The implementation of sustainability in the investment sector often takes place based on so-called ESG strategies. What should be excluded as an investment (“Exclusions”), how is the dialogue with companies (“Engagement”), and what are the requirements for an ESG rating (“Positive Selection”)? The so-called ESG strategies start with the investment activity and not with the objective: Different strategies can be used with the same goal – they are interrelated regarding sustainability. This is the case, for example, with child labour.
The respect of fundamental human rights is also strived for in the financial world. The relevant international conventions are generally recognised and are the basis of numerous initiatives, such as the UN Global Compact (UNGC). The value is incorporated into the investment policy of numerous products and the investment regulations of investors. The implementation is based on ESG data. Education is one of the important human rights and entails a ban on child labour. As a result, portfolios managed in this way are involved with child labour to a lesser extent than portfolios where the ESG Exclusions strategy is not applied.
Companies that are repeatedly involved in cases of child labour are likely to be confronted with higher reputational risks, especially in markets close to consumers, and to experience additional sales fluctuations. At the same time, child labour prevents education and thus reduces the knowledge and know-how of society. The affected national economy has only a few qualified workers at its disposal. This significantly weakens productivity, and prosperity is comparatively low in the long run. This is the second side of materiality. In the UN’s Sustainable Development Goals (SDGs), this is mentioned under the heading of “quality education” and the avoidance of child labour (see Goal 4 of the SDGs).
The ESG strategy “Exclusion” thus implements sustainability in the same way as other ESG strategies. Suppose an ESG rating, like that of Inrate, is based on the capture of dual materiality. In that case, the orientation towards ESG strategies is more likely to lead to overlaps in the implementation of sustainability than a consequent orientation towards the objectives and principles of an investor.
