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  • 1. Morley Fund Management’s Proposal for Collaborative Engagement on the UN Global Compact by UN PRI Signatories 1.0 Summary Morley would like to propose that signatories to the UN Principles for Responsible Investment (PRI) engage with a sample of the companies that have signed up to the UN Global Compact. The proposal is to engage with the Chief Executive of listed Global Compact signatories, via a jointly signed letter, in order to either: (1) welcome particularly good practice, or, conversely, (2) challenge non conforming companies to regain full participant status. This action would support Principles 2, 3 and 5 of the PRI. We have identified 73 listed companies from around 3000 Global Compact signatories where engagement would be appropriate. The Compact database has not yet been fully catalogued, but currently includes 19 non-communicating and 5 inactive companies. It also highlights 49 companies that the Compact believes are producing particularly good reporting (see Appendix 2 for the full list of companies). These companies are domiciled in 21 different countries, suggesting that a collaborative approach involving global investors should be more effective than individual attempts at engagement. PRI signatories are requested to consider signing the draft letter (see Appendix 3). Collaborating investors will receive feed back on the results when the Global Compact next evaluates the communications status of its signatories. This is currently anticipated to be in the fourth quarter of 2007. 2.0 Background Morley Fund Management requests the support of other PRI signatories in using their combined influence to help the Global Compact achieve its aims. The following sets out the background to this proposal: 2.1 What is the UN Global Compact? The UN Global Compact is the largest voluntary corporate citizenship initiative in the world. It is currently engaged with around 3,000 companies from 100 countries, as well as 700 civil society and international labour organisations. It was launched in 2000 as an initiative to promote responsible corporate citizenship, and to commit businesses to being part of the solution to the challenges of globalisation. Participants work to advance ten universal principles (see Appendix 1) in order to foster a more sustainable and inclusive global economy. These principles cover human rights, labour standards, the environment and anti-corruption. The ten principles are based on various international treaties and agreements that have been translated into a business context. There are of course limits to how much voluntary corporate citizenship initiatives are able to achieve. For example, a company signing the Global Compact does not guarantee that it will uphold these ten principles. Nevertheless, the Compact has successfully raised the profile of corporate impacts on human rights, labour standards, and the environment – and has arguably increased the quality of the board room debate on these potentially material issues by signatory companies. As a result, we see a corporate statement to adhering to the Global Compact as a positive public statement, and believe that it deserves the support of PRI investors.
  • 2. 2.2 What is the Business Case for Corporate Participation in the Global Compact? A company’s ability to manage and mitigate exposure to social and environmental risk is increasingly relevant to long-term financial success. Participating in the Global Compact signifies a corporate high-level commitment to being accountable and transparent. The Compact also attempts to encourage greater participation and engagement between businesses and their stakeholders. It provides a framework for companies to enact on commitments to upholding human rights, promoting labour standards, protecting the environment and eliminating corruption. In so doing, it helps companies to maintain their license to operate. 2.3 Is the Global Compact Relevant to Shareholder Value? There are very few industry studies of the direct link between shareholder value and Global Compact status. However, WestLB recently published research on the materiality of extra-financial factors based on a sample of 540 European companies (Garz, H & Volk, C. What really counts: The materiality of extra-financial factors, WestLB, February 2007). It found evidence of a link between extra-financial risk, cost of capital to a firm and shareholder value. The report suggested that compiling a sustainability report (such as a COP) was among the most important catalysts for change – contributing to accumulation of knowledge, questioning of processes and the establishment of suitable structures and practices. The regression technique used found a modest but statistically significant positive correlation between Global Compact signatory status and shareholder value. There was a similar positive correlation with public reporting based on GRI guidelines. 2.4 How is corporate adherence to the Global Compact evaluated? Once a company has committed itself to the Compact, it is expected that changes to business operations should be set in motion so that the principles become part of strategy, culture and daily operations. However, it is not possible for the Compact to directly assess the extent to which this takes place. As a result, the company is required to publish in its annual financial report, or similar document, a description of the ways in which it is supporting the Global Compact and the ten principles. This is known as a Communication on Progress (COP). The rationale of the COP is to raise the transparency and public accountability of the initiative, through a repository of corporate practices that serve as a basis for continuous improvement. There are many ways to structure a COP However, use of a globally recognised reporting framework such as that developed by the Global Reporting Initiative (GRI) is encouraged by the Compact where businesses are of a scale and complexity that warrant that form of disclosure. Failure to submit a COP puts the company at risk of being identified as ‘non- communicating’ and later ‘inactive’, and ultimately removed from the Global Compact. For further information see 3.0 The Case for Collaborative Engagement by PRI signatories The 73 companies targeted for engagement are domiciled in 21 difference countries around the world. It is unlikely that they will be collectively held by any one institutional investor. A collaborative engagement initiative by global investors should therefore increase the influence of the initiative. Without adequate reporting on progress, companies’ adherence to the Global Compact’s ten principles represent little more than a statement of good intentions.
  • 3. While an engagement focus on reporting is only a part of the process of improvement advocated by the Global Compact, it represents the most obvious initial area in which PRI signatories have the most potential leverage and influence. It is through the COP process that participants can be held to account by stakeholders, including us as the investment community. Where companies have committed to produce a COP, but not delivered on that commitment, then investors can use their influence to ensure that the management does deliver. Equally, where companies have produced notably good communications, then this should be welcomed. In terms of the specific rationale for PRI signatories, we believe that the initiative supports three principles: Under Principle 2, signatories pledge to ‘be active owners and incorporate ESG issues into our ownership policies and practices.’ The proposal for engagement on the Global Compact offers an ideal opportunity to exert ownership influence and encourage ‘non-communicating’, and ‘inactive’ companies to re-engage. Principle 3 states: ‘We will seek appropriate disclosure on ESG issues by the entities in which we invest.’ Possible actions include requesting information from companies regarding their adherence to relevant international initiatives, and specific reference is made in the principles to the Global Compact. Principle 5 states ‘We will work together to enhance our effectiveness in implementing the Principles.’ 4.0 What would I need to do? Participating investors need only provide comments on the letter (see Appendix 3), the name and title of the person signing it, and an electronic copy of the signature. Some investors may wish to lead more involved engagement programmes on the Global Compact. This could involve engaging with companies that are not signatories to the Global Compact but perhaps should be. Alternatively, it may involve engaging with Global Compact signatories that are producing a COP, but where there are substantive questions about their performance or practices. 5.0 How can I register my interest? Please contact Steve Waygood, Head of SRI Engagement at Morley Fund Management via or +44 (0)20 7809 6327.
  • 4. Appendix 1 : The UN Global Compact Ten Principles Businesses should: Human Rights Principle 1: support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. Labour Standards Principle 3: uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: (work towards) the elimination of all forms of forced and compulsory labour; Principle 5: (work towards) the effective abolition of child labour; and Principle 6: (work towards) the elimination of discrimination in respect of employment and occupation. Environment Principle 7: support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies Anti-Corruption Principle 10: work against all forms of corruption, including extortion and bribery.
  • 5. Appendix 2 : Global Compact Signatories Where Engagement is Proposed *
  • 6. Symbol Company Name USD m Country Global Compact Status B0LCB0 AarhusKarlshamn AB 1,046.3 SWEDEN Non-communicating 527313 Altana AG 10,074.9 GERMANY Non-communicating ANSW Answers Corp. 113.8 UNITED STATES Non-communicating 561752 Apranga 246.0 LITHUANIA Non-communicating 591591 Axfood AB 2,129.4 SWEDEN Non-communicating 712854 Banca Monte dei Paschi di Siena S.p.A. 16,650.8 ITALY Non-communicating B1NVX6 Bankas Snoras 200.1 LITHUANIA Non-communicating 207437 BBVA Banco Frances S.A. 1,831.3 ARGENTINA Non-communicating 674125 Biocon Ltd. 1,163.0 INDIA Non-communicating 218353 Cemento Polpaico S.A. 419.6 CHILE Non-communicating 587526 Fleury-Michon 296.0 FRANCE Non-communicating 565227 Grindeks 147.5 LATVIA Non-communicating 727952 Klaipedos Nafta AB 144.1 LITHUANIA Non-communicating 552172 Lifosa AB 217.3 LITHUANIA Non-communicating 595249 Nordea Bank AB 44,610.5 SWEDEN Non-communicating 335600 Premier Oil PLC 1,974.6 UNITED KINGDOM Non-communicating 598411 TEO LT AB 766.9 LITHUANIA Non-communicating 707624 Unibail 12,821.4 FRANCE Non-communicating 238600 Usinas Siderurgicas de Minas Gerais S/A 9,721.3 BRAZIL Non-communicating 610000 Dena Bank 257.0 INDIA Inactive ECIL ECI Telecom Ltd. 970.1 ISRAEL Inactive B01WTJ Gruppo Ceramiche Ricchetti S.p.A. 134.8 ITALY Inactive B0GWF4 Hindalco Industries Ltd. 4,109.6 INDIA Inactive B19DVX Invensys PLC 5,260.9 UNITED KINGDOM Inactive 710889 ABB Ltd. 43,963.5 SWITZERLAND Notable 525076 ABN AMRO Holding N.V. 90,561.6 NETHERLANDS Notable 597980 Alcatel-Lucent 30,587.1 FRANCE Notable 004864 Allianz SE 98,592.0 GERMANY Notable 049015 Anglo American PLC 78,600.4 UNITED KINGDOM Notable 550190 Banco Bilbao Vizcaya Argentaria S.A. 85,040.2 SPAIN Notable 008314 BASF AG 59,556.5 GERMANY Notable B19GH5 BNP Paribas S.A. 108,738.9 FRANCE Notable B0Z867 Carrefour S.A. 54,494.0 FRANCE Notable 612156 Chennai Petroleum Corp. Ltd. 773.2 INDIA Notable 453278 Coca-Cola Co. 119,840.1 UNITED STATES Notable B04TZX Coloplast A/S 4,306.7 DENMARK Notable 738137 Compagnie de Saint-Gobain S.A. 39,082.1 FRANCE Notable Companhia Brasileira de Distribuicao Grupo Pao de 266777 Acucar 3,668.6 BRAZIL Notable 554389 DaimlerChrysler AG 83,912.2 GERMANY Notable 415558 Danisco A/S 3,992.6 DENMARK Notable 023740 Diageo PLC 56,665.5 UNITED KINGDOM Notable 527178 Endesa S.A. 57,840.4 SPAIN Notable 595748 Ericsson, L.M. Telefonaktie A 61,487.3 SWEDEN Notable 401234 European Aeronautic Defence & Space Co. EADS N.V. 26,257.1 NETHERLANDS Notable 517617 France Telecom 76,480.6 FRANCE Notable B02XBR Hewlett-Packard Co. 112,991.9 UNITED STATES Notable 711075 Holcim Ltd. 27,327.1 SWITZERLAND Notable 045949 Imperial Chemical Industries PLC 12,680.1 UNITED KINGDOM Notable 220570 Interconexion Electrica S.A. 2,825.9 COLOMBIA Notable 450270 Lafarge S.A. 28,522.4 FRANCE Notable 712387 Nestle S.A. 151,602.3 SWITZERLAND Notable B11HK3 Norsk Hydro ASA 42,805.1 NORWAY Notable 710306 Novartis AG 136,237.3 SWITZERLAND Notable 707752 Novo Nordisk A/S 31,198.5 DENMARK Notable 465853 Novozymes A/S 6,313.7 DENMARK Notable 253999 Petrobras Energia Participaciones S.A. 2,222.6 ARGENTINA Notable 710352 Peugeot S.A. 18,541.7 FRANCE Notable 068470 Pfizer Inc. 186,748.8 UNITED STATES Notable 471279 Renault 37,083.3 FRANCE Notable 252509 Repsol YPF S.A. 39,921.4 SPAIN Notable B09CBL Royal Dutch Shell Class A 221,781.4 NETHERLANDS Notable
  • 7. *NB This list may be subject to some updating as the Global Compact database has not yet been fully catalogued.
  • 8. Appendix 3 : Draft Letter to Global Compact Signatories Dear <<<CEO>>>, Re: <Company Name’s> Global Compact Signatory Status As signatories to the UN Principles of Responsible Investment (PRI), we have recently been examining the companies that have signed up to the UN Global Compact, which is one of the PRI’s founding institutions. We believe that the Compact has successfully raised the quality of the debate surrounding corporate impacts on human rights, labour standards, and the environment, which we regard as potentially material issues. As a result, we see a corporate statement to adhering to the Global Compact as a positive public statement, and believe that it deserves our support. As existing or potential investors in your company, we would like to … [[[Then one of the three following paragraphs.]]] [[[1. To companies that have submitted exemplary COPs:]]] … take this opportunity to congratulate <name of company> on being selected by the Global Compact as having submitted a notable Communication on Progress (COP). We welcome this accolade, which demonstrates a serious commitment to responsible corporate practices. [[[or 2. To companies that have become ‘non-communicating’:]]] … express our concern that <name of company> is no longer in full engagement with the Global Compact. It has come to our attention that you have been designated as a ‘non-communicating’ member. We urge you to re-engage with the Global Compact as soon as possible to avoid further measures that may ultimately result in expulsion. Alternatively, we would welcome a written explanation as to why this is not possible at this time. [[[or 3. To companies that have become ‘inactive’:]]] … express our grave concern that <name of company> is no longer in full engagement with the Global Compact. It has come to our attention that you have been designated as an ‘inactive’ member. We urge you to submit a Communication on Progress as soon as possible to avoid losing participant status. Alternatively, we would appreciate an explanation as to why this is not possible at this time. [[[Letter continues…]]] We recognise that reporting on the Global Compact principles can be time consuming. Nevertheless, a company’s ability to manage and mitigate exposure to social and environmental risk is increasingly relevant to long-term financial success. The Compact provides a framework for companies to enact on commitments to upholding human rights, promoting labour standards, protecting the environment and eliminating corruption. In so doing, it helps companies to maintain their license to operate and protect shareholder value. Yours sincerely, Morley Fund Management, et al…