Practical analysis for investment professionals
26 October 2012

Dilemmas in Responsible Investment: Lessons from the Lonmin Strike

Lonmin, a mining giant, listed at the London Stock Exchange and Johannesburg Stock Exchange, made headlines across the world when dozens of miners were killed during a strike at the Marikana platinum mine in August 2012. The public discussion focused, and rightly so, on the loss of human life. At the same time, the news triggered a debate in the investment community as Lonmin’s share price took a nose dive and it issued a warning that it will likely breach the terms of its debt.

While all investors are concerned with the risk and return of investing in companies like Lonmin, some have concerns that go beyond this. They are also concerned with their own responsibility to society and the environment, and the investing dilemmas those responsibilities create. To understand the issues facing these investors — we will call them responsible investors — I sought the views of Céline Louche, an accomplished researcher in responsible investing and coauthor of the book Dilemmas in Responsible Investment.

CFA Institute: What are the options for responsible investors who own securities in a company like Lonmin? Once they get the news on Marikana, should they wait to establish the facts, divest, engage with the company, go short, or treat this as a buying opportunity?

Louche: I would say, if the company was selected to be in the portfolio of responsible investors, that means it met certain social and environmental standards to be among the best in class. For this reason, I would not immediately divest especially not on one single source of information. However, it requires investors to act quickly. The company could be put on “hold” until the facts are checked and a decision is taken. This case is obviously complex because it involves several stakeholders, the company but also the trade unions and the government, and also highly emotional because 44 people died. The challenge for responsible investors in this case is to incorporate the emotional and ethical aspects of their assessments in their communications with corporations and the public in such a way as to give them their due, but at the same time avoid precipitous action or frivolous debate.

First of all it is important to cross-check the facts, to make sure the claims are real. Acting based on one single source of information may be risky as no information is neutral. Therefore: 1) contact the company to check what has happened and confront the company with the claims; and 2) contact other stakeholders such as NGOs, trade unions, the government, and local communities. This step of data collection and triangulation is crucial. However, it cannot last too long as a decision has to be taken.

Second (or in parallel), go back into the file of the company to check if this is a single event or if similar events have happened in the past. Or, in other words, is it part of a pattern or a one-time event?

Depending on the outcome of the fact-finding step and the response of the company, the responsible investor has several options that can go from divesting, waiting, or engagement (maybe collectively with other stakeholders). At this point it is important for the responsible investor to know what is the policy of the fund (to make sure there is alignment between actions and policy, to evaluate how far one can go into engagement, whether or not there is a willingness but also capacity and ability to try to change corporation’s behavior, whether or not entering in the political sphere is something acceptable and possible) and to evaluate what are the means available to influence the situation (this may entail collaboration with other stakeholders/investors).

Dilemmas in Responsible InvestmentWhatever the option chosen, it is important to have a clear objective and define a time line. Nonetheless, this may be changed and adapted, depending on what is happening. The art of engagement is to be flexible enough to adapt the approach depending on what is happening. It is also important to be able to communicate clearly and transparently with the company and the clients.

Again divesting and engaging both have implications, and it is important to be aware of those as much as possible. One may want to sell immediately because what has happened is perceived as not acceptable. However, will it help the people affected (the victims), or on the contrary, will it make it worst? Indeed, the company is already in a difficult position because of significant loss in production. Major divestments may worsen the financial situation of the company and lead to layoffs or even a closure. A “clean hand” approach — that is, divesting to make sure we don’t have any questionable companies in our RI portfolio — may have certain implications that need to be considered before acting.

Lonmin’s “Sustainable Development Report” carries a number of references to partnering with communities and mentions that Lonmin is included in both FTSE4Good and JSE SRI indices. How cautiously should investors approach these reports and indices?

Having partnerships, having a sustainability report, and being in some social and environmental indices are positive elements but they are no guaranty. This has been shown at several occasions for example with the BP case and the oil spill of 2010 or the financial sector and the financial crisis in 2008. BP was also recognized as a leading company with regard to sustainability and was in most if not all social and environmental indices. It didn’t prevent the 2010 oil spill.

The challenge for responsible investors is to be aware and recognize early signals. There were early signals in the BP case, but they were not picked up by responsible investors, or only a few. Indeed to pick up those early signals requires investors to go beyond the standard screenings and evaluation models.

Standard models often evaluate the explicit part of CSR that is the corporate policies and actions that assume and articulate responsibility for some societal interests. However “implicit CSR” is more difficult to assess. It refers to corporations’ role within the wider formal and informal institutions for society’s interests and concerns. Implicit CSR consists of values, norms, and rules while explicit CSR consists of formal policies and rules within the companies. Although explicit CSR is important and necessary, implicit CSR is key as it addresses the behavioral component and value dimension and to detect the early signs of a potential malfunctioning.

Issues faced by Lonmin may also be faced by other companies. Assuming there are no safe havens from social and environmental challenges, what is the best course of action for responsible investors?

Indeed, the question is: Is it a company specific issue, a sector wide issue, or a country wide issue? (Or a combination.) There is probably less urgency, but such an event needs to be reflected upon and understood in a broader context. This reflective work is important to make sure responsible investors keep asking fundamental question and raising broader debates.

What has happened at Lonmin raises a larger question of what companies in general do to avoid these conflicts (in terms of prevention) and how they are prepared to respond when it happens, especially in sensitive areas like South Africa. It also raises the question of the participation of corporations in certain systems that may be unfair and unjust. It raises broader issues related to industrial relations.

So yes, when significant events happens and when the methodology did not allow the responsible investor to identify the early warning signals, it is important to reflect on the methodology to see how it could be improved. It also requires investors to think more broadly than the single company, as in many cases either other companies may be involved one way or another, or may face similar problems (even if it has not created a scandal yet).

A key point here is that issues like community relations, as we saw in the Lonmin case, can have a direct impact on the financial performance of the company and on its share price. Societal and environmental issues often translate in financial risks and therefore are of relevance to all types of investors.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Usman Hayat, CFA

Usman Hayat, CFA, writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals;" the literature review, "Islamic Finance: Ethics, Concepts, Practice;" and the research report "Sustainable, Responsible, and Impact Investing and Islamic Finance: Similarities and Differences." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in development economics. He has served as a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP) and former CEO of the Audit Oversight Board (Pakistan). His personal interests include reading and hiking.

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