In this weekly feature, FSA shows a potential investment that a firm has declined on the basis of ESG criteria. The purpose is to highlight firms that are actually putting into practice an aspirational ESG policy.
Commentary by: Jie Lu, head of research in China for Robeco
Company: A leading Chinese metals and mining company
Robeco liked the mining company – a leader in its industry – because of potential upside in the share price. The team believes commodity prices will increase over the long term and the company’s large scale operations and ownership of key mines position it well for growth.
But after an ESG investment analysis, Robeco saw that the company had been “consistently negligent in protecting employee safety”.
Lu said that according to publicly-available information, the company had fatal accidents that led to death and injury of several employees in 2013.
“In 2015, the company also violated safety regulations and got fined, as it failed to register explosives it planned to use.”
Lu also faced a lack of transparency. “The company did not disclose the exact figures or percentage of safety incidents, fatalities or injuries, and also delayed decommissioning of an outdated product line, which presented both safety and pollution risks.”
In addition, management hesitated to invest in more environmentally-friendly mining processes.
“Mostly these are issues related to waste discharge. For example, they were accused of discharging industrial waste far above permissible level that polluted the river nearby, and of delaying the decommissioning of production lines that caused the pollution.
“We believed that such practices will expose the company to more risks of environment-related fines, and lead to margin contraction and increasing capital expenditure in the future.”
The investment was declined. However, because the company is a leader in its industry, they still like the fundamental story.
Lu said they will look at it again “but will keep on applying a valuation discount if the company cannot show improvement on ESG-related issues”.
