Sharan Burrow: ESG – S and the E key

ITUC General Secretary Sharan Burrow’s closing words at the 2019 CWC Workers’ Capital Conference in Paris, France: Decent work, sustainability and stabilising a global economy in crisis requires a reset of investment priorities, and the role of workers’ capital through the pension funds is critical.

Rana Foorahar is my favorite financial journalist.

This week she takes on Starbucks as a metaphor for the health of corporate America.

She says:

“The money raised from new bond issuances is often used to pay for buybacks. Starbucks’ own debt load has roughly tripled over the past few years as it has pivoted to what it calls a ‘more highly leveraged model’.”

“Starbucks is of course by no means alone in its employment of such financial engineering. One of the biggest market stories of the past several years has been corporations capitalising on cheap money, using record low rates to issue bonds and then using the money raised to buy back their own equity in order to bolster share prices.

“It’s a shell game that has always made my head spin, particularly when done at a market peak, rather than a trough, which tells you that the strategy isn’t a bet on a real, underlying growth story but an attempt to make headlines.

“I thought we’d reached a peak in such Faustian financial wizardry a while ago, but no. In recent days, Apple, which has $200bn dollars of cash or cash equivalents on hand, announced a $7bn bond offering, part of a slate of $54bn worth of corporate debt issuances in the past week or so. Just when you think the bond bubble can’t get any bigger, it does.

“Given the looming risk of recession, a spate of recent corporate trouble (involving heavyweights such as GE, Kraft Heinz, Boeing, PG&E, and now Johnson & Johnson, which is under fire for its role in the opioid crisis), you would think investors might steer clear of even ‘high grade’ corporate debt. But the asset class seems to fill an existential need for something between equities, which many worry could crash, and the glut of negative-yielding government bonds.”

Rana points out that corporate America is living on borrowed time in regard to risks of a crash, but they are by no means alone!

There is without doubt an overwhelming risk of a new economic crisis on the horizon, and this time it will be multifaceted.

Global growth has stalled if not stagnated. The IMF’s global growth projection is now expected to be 3.2 per cent in 2019, and 3.5 per cent in 2020 – 0.1 per cent lower than April 2019 projections.

Trade wars in China and the US are unsurprisingly having a negative impact: In the second quarter of 2019, China’s economy grew by 6.2%, which is the lowest growth figure since 1992. US growth fell from 3.1% in Q1-2019 to 2.1% in Q2-2019, and the US Federal Reserve is already trying early-response measures by lowering its interest rates, the first time since the 2008 crisis.

Brexit: After seven years of growth, the British economy contracted by 0.2% in Q2-2019. Analysts expect further contraction if the Brexit outcome results in a weak deal or no deal and more businesses relocate to continental Europe with supply chains cut. The pound is in almost 1-1 ratio with the Euro, and economic uncertainty is reinforced.

In Germany, industrial production dropped by 1.5% in June 2019 (month on month) while the continent also braces for 700,000 job losses in the event of a no-deal Brexit. In this case, the UK will lose half a million jobs.

Ballooning private (corporate) debt is frightening: UNCTAD’s Trade and Development Report for 2018 warns of high debt levels. “By early 2018, global debt stocks had risen to nearly $250 trillion – three times global income – from $142 trillion a decade earlier. UNCTAD’s most recent estimate is that the ratio of global debt to GDP is now nearly one third higher than in 2008.” Developing countries’ private debt as a share of global debt stock increased from 7% in 2007 to 26% in 2017. Debt sustainability problems seem to be concentrated in non-financial corporations (companies that are not banks, insurance companies, etc.).

A recent OECD report finds historically low ratings for investment grade (safe) bonds and a prolonged decline in overall corporate bond quality. A recession now would make it more difficult for these companies to re-finance their debt.

Then we have an employment crisis. We have an employment crisis with high levels of unemployment, increasing numbers of young people and women excluded from the labour market and the breakdown in direct employment to the extent that 60% of the world’s workers are now working in informal work including new platform businesses – no rights, no minimum wages, no social protection, no rule of law.

And there is a model of global trade that has generated a labour market crisis. Global supply chains are constructed on dehumanising exploitation – including modern slavery with forced and child labour. This requires domestic law and compliance, mandated due diligence for corporations and a global ILO standard. Employers and governments need to understand that this is vital for humanity but is also the floor of stabilising the risk to the global economy.

Further, we have a global wage crisis. Historic levels of inequality and a drop in income share is creating despair and anger, paralysing domestic markets and global growth. Sixty per cent of working families report that they are living on the edge, struggling to survive, and minimum wages for families in the majority of our nations are not living wages, with too many families living in poverty. Only minimum living wage mechanisms and strengthening collective bargaining will remedy this.

Multilateralism is in crisis, and this must be a front-of-house issue for pension funds charged with managing workers’ capital.

We urgently need reform of multilateralism with a new floor for fair competition if the global economy is to find a stable path. Exploitation of workers with low-wage insecure work can no longer drive profits. Without labour rights and environmental standards, the floor competition is unfair and driving both a slump in demand and the call for national retreat. We want a seat at the table and we want third party access to take complaints to national and global courts/disputes panels. We need new or reformed legal structures regarding complaints against both governments and companies facilitating or practicing unfair trade practice. This applies to environmental standards as well as labour rights. Industry policy is key to climate action that requires a shift in energy, technology and behaviour if we are to both stabilise the planet and avoid green tariff borders.

The lack of a global response is staggering and in stark contrast to the 2008 crisis when the G20 leaders assumed joint responsibility.

Despite all these red flags, G7 leaders and G20 leaders meetings in the last few months failed to discuss the possibility of a multifaceted global crisis with any urgency or to lay any foundations for a response.

And the IMF continues to take a machete to the social contract and destroy demand with its austerity conditionality.

The point is not to depress you but to depict the context in which our strategic plan for the CWC priorities sit.

Future-proofing our funds is critical but can no longer be on the basis of financial returns where they damage the economy with environmental risk and/or exploitation of workers.

And I think the past two days have been really focused on the priorities that will help.

Asset Manager Accountability requires direct engagement by us with unions/trustees on the basis of exploitation of workers and/or denial of rights and safety. Through this engagement, ensuring due diligence based on the UN Guiding Principles on Business and Human Rights and developing a regular dialogue, and where necessary the grievance procedures to resolve exploitation, is central. Scaling up this work is an important strategy to support workers in dispute and to shift corporate strategy by having partnerships to shore up their due diligence.

Mandating due diligence is a global union demand, and we are optimistic this will happen across the EU in the first instance. The possibility of a binding UN global treaty for business and human rights will shift the legal framework, but in the meantime pushing the asset managers is critical.

We must continue to challenge and expose the deficit in responsibility and due diligence from the large asset managers. Blackrock is an example, and letters from the CEO are not enough when despite some response to publicity in the US, their shareholder resolution record is abysmal and they continue to invest in some of the most environmentally unsound companies with no public demands as well as turn a blind eye to labour exploitation.

And in Germany we heard of their attempt to weaken the co-determination model which is a backbone of stability with workers on company advisory boards. You can only ask why? For us this requires a solidarity response.

The questions of reporting and measurement vs direct action still raise their head. Of course we would be supportive of PRI aligning standards for reporting, as there are too many, they are too complex and none of them adequately expose abuse of core labour standards. Most are still relics of the CSR model that has failed to deliver. Direct engagement must lead to action that responds through due diligence and is backed up with grievance mechanisms at all levels. This is essential.

The frontline demand from us for Just Transition is both a guarantee of a secure future for workers and their communities, but it is also the basis of hope for workers and their families and therefore the confidence factor to back in high ambition for climate action, Aligning investor response to the climate crisis with the security we demand for workers and communities is urgent now, and the PRI/ITUC/Harvard/LSE Investor Brief is a good guide. We must continue to promote expansion of the funds signing on, but equally it is now important to put in place monitoring of funds and develop the case studies to promote best practice. For the unions and the CWC, we need to expose bad practice in funds/companies funded by pension funds.

Trustees sit at the heart of our effectiveness, and supporting them with the research and the narrative to drive the principled reforms we seek based on long-term investments must be a priority. With ESG, S is still the nasty relative you try to avoid inviting to the table. That must change.

And as we concluded on tax, it is an issue front and centre for unions and trustees. It is an imperative to clean up the crime of tax evasion, but it is also critical for repairing the tax base of nations and the guarantee of social protection and vital public services.

Fundraising for the CWC, deepening the partnership with PRI – both priorities for us.

But in all this work, workers must be at the centre. If we are not organising around these priorities and connecting the work with those it is designed to assist, then we are not growing the knowledge power of workers. We are in fact not leveraging our authority.

The call to reset the funds is not new. The ITUC has been promoting this since 2011, but if we cannot reorient our capital to ensure a lens of operation that reflects our values and consequently agreed standards with disclosure backed by direct engagement and dialogue, then the funds themselves with the core of fiduciary responsibility are at risk.

Thank you to the secretariat, to the leadership team – Tuur, Paddy, Liz and to Therese, who sadly for us plans to retire – and of course the ITUC, affiliate and GUF teams who make it possible.

Let’s make 2019/20 our most activist and influential year yet.

Sharan Burrow