In January, more than 630 investors and corporations signed a statement asking the incoming administration and Congress to continue moving us toward a low carbon economy, and not to walk away from the historic agreement on climate change reached in Paris last year.
You can find the statement at lowcarbonusa.org. Alongside our name, you will find the names of some of the largest companies in the world. Today, that statement has grown to include over 1,000 companies and investors headquartered in 46 states.
Perhaps even more importantly, more than 200 major companies have made public commitments to set “science-based targets” for reducing their greenhouse gas emissions. This means that they will seek absolute reductions in line with what climate science demands, while continuing to grow their companies. These commitments replace climate goals that improve efficiency but may not actually reduce emissions as companies grow.
These climate commitments are not based on political ideology, but on a pragmatic, hard-nosed look at reality. These companies—among the largest in the world—have done the math, and they see the risk. As a recent Scientific American article proclaimed, “physics doesn’t care who was elected president.” Commitments based on an accurate understanding of reality will remain.
Just last week, one of the world’s largest money managers installed a statue of a defiant little girl, facing down the famed Wall Street bull. They did this to raise awareness of the need to increase the number of women on corporate boards. They did not do this solely out of the goodness of their hearts. They did this because they recognize that diversity is good for business.
All of this reinforces a core belief we have always held: small things matter. When we look back over the course of our history, we see that movements are made of individuals. We can all applaud the billionaire philanthropist or private equity investor looking to make a real impact, but those investors are riding the crest of a wave. Looking back, we see one small investor after another merely seeking to build a college fund or a retirement account that reflects their concern for human rights and environmental sustainability.
For many, it began with a small voice that said “I don’t feel right investing in that company.” These are the change-makers that brought us to a world where the largest companies in the world now monitor their supply chains for child labor and environmental abuses.
Many of these corporate commitments began with a call from a responsible investor, explaining how business can be strengthened by taking sustainability seriously. Investors large and small helped to make the case to company after company, year after year, and our voices are being heard. There is much more work to do, but there is also much to celebrate.
Every day, the news seems to give us more cause for alarm. But this is not the time to flinch or to turn back. We have been here through Democratic and Republican administrations, doing what we do—using social and environmental standards to select our investments, engaging companies to move them in the right direction, and finding ways to make a direct impact for communities in need.
We are working to ensure that the capital markets serve society, and not the other way around. We are part of a community of responsible investors that is larger, stronger, more innovative, and more effective than it was ten or twenty years ago, and we have more allies than ever before.
Your investment portfolio may seem like a small thing. When it is invested responsibly, however, it can serve as one more link in a chain of accountability that will not be broken.
Corporate tax avoidance has been an important component of our engagement and policy work for several years. The United Nations’ backed Principles for Responsible Investment is a global network of investors responsible for $60 trillion in assets. After expressions of interest from a significant number of its members, PRI established a Taskforce on Tax, including Domini, to develop guidance to help investors engage with corporations on global tax strategies. In the fourth quarter, the PRI published the result of this work, and in the first quarter hosted a roundtable discussion with a group of six non-US corporations to discuss the guidance. We were very encouraged by the constructive nature of the meeting and look forward to continuing our work with the Taskforce.
One of the most important areas of corporate social responsibility has gone largely ignored, until now. The headlines are filled with stories of aggressive strategies by corporations to minimize or eliminate their tax payments, primarily through the use of offshore tax havens. Countries around the world are losing billions in tax revenues, all in the name of shareholder value.
Tax avoidance weakens societies and threatens long-term wealth creation. That is why Domini is taking a lead role in asking corporations to adopt more responsible and transparent tax strategies.
Tax is an investment in society. What is our return on investment? Corporations and investors depend upon government services funded by tax revenues, including law enforcement, market regulation, judicial systems, infrastructure maintenance, public education, poverty alleviation, environmental protection and national defense. These indispensable services can only be funded by tax revenues.
Economist Joseph Stiglitz warns that corporate tax avoidance threatens the wellspring of “future innovation and growth.” Companies like Google and Apple have benefited from taxpayer-funded scientific research.
Investors need to speak up, and end this global race to the bottom. At Domini, we are asking companies to adopt ethical principles to guide their tax strategies, considering their impact on society and brand value, just as they have with bribery, child labor and climate change.
Quick Facts on Corporate Tax Avoidance
Corporate profits are booked in places like Bermuda to avoid paying taxes where those profits were actually earned. How do we know? In 2010, the amount that American companies told the IRS they actually earned in Bermuda was 1,643% of that country’s entire yearly economic output.*
At least 362 companies (72% of the Fortune 500), operate subsidiaries in tax haven jurisdictions as of 2013.*
When corporations don’t pay their taxes, somebody else needs to pick up the tab. In 1952, 32% of U.S. federal tax revenues came from corporate income tax. By 2012, this portion had shrunk to only 8.9%. (Source: Congressional Research Service)
*Source: Offshore Shell Games 2014 (U.S. PIRG Education Fund and Citizens for Tax Justice)
Investors may only just be waking up to this critical issue. Our first of its kind proposal, asking Google to adopt a set of ethical principles to guide its tax strategies, went to a vote at the company’s annual meeting in May. Although we received a very low vote, nearly 20% of investors abstained, telling us that many investors are undecided. In the meantime, our proposal helped to raise awareness, and led to our first conversation with Google about its tax strategies, a dialogue that we hope will continue.
On May 14, Google Inc. shareholders rejected a proposal sponsored by my firm, seeking the adoption of a responsible code of conduct to guide the company's global tax strategies. I suspect this proposal prompted a quizzical reaction from many investors who assume that minimizing corporate tax payments is good for shareholders. An April 28 Pensions & Investments editorial, “Tax exempt but tax conscious,” wrestled with this issue, ultimately concluding fiduciaries could not ask companies to pay more.
We believe a deeper analysis is required. Corporate tax minimization strategies present serious threats to long-term wealth creation and might pose greater risks than corporate taxation itself. But first, I think it is important to dispel a few myths.
The P&I editorial reports the U.S. has the highest effective tax rate in the industrialized world, at more than 40%. According to the Congressional Research Service, however, the average effective corporate tax rate in the U.S. is 27.1%, compared with 27.7% for the rest of the world. In fact, a number of multinationals pay far less than 27%, and some pay nothing at all. But this is not solely a U.S. problem. According to MSCI research, 21.4% of companies in the MSCI World index paid tax rates substantially below the weighted average tax rate of the countries in which they generate revenues.
Why would a company pay even 20% when it could go to Bermuda and pay nothing? The statutory rate is irrelevant. At issue is the ability of multinationals to pay nothing.
The P&I editorial repeats another common myth: “Corporations don't pay taxes, they collect taxes. They allow Congress to hide the true level of taxes.” This version of the “corporate taxation is double-taxation” rhetoric is also false.
Corporations collect payroll and sales taxes, and also pay real estate and income tax. A portion of corporate profits are taxed twice if they happen to be paid out in the form of dividends. But, of course, companies are not required to pay dividends and they do not pay out all of their profits. Shareholders are taxed on capital gains, based on their cost basis when they sell their shares, and on dividends. These taxes bear no direct relation to annual corporate profits.
Perhaps the biggest myth of all is that fiduciary duty compels us to look the other way. Imagine a legal obligation, based on principles of prudence and loyalty, that compels us to condone behavior that stifles innovation, destroys local and national economies, and shifts heavy financial burdens to our own clients and beneficiaries.
Fortunately, this obligation to minimize tax payments does not exist.
According to a legal opinion issued by the U.K. law firm Farrer & Co., “the idea of a strictly "fiduciary' duty to avoid tax is wholly misconceived” and a duty on corporate directors to maximize profits for the benefit of shareholders is “unknown to English law.” In the U.S., I believe a legal analysis would produce the same conclusion — the business judgment rule protects directors who choose to assess their company's “fair share” of taxes, in light of the reputational and legal risks presented by aggressive tax avoidance measures.
For fiduciaries serving investors, the duties are similarly clear — to diversify assets and pursue long-term risk-adjusted returns on behalf of their clients and beneficiaries. Even if Google itself is somehow shielded from costly liability as a result of its tax strategies, it is necessary and appropriate for fiduciaries to consider how Google's activities affect the portfolio, the broader economy, and participants and beneficiaries “in their retirement income,” to quote the Department of Labor's interpretation of obligations under the Employee Retirement Income Security Act. Trustees of underfunded state pension funds might want to do a bit more than merely consider these things.
Aggressive tax avoidance is not the norm, nor should it be. It is a short-sighted and risky strategy that harms investors and society.
Corporate tax avoidance is a direct threat to government and rule of law, and, at a time of high unemployment and high government debt, tax-avoidance strategies have prompted many countries to fight back, including active work by the G20 group representing major economies and the Organization for Economic Co-Operation and Development. Reliance on aggressive tax strategies targeted for reform could result in financial shocks for investors. Google's effective foreign income tax rate has been in the single digits for more than a decade even though most foreign countries it operates in have corporate tax rates in the mid-20s. Does anybody think this can go on forever? The U.K. House of Commons Public Accounts Committee published a report in June 2013 criticizing Google's U.K. tax-minimization approach. The committee chair referred to these tax arrangements as “highly contrived,” “devious” and “unethical.” The French government just handed Google a tax bill for nearly $1.4 billion. If France is successful in collecting even a portion of this, we will see other aggrieved countries stepping up for their share.
Certain multinationals are weaving intentionally opaque and winding trails in and out of every loophole they can find. This global shell game not only hides taxable revenues from governments, it also hides the true sources of corporate value from investors. What portion of Google's profits are derived from superior products and services, and what portion from creative accounting? I would certainly like to know.
Tax should be viewed as an investment, not a cost. To paraphrase Oliver Wendell Holmes, tax is an investment in civilization. Too often in these debates over the burden of corporate tax, we fail to consider what corporate taxes deliver in the long run. What is our return on investment?
Corporations and investors depend upon government services funded by tax revenues, including law enforcement, market regulation, judicial systems, infrastructure maintenance, public education, poverty alleviation, environmental protection, national defense and scientific research. These indispensable services cannot be funded by corporate philanthropy or a rise in share price.
Economist Joseph Stiglitz warns that corporate tax avoidance threatens the wellspring of “future innovation and growth.” Other economists have documented the critical and visionary role government has played in spurring scientific and technological innovation when private investors were unwilling to take the risk. Google and Apple Inc. might not exist today if it had not been for taxpayer funded research. Larry Page and Sergey Brin's initial research was financed by a taxpayer funded National Science Foundation grant.
Investors should be asking Google and other multinationals to adopt ethical principles to guide their tax strategies, considering their impact on society and brand value. Just as corporations should be expected to follow consistent standards globally regarding bribery, child labor, greenhouse gas emissions and non-discrimination, they should adopt principles to help navigate the complexity of local and national tax systems.
We believe this is what fiduciary duty demands.
A year after one of the worst factory disasters in history, Domini continues its work as part of global investor initiative to help respect and protect the fundamental human rights of workers in global supply chains throughout the world.
The coalition of institutional investors, representing over $4.1 trillion, originally came together last May, under the leadership of the Interfaith Center on Corporate Responsibility, following the Rana Plaza factory collapse in Bangladesh, a disaster that claimed the lives of more than 1,100 individuals and injured 2,500 more. At that time, we issued a statement appealing to apparel companies to use their influence to help implement systemic reforms to ensure worker health and safety.
Last week, we joined the coalition in releasing a new statement marking the one-year anniversary of the Rana Plaza collapse. In it, we highlight the improvements that have been made over the past year, while renewing our appeal to brands and retailers and detailing the progress that still needs to be made. Notably, we urge companies to make stronger financial commitments to the Rana Plaza Donors Trust Fund, which was established to provide much-needed aid and remediation to the victims and families affected by Rana Plaza.
Originally Appeared in Domini Funds' 2013 Annual Report
On March 25, 1911, a fire swept through the 8th-10th floors of the Asch Building in lower Manhattan, occupied by the Triangle Waist Company garment factory. This tragic event, which killed 146 young immigrant workers, helped spur the growth of unions and set in motion a series of legal reforms to protect U.S. garment workers from such preventable disasters.
More than 100 years later, however, garment workers around the world still face the same risks that led to that tragedy. The recent collapse of the Rana Plaza factory complex in Bangladesh was the worst disaster in the history of the apparel industry. The owners of the eight-story complex had illegally added three floors to the building, and although cracks had been seen in the walls the day before the collapse, the factory owner chose to ignore warnings and protests, and ordered workers into the building.
Unfortunately, Rana Plaza was no anomaly. Factory disasters claim the lives of countless workers around the world every year. In Bangladesh, more than 1,800 workers have been killed during the past eight years, and in the past eight months alone, approximately 130 Bangladeshi workers have lost their lives in factory fires.
Globally we have seen a continuous search for the lowest-cost facilities, but nowhere has this issue become as critical as it is in Bangladesh, where the apparel sector employs more than four million people, mostly women. The minimum wage in the country is $38.50 per month, less than half the wage paid in Cambodia and a quarter of the wage paid in China. According to the World Bank, as of 2010, Bangladesh ranked last in terms of minimum wages for factory workers. This race to the bottom has made Bangladesh the second-largest global apparel exporter, behind China. Adding to the problem is a history of weak labor unions and strong representation of factory owners in government. Roughly ten percent Bangladesh’s parliamentary seats are currently held by garment industry leader. The sector’s political influence has been, predictably, an obstacle to meaningful reform.
In the same way that the Triangle Shirtwaist fire brought attention to these issues in the United States a century ago, Rana Plaza has now brought attention to these issues globally. Below, we discuss several paths that companies have taken to improve worker health and safety, particularly in Bangladesh, where the issue has become most critical.
Factory Monitoring Efforts
When we began reaching out to companies to discuss supply-chain sweatshop issues in the mid-1990s, we heard a common refrain: “we don’t own these factories.” However, as responsible investors, consumer activists, students and other labor rights groups engaged with companies to discuss the advantages of taking on greater accountability, things began to change. Companies in a wide range of industries have since adopted codes of conduct for their suppliers and have instituted factory monitoring programs. Many have supplemented these efforts with training programs to educate workers and managers on factory safety and labor rights. Some companies, like Gap, have recognized that a degree of responsibility also lies back at corporate headquarters, where cost-cutting initiatives and last-minute changes to orders can trigger overtime violations and increased pressures on factory managers to cut corners on safety.
It is clear, however, that these efforts have been insufficient to address systemic problems that persist in factories around the world, including excessive hours, forced labor, child labor and safety problems. Many multinational corporations report that they are serving a regulatory function with factory owners that should be played by government. While several leading companies have partnered with civil society organizations to find more lasting solutions, Rana Plaza has made it abundantly clear that more drastic and immediate action is needed.
Banning Production in Bangladesh
Global brands cannot police factory working conditions if they do not know where their clothes are being made. When a company places an order with a factory that meets its standards, it is not uncommon for that factory to ship the order to another factory without the buyer’s knowledge. This practice of unauthorized subcontracting is endemic in Bangladesh, where it is estimated that half of the nation’s roughly 5,000 factories are subcontractors. Even companies with rigorous monitoring programs risk finding their orders being produced at factories not on their approved list. Such was the case when several boxes of Disney sweatshirts were found at the Tazreen factory after a November fire that killed 112 workers.
Our relationship with the Walt Disney Company dates back to 1996, when we first encouraged the company to take greater responsibility over its supply chain. Since then, we have seen a dramatic evolution in its approach to these issues. In addition to providing feedback over the years on Disney’s code of conduct and audit program, we have also visited factories and participated in a hands-on project with Disney and McDonald’s to find a better path towards sustained factory compliance with labor standards.
Two months before Rana Plaza, Disney executives reached out to obtain our feedback on their plans to withdraw from Bangladesh. Disney permits licensing of its name and characters for production in more than 170 countries. While Bangladesh represented only a very small portion of its global sourcing, Disney believed it presented significant risks. Leaving Bangladesh could help the company reduce risk to its brand and allow it to focus efforts where it could most improve working conditions. Therefore, in March, Disney announced that Bangladesh had been removed from its “Permitted Sourcing Countries” list.
Some have accused Disney of “cutting and running,” a tactic that companies use to avoid accountability for sweatshop conditions, but we disagree with those accusations. Disney’s limited economic activity in Bangladesh would have afforded it little leverage with factory management, but by publicly withdrawing, it was able to exercise its leverage as a global brand to send a clear message. The Bangladeshi government needs to understand that substandard working conditions will have economic consequences if it does not take immediate action.
A Shift in Worker Safety Initiatives
For many companies, however, leaving Bangladesh is not a viable option. These companies instead must take a hands-on approach to reform.
In the wake of the collapse, several significant initiatives have arisen to improve worker safety issues. Most notable is the Accord on Fire and Building Safety (the Accord)—a five-year, multi-stakeholder agreement between retailers, non-governmental organizations, and labor unions to maintain minimum safety standards in the Bangladesh textile industry. We believe that this initiative is the best hope for meaningful reform. As a legally-binding agreement, the Accord represents a significant shift from past practice. Its board of directors, which is chaired by the International Labor Organization (ILO), is split evenly between corporations and labor unions. We believe that this equal representation of trade unions is critical. Domini’s Global Investment Standards have always recognized that:
“Healthy and vital unions play a crucial role in addressing the imbalances in power that often arise between corporate management and workers in their struggle for fair working conditions. Without unions, the possibilities for long-term equal partnerships between management and labor would be vastly diminished.”
One Rana Plaza survivor told Time: “The managers forced us to return to work, and just one hour after we entered the factory the building collapsed…" It was not simply lax regulations, political corruption and greed that led to these deaths—it was also fear. In order for desperately poor workers to stand up for themselves, they need strong labor unions.
To date, the Accord has been signed by more than 80 companies, primarily based in Europe. One of the first to sign was Hennes and Mauritz (H&M, Sweden). Over the past three years, we have seen impressive improvements in H&M’s approach to labor conditions in its supply chain. The company has advocated for increases to the minimum wage and for the adoption of a “living wage” standard, and has pledged to remain in Bangladesh even if wages rise.
Some of the other major global brands that have signed the Accord include Fast Retailing (Uniqlo, Theory), PUMA, Carrefour, Tesco, Next and Marks & Spencer. The decision to sign the Accord by Japan’s Fast Retailing, one of the world’s largest retailers, supplements an already impressive social profile, including its practice of publicly reporting the results of its factory audits and the remedial measures its takes. To date, only a handful of American companies, including PVH (Calvin Klein, Tommy Hilfiger) and American Eagle Outfitters, have signed the Accord.
Domini Helps Lead Investor Response to Rana Plaza
In May, Domini worked with other investors affiliated with the Interfaith Center on Corporate Responsibility (ICCR) to draft a public statement urging global companies sourcing from Bangladesh to sign the Accord on Fire and Building Safety and to strengthen local trade unions, disclose suppliers, and ensure appropriate grievance and remedy mechanisms for workers.
More than 200 institutional investors from around the world, representing more than $3.1 trillion, signed our statement. The first 120 signatories came together in only 48 hours, a strong testament to the seriousness of this issue and the need for systemic reform (Read the investor statement).
Citing legal concerns with the Accord, a group of 20 North American retail companies, including Gap, Wal-Mart, Target, Macy’s, Nordstrom and Costco, announced another initiative—The Alliance for Bangladesh Worker Safety (“the Alliance”). While we favor the Accord over the Alliance because of its legally-binding nature and the role of labor unions in its governance structure, both initiatives represent an important shift in approach to worker safety issues. Both the Accord and the Alliance focus on bottom-line, critical reforms to address urgent fire and safety issues; both recognize the need for competitors to work together toward common solutions, to share the results of their factory inspections with each other, and to enforce common standards; both are committed to a level of public transparency; and both recognize the need for workers to have a voice.
Domini is currently helping to coordinate a global investor coalition focused on factory safety in Bangladesh. In the coming months, as we follow developments with the Accord and the Alliance, we will turn careful attention to those apparel companies that have not signed up for either initiative.
Here are a few additional changes we will continue to push for, both in Bangladesh and around the world:
- A global dialogue is needed about the definition and achievement of a sustainable living wage—sufficient for a worker to support a family and save for the future.
- A social safety net should be provided for the families of workers who are injured or killed in the line of work.
- The New York Times reports that children in Bangladesh can tell the latest fashion trend based on the color of the water in the canal that runs past their schoolhouse. The environmental consequences of global supply chains are significant and must be addressed.
- We would like to see the Accord model, which incorporates cross-company information sharing, an active partnership with unions and a commitment to public transparency, become the norm for global supply chains everywhere.
- While Bangladesh may be the flash point today, similar problems persist in other countries around the globe. It is our hope that the reforms sparked by Rana Plaza will reach beyond Bangladesh.
Rozina Akter, a 21-year-old survivor of the Rana Plaza collapse, told the Wall Street Journal: "I'll go back to work as soon as I get better. Not all buildings will collapse." What other choice does she have?
Like the Triangle Shirtwaist fire of another era, we hope to look back on Rana Plaza as a turning point for Bangladesh, and an end to the global “race to the bottom” that this poor country has come to symbolize. We hope that it will catalyze a new era of labor reforms that will provide young women like Ms. Akter with more acceptable and dignified choices. As investors, we will continue to do our part to bring that hope to fruition.
The Walt Disney Company’s decision to not allow sourcing in Bangladesh was an appropriate response to a lack of governmental labor enforcement that has manifested itself in a lengthy series of tragedies, including a fire that took the lives of over 100 workers in November and last week’s building collapse that killed more than 400 workers.
Disney permits licensing of its name and characters for production in more than 170 countries, with a range of social, environmental and economic performance. The company states it is simultaneously looking to reduce risk to its valuable brand and focus its efforts where it can improve working conditions. Its limited economic activity in Bangladesh may have afforded little leverage with factory management. Disney chose instead to exercise the significant leverage of its global brand, by publicly withdrawing and sending a clear message to the Bangladesh government to implement the International Labor Organization's Better Work program.
Bangladesh presents a series of systemic problems from low wages to safety, as well as a history of unreported subcontracting that can make it very difficult for brands to ensure acceptable working conditions, or even know where their products are made.
Companies can choose to stay and make the difficult, long-term commitments that will be needed to benefit workers, or they can make a noisy exit, as Disney has. Both courses of action are responsible, and both can be effective. Disney's public departure may, however, in the end, have more impact than its monitoring efforts, had they allowed their licensees to stay.
I applaud those companies that are committed to making a difference in Bangladesh, but when a company’s leverage and economic commitment is minimal, I don’t expect them to stay and suffer the reputational harm resulting from repeated tragedies that are outside their control. I expect them to publicly declare that "enough is enough," and set conditions for their return.
All companies should establish a rigorous and transparent country selection process, backed by meaningful human rights due diligence. They should enter these countries with a commitment to improving conditions by working with all affected stakeholders and, perhaps most important, by strengthening local trade unions. If they simply place orders without that degree of commitment, however, they risk making conditions worse and suffering the ire of their consumers and shareholders.
A key benefit of our investment decision-making model is the ability to make consistent comparisons between companies, and to follow trends over time. We also need to be flexible to address changing circumstances. Domini’s long-standing view on nuclear power has not changed — we believe that its inherent risks dramatically outweigh its benefits.
Tragically, many of these risks came to pass in March 2011 when an earthquake hit Japan and triggered a tsunami, leading to the worst nuclear disaster since the Chernobyl accident of 1986. Tokyo Electric Power (Tepco), the company at the center of this crisis, has been consistently excluded from the Domini Funds, as has General Electric, Toshiba and Hitachi, leading designers of nuclear reactors, including the reactors that failed in Fukushima.
We are constantly evaluating and updating our key performance indicators. In the wake of this tragedy, our team developed an approach to evaluating how Japanese companies were responding to these new and rapidly changing circumstances. Food contamination was one particularly pressing risk we highlighted. We wrote to Japanese retail food manufacturers and retailers with a set of questions about their efforts to protect Japanese consumers from radiation contamination. We discovered a significant divergence of practices, which led to the exclusion from our Funds of Toyo Suisan Kaisha and Yakult Honsha, two food production companies with facilities close to the site of the nuclear disaster. Yakult Honsha is known for providing dairy products to schoolchildren and Toyo Suisan Kaisha’s products include processed seafood using codfish captured in Japanese waters. Neither company’s safety measures were sufficient to alleviate our concerns.
By contrast, ÆON reportedly strengthened the radiation inspection programs on its food products by setting radiation standards two times safer than the national standard, and expanding the items subject to testing. If the company were to find excessive levels of radiation, its 1,000 retail stores would suspend purchasing those products until they fall below the company’s thresholds. The company also discloses inspection results on its website and updates its testing results several times a month. This information was welcomed by Greenpeace Japan.
Fujifilm launched an impressive set of programs to support disaster relief and reconstruction efforts in Japan, leveraging multiple company divisions, including its medical systems, logistics, pharmaceuticals and radioisotope divisions. The company’s consistent record of effective environmental risk management and reduction allowed the company to provide a comprehensive and meaningful response. The company dispatched medical teams with diagnostic equipment to support medical facilities in the affected area, provided drugs to the Japan Medical Association with emphasis on pediatric medicines, and worked closely with NGOs to execute disaster relief operations. A factory owned by one of the company’s subsidiaries, located in Fukushima prefecture, led decontamination activities and provided radiation level monitoring for the community. The company’s decontamination operation uses much stricter levels than the government, with a zero tolerance for any levels of radiation residue.
Every investment has positive or negative social and environmental impacts. We begin our process by evaluating these impacts at an industry level, and assessing the industry’s degree of alignment with our ultimate goals of environmental sustainability and universal human dignity.
For certain industries, such as those focused on organic farming or alternative energy, the benefits are clear. Most industries, however, present a mix of risks and benefits, and these can vary greatly by industry.
For the pharmaceutical industry, public health is obviously paramount. We therefore pay particular attention to incentives and market pressures that may conflict with the public interest.
One consequence of market pressure is that certain rare medical conditions, known as “orphan” diseases, are often ignored. In such cases, governments have stepped in to create incentives to develop “orphan drugs,” and we favor those companies that are dedicated to offering these critically needed drugs. Biogen Idec derives more than half of its revenues from an orphan drug used to treat multiple sclerosis. The company has stated that it intends to focus its research and development efforts on finding novel therapeutics in areas of high unmet medical need.
Gilead Sciences derives more than 80% of its revenues from HIV products, and has developed a system of tiered pricing that reflects economic status and HIV prevalence. As a result, the company reports that the majority of people that receive one of the company’s HIV therapies live in the developing world, with approximately 2.4 million people receiving treatment. The company has licensed one of its antiretroviral drugs to two not-for-profit organizations in South Africa — for no royalty — to study the effectiveness of the first HIV-prevention regimen designed for women that can be used without detection.
Novo Nordisk (Denmark) is a good example of a pharmaceutical company that recognizes its dual mission of solving health problems and turning a profit. The company is a pioneer in the field of ‘integrated reporting,’ an approach to corporate reporting that combines financial and sustainability data in order to more effectively illuminate the key drivers of performance in each area. The company’s primary focus is diabetes treatment, and it is the world’s largest manufacturer of insulin. Novo Nordisk ranks second on the Access to Medicine Foundation Index, and sells insulin at cost to the world’s fifty poorest countries. The company also runs campaigns to help prevent people from developing Type II diabetes through unhealthy lifestyles.
All pharmaceutical companies face the principal challenge of how best to balance public health interests with the company’s interest in making a profit. When a company fails to properly balance these interests, things can go very wrong. In July 2012, GlaxoSmithKline (UK) plead guilty to criminal charges and paid $3 billion in fines — the largest fine ever paid by a drug company — for illegally promoting two antidepressants, and for failing to report safety data about a diabetes drug. Our key performance indicators, which direct our analysts to pay particular attention to marketing and safety controversies in the pharmaceutical industry, led us to exclude Glaxo from our funds the prior year. In addition to the concerns that ultimately led to the $3 billion fine, our analysts also noted recurring product safety problems, a $750 million fine for knowingly selling contaminated and ineffective drugs, improper marketing and overcharging Medicare/Medicaid. Similarly, we excluded Roche Holding (Switzerland) from our portfolios in 2009 due to what we viewed as a pattern of safety, pricing and corruption concerns. In 2012, Roche faced a regulatory investigation regarding its alleged failure to disclose reports that 15,000 people died while taking its medicines.
an interview with Adam Kanzer by author and journalist Marc Gunther (August 2010)