With a potential LSE listing for Shein on the horizon, a quandary for responsible investors may also be coming along in its wake – to invest or not invest? Put very simply, and notwithstanding any financial considerations, responsible investors have to consider two alternative approaches when it comes to companies that are associated with significant ESG risks.
Firstly, do they take an approach which accepts that the risks and impacts of a company are too great for themselves and/or their clients to be exposed to? This may be in the form of inward risk (e.g. if a company’s historical record of labour rights violations is deemed to present a material risk to its cashflow and profitability), outward risk (e.g. if these labour rights violations is deemed unacceptable to the investor given impacts on other stakeholders), or a combination of both.
Shein is perhaps a perfect example of this. Beginning with an article by Wired in May 2022, numerous reports have identified and highlighted human and labour rights-related risks associated with the company and its supply chain, with many of these centred around allegations of unsafe working conditions, lack of minimum wages, and working hours in excess of Chinese labour laws.
While issues such as these unfortunately remain somewhat common in supply chains for garment manufacturers, investors will have to decide if the risks associated with Shein and its supply chain are just too great to warrant investment, at least at this time. The company’s financials may look strong for now, but will this last if Shein fails to address concerns which are facing increasing levels of scrutiny? If not, then perhaps, Shein’s rise to dominance in the fast-fashion market will slow, and shareholders may feel the effects. Furthermore, investors will have to consider if these risks are simply too much to bear. Any inward risks aside, outward risks (i.e. risks to stakeholders) associated with Shein are significant, to say the least. For some investors and/or their clients, Shein might just be a pill that is too hard to swallow.
Alternatively, do responsible investors take the stewardship approach? Realistically, shares in many high-risk/high-impact companies are going to be purchased and held by someone, regardless of any concerns raised by third parties. If this is the case, does it perhaps matter who owns these shares? Let’s not forget that shares are more than just numbers on a screen – they’re a share of company equity, and with ownership of equity comes the right to question a company’s practices as an owner, and not just an external observer.
Let’s go back to our example of Shein. If shares of its equity are available to buy, and are going to be held, do responsible investors have a duty to hold a portion? That way, they can use their ownership rights to vote at Shein’s annual general meetings, and leverage their influence to engage with its leadership, with a view to trying to direct the company towards making improvements and mitigating ESG risks. Many other shareholders will likely not do so, after all.
However, while a noble pursuit, this approach to responsible investment is underpinned by a critical assumption – that engagement will work. Smaller investors that wish to take this approach should consider what impact they can truly have. Of course, there is a growing movement among responsible investors for collective engagement efforts (such as those organised by the UN PRI), but it still a consideration that needs to made, especially when it comes to large-scale multinationals like Shein.
Overall, how investors may respond to a Shein listing here in the UK market remains to be seen, but regardless of whether this goes ahead or not, the question of whether to invest and engage, or not invest at all, remains a common one.