Norges Bank

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Children’s Rights – A concern for investors

by Magdalena Kettis, PhD, Head of Social and Corporate Governance, Norges Bank Investment Management (NBIM)

World Day Against Child Labor

Today is the World Day Against Child Labour. We want to acknowledge this day, since there are 126 million children engaged in hazardous work according to ILO. Many of these children work in the supply chains of large multinational companies with large institutional investors as owners. This is not acceptable. Companies are often told that they can be part of the problem or part of the solution, that they have a choice. So do investors.

Why is children’s rights a concern for investors?

Norges Bank Investment Management's (NBIM) is responsible for managing the assets of the Norwegian Government Pension Fund. The fund’s market value at the end of March 2009 was USD 307 billion. NBIMs active exercise of ownership rights seeks to safeguard the long-term returns of the fund and is based on the UN Global Compact and the OECD Guidelines for Corporate Governance and Multinational Corporations. NBIM has chosen children’s rights and child labour as one of the strategic areas for corporate governance and corporate engagement.

NBIM believes that children’s rights are important from an investor’s perspective for a number of reasons. Poor education and health for the coming generation of workers and consumers provide a weak and inadequate basis for future production and employment. Part of the fiduciary duty of boards is to consider the economic impact of social issues, which includes child labour concerns. Lack of corporate responsibility towards social issues may be an indication of weak corporate management, especially in dealing with risk. Poor corporate social responsibility (CSR) performance by companies within a sector or market can affect the legitimacy of the sector or market, increasing the exposure of the company to operational risk. These factors will have an effect on the long-term value of a company. They may also impact the investment decisions of investors and thus the ability for companies to raise capital.

This points to the importance of well functioning governance structures. It is not our role as investors to direct in any detail how a company organizes its board and management structure. NBIM believes, however, that in order to implement and oversee any CSR practices in an efficient and proper manner, companies need to have a transparent and well-functioning governance structure. This structure should include board-level involvement, risk management, control and monitoring processes, and internal performance reporting lines. NBIM also believes that the potential economic impact of social issues should be integrated into a company’s strategic business planning. For some companies it is relevant to have human rights and business competence represented at board level.

NBIM Investor Expectations on Children’s Rights

In order to address these concerns NBIM developed The NBIM Investor Expectations on Children’s Rights. The purpose of the Expectations is to set a standard that companies must be expected to live up to, and serve as a basis for a constructive dialogue with portfolio companies. NBIM Investor Expectations on Children’s Rights are directed towards corporations with operations or supply chains in sectors and countries where the exposure to child labour risk is high, and will thus not apply to all 8000 companies in which NBIM is invested. The Expectations are based on criteria that take into account preventive corporate action, including relevant governance structures, with regard to the worst forms of child labour, sustaining minimum age for labour, and promotion of children’s rights.

NBIM will on an annual basis conduct a systematic assessment of our holdings in relevant sectors and markets of the level of compliance with these criteria. The assessment is based on publicly available information. The first NBIM Compliance Report released in March 2009 covers 430 companies in four sectors: cocoa, mining, steel and apparel, and shows that the number of companies that address children’s rights and the risk of child labour in their own operations or supply chains is low. Few companies report on continuous risk assessments of direct operations and supply chains and monitoring systems for the prevention of violations of children’s rights was practically non-existent within all sectors. NBIM hopes to see real improvements in all sectors by next year. We also expect that performance reporting – including targets and key performance indicators - reflecting not only short-term investor concerns, but also the concerns of long-term investors that have an interest in social issues such as children’s rights and child labour will improve.

Can active ownership make a difference?

The aim of NBIMs active ownership is to promote long-term financial returns through practices such as voting at general meetings, engagement with companies, and collaboration with other investors. NBIM believe that active ownership activities that focus on social corporate governance promote long-term value of a company. So far NBIM have been in contact with 130 companies regarding our Expectations on Children’s Rights and many of our in-depth engagements with individual companies have been very productive in terms of positive change. Most of these engagements are with individual companies and have been very productive in terms of positive change.

NBIM also have had a productive sector engagement involving four multinational companies with operations in seed production in India; Monsanto, Bayer, Syngenta and DuPont. The working process with these companies has convinced us that a sector approach is a most powerful way to deal with the issue of child labour. This is a model that can be used in other sectors as well, and a best-practice example that other companies can learn from. The process with the four companies started in 2008 with a round-table meeting initiated by NBIM. The conclusion of that meeting was that working together towards a common child labour management approach would be a resource efficient way for the companies to deal with the issue of child labour. It was also decided that the companies would own the process towards a policy and action plan regarding child labour in the companies contracted seed-growing operations and supply chain and that NBIM would be the facilitator of the process. The process included a multi-stakeholder consultation process.

The four companies announced today, in a CropLife press release, the adoption of  joint position paper - “CropLife Position on Child Labour in the Seed Supply Chain”-  which outlines the coordinated efforts of the companies to prohibit the use of child labour by suppliers, and other business partners within the seed supply chain. The position paper will apply to all companies participating in CropLife, an international global federation representing the plant science industry. This cooperative effort will probably increase the possibility of achieving adequate monitoring of the child labour situation on the ground.

NBIM expects visible improvements in companies' results from year to year.  However, it may take time for changes do come into effect. Given the long time horizon and the size of the Norwegian Government Pension Fund, NBIM is through its active ownership activities and corporate governance objectives, in a good position to follow-up and contribute to long-lasting solutions.

Published 12 June 2009 09:15