European investors focus on due diligence risk despite delay to deforestation regulation

The EU deforestation regulation (EUDR) may have been delayed for a year, much to the relief of many embattled risk and compliance managers in Europe and their suppliers, not least in Asian countries such as Malaysia and Indonesia that supply so many of the raw materials that impact forests in the region. But the EU focus on supply chain due diligence is already having a significant impact on the investment decisions of leading institutional investors and thus shaping the global economy and risk decisions regardless. Robeco, the Dutch asset management firm and part of Japanese financial services group Orix, has €246bn of assets under management and is one such investor already making big decisions based on new regulations. Peter van der Werf, head of active ownership, recently revealed that his team will expand its existing nature engagement in 2025 to cover natural resource management, and a wider range of commodities affected by deforestation, while broadening the scope of diversity engagement to focus on improving human capital management. “Two new themes will cover supply chains in transition minerals and the issue of shareholder rights being watered down in certain jurisdictions. Most of the work in 2025 will, however, expand ongoing themes such as the ‘evergreen’ topic of tackling climate change and the nature issues related to it,” said Van der Werf. “We continue to significantly invest a lot of time in our climate engagement, and are now in the process of establishing nature targets connecting to our net-zero roadmap,” he said. “There will be a lot more attention on deforestation as we expand our engagement from palm oil to include soy, beef, leather, paper and pulp in that programme as well. We’re also looking to expand our natural resource management theme, in which we focus on water and waste, because those are also important drivers of biodiversity loss, which is another topic we want to address.” “And we’re broadening the scope of our work on diversity and inclusion to do more on human capital management. We can then address a range of issues relating to employee relations, employee satisfaction and whether employees feel themselves valued at work.” Van der Werf said that the engagement themes are chosen each year in consultation with clients, other external stakeholders, and Robeco’s investment teams. Climate remains the top choice, and as the focus is increasingly moving toward achieving net-zero emissions, transition has become the principal topic. “When we consulted our clients during our client panel and received feedback from our investment teams, there was unanimous support for starting a theme on transition minerals,” said Robeco senior sustainability investing specialist Ghislaine Nadaud. “In our engagement with transition sectors, we will be not only focusing on downstream or upstream activities. In the transportation sector, we’ll be looking at the whole electric vehicle battery supply chain, from the mining of the critical minerals needed to the wider issue of the electrification transition,” she added. “We’ll investigate some of the battery makers and maybe some EV producers as well. So it’s really taking a whole supply chain perspective in these transition sectors and not just zeroing in on individual companies,” continued Nadaud. The transition minerals engagement builds on the existing themes for the Just Transition and net-zero carbon emissions engagement, focusing both on climate and human rights. “Transition minerals are vital for the technologies that are decarbonising our economy,” added engagement specialist Harry Ashman. “Yet their extraction can be accompanied by problems, for example with deforestation linked to nickel mining in Indonesia, lithium extraction impacting water quality and quantity in South America, and cobalt mining connected to social issues in Congo,” added Ashman. “As new mines open to meet the growing demand for these minerals, we’ll be encouraging companies to uphold high environmental and social standards across a range of key issues,” he promised stakeholders. Robeco said that the second new theme on shareholder rights takes a different approach to the normal route of corporate engagement over selected ESG issues. Governments or regulators want to make stock market listings more attractive by applying business-friendly regulations, but these often come with unintended consequences for shareholder rights. “In quite a few jurisdictions, we are seeing legislation that was protecting shareholder rights being watered down or changed or in some form, and minority shareholder protection is weakening rather than strengthening,” said head of voting Michiel van Esch. “We’ve seen this in several markets, including in Europe. Our focus will be more on policy engagement, so that's probably going to be harder to work on, as it’s not aimed at one single company in a portfolio, but a wider set of markets and regulators. It will mean consultations, writing letters to regulators and other things.” “The idea is to ultimately protect our investments at large, rather than looking to make changes at a small set of companies in one theme or investment portfolio. It’s a different set-up on policy engagement rather than company engagement,” explained Van Esch. The investment firm said that it is keen on evergreen because it makes long-term economic sense. In all, it means taking more time on the evergreen themes linked to climate, biodiversity and human rights, which have long been identified as the biggest focus areas for sustainable investing, said the investment group. “We’re focusing less on starting something new each year, because we want to focus more on things that are long-term risks for our clients’ portfolios, or structural transitions that need to take place in society. By doing so we aim to create long-term positive impact,” said Van der Werf.

European investors focus on due diligence risk despite delay to deforestation regulation

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