Another Nike moment for Apple?


BBC Panorama raises some salient questions regarding Apple’s production practices in developing countries. There are significant implications for consumers and investors in developed countries. What is the role of the Fairtrade Foundation and Fairphone?  Are you indirectly investing in Apple via the UK’s National Employment Savings Trust, the BBC’s pension fund or a myriad of other pension funds?

Over the Christmas break, I managed to catch up on a lot of reading and TV watching that I’ve had on my list for a while. The most thought-provoking program I watched was actually something relatively recent: the BBC Panorama’s feature on Apple (Apple’s Broken Promises, you can read about it here or for those in the UK you can watch it here).

First of all, I need to acknowledge my own hypocrisy as I’m writing this on an iPad, I have an iPhone and I am an indirect investor in Apple through my company’s pension fund. I’m certainly not an Apple fanatic though, in fact I’ve been quite late to the game having been a user of Android devices for a couple of years before switching. In this case though, it doesn’t seem to matter which device maker you choose, they’re all very much in the same boat.

While BBC Panorama can be controversial at times, they seem to have hit the mark in this case. The working conditions on the assembly line shown in the program would be illegal in most Western nations. The trials that the tin miners go through is mind-boggling. It’s hard to deny that Apple have a lot to answer for, but what about us as consumers? What about Apple’s shareholders?

“Deeply offended”

This really reminds me of the backlash Nike faced back in the 90s and I recall feeling that we as consumers didn’t really have a choice as the vast majority of producers of sportswear followed similar practices. In the case of electronics, I’d be amazed if the practices used by Apple weren’t the standard across the industry, but I don’t claim to know the details for all involved.

However, in the aftermath of the program’s airing, what really struck me as strange was Apple’s senior vice president of operations Jeff Williams stating that he was “deeply offended” by what was presented in the program. Is that the appropriate emotion in this circumstance? Why not “deeply concerned” or “deeply troubled”? What about the emotions of those being subjected to these work conditions?

Either way, it’s not like Apple haven’t been here before. Apple should recognise that as a leader in their industry, they’re an obvious target for further investigation. Even if Apple claims they are doing more than their fair bit to improve their work practices, their senior management need to understand that Apple, as industry leaders, are held to a higher standard, whether they like it or not. It comes with the territory of being big.

Apple highlighted that in 2013 they had a 95% compliance rate with their stated maximum 60 hour working week. If an employer in the EU achieved this rate of compliance, I wonder if businesses would be so proud of their efforts at providing suitable working conditions. Rather, I would expect that a 95% compliance rate would be viewed as unacceptable in front of an EU member state labour tribunal.

“Bagging and tagging”

Returning to Jeff Williams, he defends Apple’s reputation by emphasising:

We spearheaded the creation of an Indonesian Tin Working Group with other technology companies. Apple is pushing to find and implement a system that holds smelters accountable so we can influence artisanal mining in Indonesia. It could be an approach such as “bagging and tagging” legally mined material, which has been successful over time in the Democratic Republic of the Congo. We are looking to drive similar results in Indonesia, which is the right thing to do.

Why not do more Jeff? Why don’t Apple implement a system which traces the tin from source and pays a fair price while ensuring safe working conditions? For example, Apple has already successfully used nanotechnology in its products, why not for tracking and tracing the source of its raw materials?

In fact a viable system has already been developed by the German Federal Institute for Geosciences and Natural Resources (BGR) which aims to create Certified Trading Chains (CTC) focussing on the artisanal and small-scale mining (ASM) sector. As stated in Franken et al (2012, emphasis mine):

Up to now, there exists no generally accepted mechanism to ensure transparency in the mineral production of high-value minerals in ASM (apart from the so-called Kimberley Process for diamonds) and also to ensure adherence to internationally accepted minimum standards. Both are the prerequisite for responsible mining and production and due diligence also for the consumer industries. A differentiation of the production regarding compliance to internationally accepted standards would add valueto the ASM production and provide direct access to the mineral markets in industrial countries. For industrial countries, the access to ASM production without fearing of reputational loss would help to improve the supply security since the flexibility of the sector with regard to price changes would help to reduce the consumer’s need for stock-keeping of minerals…

Preliminary findings suggest that high-value metals produced in and exported from Rwanda including tantalum (coltan), tin and tungsten offer a leverage to handle poverty alleviation, prevent conflict as well as supply security.

Another option would be for Apple to use their leadership position to work with the Fairtrade Foundation to come up with a transparent way of ensuring the livelihoods of those in the tin mining industry, including the use of a minimum price or premium. It’s already been done with gold, so why not with tin?

Fairphone to the rescue?

So where do we go from here? Do we stop buying Apple products? How about we stop buying electronics altogether? No, there’s a clear line we can take as consumers and pension fund holders if we’re not going to condone this behaviour. First of all, let’s look at the consumer.

Fairphone was established in 2013 in an attempt to produce a smartphone “designed and produced with minimal harm to people and planet“. While this is an honourable aim, the fact that Fairphone admit that they cannot currently build and distribute a 100% “fair” product highlights how entrenched these production practices are across the industry.

Fairphone is a great initiative, but it’s yet to reach a critical mass. Will consumers force change by being more demanding in their buying habits? Alternatively, is another major electronics producer willing to take up the challenge and potentially benefit from a differentiated production process?

Elect Director Al Gore: For; Establish Board Committee on Human Rights: Against

Coming from the finance industry, a natural tendency of mine is to think about those who invest in Apple by holding their shares. Apple is the world’s largest company by market capitalisation which means that nearly every pension fund is likely to have at least a small holding in the company. So if you are a pension fund member or hold an index fund, you are most probably benefitting from these practices.

Apple’s shareholder register includes a variety of well-known investment managers (most likely funds managed for clients including pension funds), but also some direct holders including a range of US state plans (CalPERS, Michigan, Florida etc) and the likes of Dutch pension fund PGGM and UK charity the Wellcome Trust.

Included on this list are UBS and F&C who are two of the appointed investment managers of the UK National Employment Savings Trust (NEST). NEST is the default pension scheme for UK workplace pensions and they are signatories to the UN Principles for Responsible Investment (UNPRI), committing them to being active in engaging with environmental, social and corporate governance (ESG) issues as part of their investment process.

Unsurprisingly, Apple is one of NEST’s largest overall holdings. However, after a bit of further digging, I stumbled upon some very interesting and rather contradictory findings. Here’s a really easy question: what is the largest shareholding within NEST’s Ethical Fund? You guessed right: Apple. Is this consistent with the fund’s stated ethical policy?:

The NEST Ethical Fund reflects the ethical concerns of NEST’s members. They’re particularly concerned about human rights, fair labour practices, fair trade policies, the environment and dealings in countries with corrupt regimes.

Let’s look at the proxy voting record for NEST undertaken by UBS (page 95) and F&C (from page 3) at the February 2014 annual general meeting. In both cases, directly relating to NEST’s holdings in Apple, the investment managers voted for the appointment of Al Gore to the board of directors (hooray, maybe he’ll help uncover another Inconvenient Truth!) while at the same time voting against two ESG related issues:

Proposal 8: Establish Board Committee on Human Rights
Proposal 9: Report on Trade Associations and Organizations that Promote Sustainability Practices

Both proposals failed. At least F&C attempted to explain their decision:

Voter Rationale: We share the proponent’s preference that human rights risk be overseen by the board, but the binding nature of the proposal is too prescriptive. Establishing a corporate responsibility or sustainability committee to actively monitor and review emerging environmental, social and ethical risks and opportunities for the company is advisable but the board should have discretion in how it addresses these issues in its committee structure.

Completing the chain

The most ironic of my discoveries related to the BBC itself. It just so happens that one of the largest investments in the BBC’s pension fund is – you guessed it again – Apple. The BBC also uses NEST as its default pensions provider.

These are facts which can be verified using publicly available information. It seems that there is no escaping Apple regardless of how well-intentioned one may be. For Apple to take notice, we need to look beyond just the products they sell and those who purchase them. Investors, both big and small, should accept that it is their responsibility to understand the impact that their investments are really having.

Apple has a great opportunity to improve the lives of those involved in their supply chain. This includes implementing better workplace standards and ensuring that their raw material supply is fairly sourced. Without these reforms, an already long shadow will continue to grow as consumer and investor awareness increases. Apple will likely see reduced profit margins from taking these measures, but surely there is a greater financial risk from disenfranchised customers and investors?

Apple like being cool. How they produce their products is definitely not cool. It’s up to Apple’s customers and investors, both direct and indirect, to point out how uncool Apple’s practices are.

Another Nike moment for Apple?

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