Morningstar Advisor - June/July 2009 - 37

We base the bulk of our investment decision on information that’s available to the public at large because we think that the company needs to be transparent about these practices not just to Calvert, but to all its stakeholders. We push public transparency, because it leads to accountability. Amy Augustine Calvert Asset Management Company Jones: You look at seven “key” criteria: environment, workplace, human rights, indigenous people’s rights, community relations, product safety and impact, and governance and business ethics. Can you talk about how these criteria have evolved over time and how they might change in the future? Augustine: With seven very broad categories, Jones: Do you have an example of a firm that was originally not eligible for investment at Calvert but then changed its practices to the point that you were comfortable investing in it? Augustine: Nike NKE. For many years, we saw the risks in Nike’s supply chain as being very difficult to reconcile from a human and labor rights perspective. I’m sure everyone’s familiar with the sweatshop campaigns and all of the allegations that the company faced for many years. One of the great things about the work that we do is that whether we invest in a company or it’s not eligible for investment we continue to look at it. That way, we can recognize both improvement and areas where the company may be falling short. Calvert and the company and Calvert and other investors of the company that gave us the comfort level to say, “OK, Nike has reached a point where they are managing the risks in this supply-chain operation as best they can. They are being transparent and disclosing the results. When there is a problem in the supply chain, they are taking concrete actions to address that.” We’ve now been invested in them for several years and are continuing the dialogue. That’s the other critical point: That once a company has had this many issues, even when we then make the decision to invest in them, the dialogue and engagement does not stop. We still think it’s very important to continue to evaluate the company, to continue to talk with them and make sure that they are managing and mitigating their risks as best as possible. Jones: You mentioned “risks” earlier in an SRI context, and you just characterized Nike’s sweatshop problems as a “risk.” What do you mean by that? Augustine: It’s actually a very broad definition. a lot of emerging issues can fall within those larger baskets. Having the big baskets gives us flexibility to deal with issues as they come up and as they change. One concrete issue that I can point to for a screen that developed in response to the way that companies were being governed is our governance and business ethics. We have always looked at governance practices. When you’re looking at a company’s environmental management system or their health and safety system, you’re looking at how they govern a particular issue within their company. But in 2001–2002, we had that first round of corporate meltdowns, and we thought very long and hard about elevating governance and business ethics into its own stand-alone screen. It’s a clear demonstration of us looking at how an issue is emerging and affecting the entire universe of companies that we invest in and seeing the need to elevate something from a way that we look at all of our criteria into its own separate bucket. It’s one of the most important issues that we look at because, as I said, it really does affect all of the other six criteria. A company’s governance measures is how they look at everything. In Nike’s case, we saw the company opening up and trying to address the risks that it faced in its supply chain. I think that any company in the retail apparel/footwear industry that says they have all their problems managed is a company that’s not being very forthright. In Nike’s case, the managers came forward and said, “We don’t have it all figured out, but here are concrete steps that we’re taking to manage the risks that we do have.” They developed very strong, robust human rights policies and programs. They developed very strong auditing processes. They opened up the factories to independent third-party audits. And then, they took the final step and started to disclose publicly the results of those audits. It was all of those steps together combined with many years of dialogue between To start off with, we think it’s a risk to the actual employees in the factories. So whether they’re contracted employees or Nike corporate employees, if their work environment is not being well-managed, there are health and safety risks, there are risks of overtime violations, and other things. Your workforce itself is not being as productive and as healthy as it could be. Those risks then MorningstarAdvisor.com 37

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Morningstar Advisor - June/July 2009

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