment is characterised by intervention in conventional investment practice to pull it into alignment with ‘real value’.

‘Real value’ contrasts with conventional investment’s preoccupation with ‘the price of everything and the value of nothing’.  Examples include portfolios insensible to catastrophic losses of species, habitat, and natural resources on which life depends; or markets that erode the institutional integrity or community cohesion on which economic development and commercial enterprise depend.

Reasonable people differ about details of what constitutes real value.  However in our experience this is often a distraction from the more fundamental questions.  One clients’ internal stalemate followed impassioned debate about what fossil fuel activities to ‘screen out’ from an equities allocation, given the beneficial activities (such as healthcare) that use them.  Yet participants were unable to articulate what they intended such screening to actually do.

Regnan proposes that responsible investors formulate strategies, choose service providers, and evaluate their responsible initiatives systematically, based on how ambitiously, how effectively, and how consistently each drives alignment of investment with ‘real value’ (however defined).  For example, climate-focussed offerings can be differentiated by the climate outcomes they seek (corporate disclosures vs national decarbonisation?); the credibility of their chosen methods (adjustments to proprietary stock valuations? Or publishing novel research?); and their consistency (a single product?  Or consistent for all corporate activity?).

The power of the ‘intervention’ model of responsible investment lies in its illumination of its activities in context. For example, requesting a screened investment option might be the most ambitious intervention available to a single individual in a million-member pension scheme. It is a less ambitious intervention for the institution able to influence suppliers, industry peers, and issuers.  Similarly, publishing ESG analysis that disrupts market norms is a more effective intervention than applying the same analysis solely for alpha within a proprietary portfolio.

The SDG rainbow might well be the first that leads to a pot of gold, as sustainable economic development creates future investment opportunities. But investors must be willing to differentiate real RI from distractions merely dressed (like leprechauns) in green. Being green, in contrast, “might not stand out like flashy sparkles in the water” as Kermit lamented.  Then again, he found much richer opportunities once clear of the swamp.

For more on a functional framework for responsible investment see On Purpose: Towards a Unified Theory of Responsible Investment. 

Susheela Peres da Costa is head of advisory at Regnan, the responsible investment boutique owned by Pendal Group Limited.  

Three prominent Chicago Booth economists have called for more targeted spending by the US government to more effectively manage the disruption to the economy, but they are not worried about inflation in the near term.

Austan Goolsbee, the Robert P Gwinn Professor of Economics at Chicago Booth and the former chair of the Council of Economic Advisers and a member of President Obama’s cabinet, says the virus is “the boss” and is still what is driving the economy.

“We should not be calling these bills ‘stimulus’ because they are not traditional stimulus. These are just rescue payments, they are disaster relief, once you realise that it becomes obvious that you give the money to the people who need it,” he says.

Goolsbee, who is named one of the 100 global leaders of tomorrow by the World Economic Forum, says that now, in the middle of the worst downturn on record and in what is possibly a double-dip recession, is not the time for governments to stop spending.

“It is not the time to tighten the belt. Governments should spend the money and direct it to the places it is most necessary. Tightening would completely miss the economic moment.”

Similarly Randall Kroszner, Deputy Dean for Executive Programs and the Norman P Bobins Professor of Economics at Chicago Booth says the government needs to move from policies that were ‘hopeful’ to those that are more targeted.

“It’s not just about spending more, it’s about where is the best bang for your buck,” he says.

Kroszner, who was a governor of the Federal Reserve from 2006 to 2009 and spoke at the Fiduciary Investors Symposium last year, says the government has to recognise that many sectors will not go back to where they were pre pandemic.

“The most recent jobs report shows there is a boom in tech but a significant contraction in hospitality and transport. It is hard to move people from one to the other. Some of those companies will have to shut down, and we need to provide support for those families and move on. That is hard for politicians to do, to move on. But we have to see that we need to provide support for people to move on, that is good for them as they get into productive work more quickly, and it is good for the economy.”

Raghuram Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance who was the 23rdGovernor of the Reserve Bank of India and was also formerly chief economist and director of research at the International Monetary Fund, says this is an opportunity for governments to concentrate on structural reform.

“Relief makes sense, but it has to be better targeted, a lot of money has gone to people who don’t need it,” he says pointing out that one option would be to extend unemployment insurance in sectors that are worse off.

“I am perturbed by the constant feeling this is all about stimulus. There is a need for serious structural reform in many countries including the US. It is clear the pandemic has exacerbated every inequality there was before. To that extent it is time to try and fix those sources of problems. How do we build back better, rethink education and infrastructure? It’s not so much about stimulus, but about how do we create sustainable growth in the medium to long term and focus on reforms.”

The economists called for a shift away from a focus on the headline spending number and a focus on where the relief is being spent.

“What you want is bang for buck: where are you spending it, not the amount you spend. Are you investing in human capital, infrastructure, what is the return and productivity of the investment, that is what will drive wages growth,” Kroszner says.

Goolsbee says the Federal Reserve has missed its inflation target for the past decade, and he continues to “not be afraid of inflation”.

“I don’t think the Fed should take its foot off the pedal because they are scared of inflation,” he says.

Similarly Rajan says the Fed won’t pre-empt anything to manage inflation.

“It will wait until it sees strong inflation and at that point it may act, but that probably won’t be over the next year,” he says.

The largest single pension scheme in the United Kingdom, USS, took advantage of the dislocation due to COVID in 2020 and has bought credit assets and increased inflation and interest rate hedging.

Last year was difficult for many investors, but Simon Pilcher CIO of USS was dealing with the complexities of starting in a new position, alongside the complexities of the market volatility.

“It was a very very challenging time for us as I’m sure it was for everyone else,” Pilcher says. The fund has a modestly levered portfolio so when the crisis hit it was important to be able to maintain its positions in the market rather than being forced into any margin calls, and the team worked “exceptionally well” to maintain those positions and take advantage of some of the opportunities, he says.

In particular the fund acquired some “cheap inflation hedging” at time when the government bond markets were behaving under clear stress.

“We also took advantage of significant widening in credit spreads and bought fixed income and credit assets that give us a combination of hedging and returns,” he says.

Throughout the year the fund continued to increase its allocation to credit and gradually increased some of its inflation and interest rate hedging.

“There was a huge trans-Atlantic dislocation that happened. We saw massive outperformance of the US treasury market relative to the UK, we had substantial holdings of US treasuries and US TIPS and were able to make some good trades out of the US and into the UK for the benefit of the scheme at various times during the year,” he says. “Lately we been looking at our currency exposure and whether there are better ways to organise that. So for example in an environment where equity markets tumble which currencies would give us hedging at a total portfolio level. We sold some dollars and are increasing euro and yen.”

 

About 22 per cent of the fund is in private assets where it has been investing for about 12 years. The program started by focusing on funds and making use of the skills and expertise of specialist private equity firms. As the focus changed to include reducing the average cost of investments, co-investment became more prominent. More recently USS has taken large direct stakes in investments, sourcing deals itself and directly managing and sitting on the boards.

“We have taken an ever greater focus on private debt and long income plays,” Pilcher says. “Especially in the last 12 months, where we have been trying to find assets with a combination of cashflow characteristics which link back to our liabilities, inflation linked in nature but at a return premium that significantly exceeds what we could do in the bond and public markets. We have seen a lot of opportunities [last] year.”

The fund made a three year-plan that outlined what investments it could make in different segments. By the end of 2020 it was well ahead of that three year plan with about 40 per cent of that plan completed.

“There is a significant wealth of opportunities coming our way. Some of those we were looking at pre-COVID, some are coming about post-COVID and in some cases it’s because there are less people competing for them.”

As an example he points to a recent £400 million investment taking out a 49 per cent stake in a UK fuel station portfolio owned by BP which is a sale and lease back transaction with cashflows linked to CPI.

“This is giving us a material uplift on the returns we could have got from investing in the debt of the company or other alternative assets,” Pilcher says.

During the crisis it looked carefully at its private market investments.

“We have an obligation to support the companies we have backed. And it was an intense time of attending meetings and advising management and giving them advice around things like liquidity. In a couple of cases we actually provided liquidity to our investments – we were very active in that regard.”

Pilcher says real estate is one of the areas that continues to have some challenges, but he also points out that in the current environment there is not such a thing as one real estate market, with performance of the asset class divergent over the last several years.

“Pre COVID there was significant pressure on retailing assets with smart warehousing doing very well, a lot of that has continued,” he says. “We invest holistically rather than simply saying here’s a real estate allocation, we look at an asset more broadly.”

In the example of the BP investment it was an attractive asset at the scheme level, he says, not as a real estate play per se.

“What we have bought is largely a secured set of cashflows. The vast majority of the value is in the contractual cashflows. This helps us from a liability perspective, and will probably do good in helping the corporate redirect their assets into the overall greening of their investments too.”