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Starting at the source: engaging Trelleborg on sustainable rubber

Home / Perspectives / Starting at the source: engaging Trelleborg on sustainable rubber

Will Pomroy, Lead Engager
02 August 2018
Small and Mid Cap
  • Fuelled by a surge in demand from China, natural-rubber prices spiked in 2011, prompting millions of smallholder farmers to enter the market, with many clearing forests to do so.
  • Prices have fallen sharply in recent years amid slowing demand.
  • Almost 85% of natural rubber is produced by approximately 6m smallholder farmers. But depressed prices mean that many farmers are struggling to pay rubber tappers anything close to a living wage.
  • Natural rubber is a key input in products made by Swedish manufacturer Trelleborg.
  • In our SDG-driven engagement with Trelleborg, we are encouraging the company to develop a sustainable natural-rubber sourcing policy to reduce deforestation and improve the incomes and working conditions of farmers at the bottom of the value chain.
  • We have also encouraged Trelleborg to systematically consider the total lifecycle impacts of its products by supporting a circular, rather than linear, approach to production – an area in which the company agrees it can do more.

The natural-rubber industry has undergone rapid and fundamental changes in the last decade. In 2011, natural-rubber prices hit record highs as demand from China surged. This led to an unprecedented rush into the market by farmers, with many clearing forests with high conservation value to make way for rubber plantations.

Today, almost 85% of natural rubber is produced by approximately 6m smallholder farmers1 and prices are depressed amid a supply glut. Smallholder farmers and companies are struggling to pay tappers a minimum wage, let alone a living wage. In addition, studies have revealed adverse working conditions and practices at rubber plantations, including inadequate safety standards, discrimination, long working hours and, in some cases, the use of child labour2.

SDG-driven engagement

The Hermes SDG Engagement Equity Fund aims to generate attractive investment returns and positive social and environmental impacts by investing in companies with strong potential to improve through engagements focused on the United Nations Sustainable Development Goals (SDGs).

This is illustrated by our exposure to Swedish manufacturer Trelleborg, which uses natural rubber to produce large tyres, springs and rubber bearings as well as hoses, seals and engineered coated fabrics.

Natural rubber is a key input – and although it accounts for only 10% of the group’s total raw materials, it requires considerable attention. Increasingly, companies using rubber are being held responsible for addressing sustainability issues in their supply chains, such as poverty among smallholder farmers and their contribution to deforestation.

The SDGs provide an ideal framework for engaging to generate meaningful societal benefits and create more impactful and profitable companies. We are engaging with Trelleborg primarily on SDGs one, two, 12 and 15.

Trelleborg has significant exposure to the SDGs:

SDG 1: End poverty in all its forms everywhere.

SDG 2: End hunger, achieve food security and improved nutrition and promote sustainable agriculture.

SDG 12: Ensure sustainable consumption and production patterns.

SDG 15: Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, halt and reverse land degradation and halt biodiversity loss.

Towards sustainable natural-rubber production

In June, we spoke with Trelleborg’s corporate responsibility team. We discussed the company’s due-diligence checks on its natural-rubber suppliers. Encouragingly, the team explained that it was monitoring this issue: last year, it had coordinated dialogue – focusing on the risk of child-labour use and deforestation – with more than 1,000 representatives of its direct and indirect suppliers in Southeast Asia and Africa. We also discussed the end-of-life collection, recycling and repurposing of its products and its renewable-energy usage.

To align its corporate practices more closely with the SDGs, we have encouraged Trelleborg to:

  1. Develop, adopt, and distribute a sustainable natural-rubber sourcing policy to its tier-one suppliers, from where it could cascade as these businesses request attestations from underlying suppliers confirming that they would adhere to the policy. The policy should focus on ensuring wages are adequate throughout its value chain and makes clear commitments to achieving zero deforestation. We have also sought to help Trelleborg prioritise its efforts by highlighting the best practices that we have observed in the industry, such as the policy adopted by tyre manufacturer Michelin, which is endorsed by the World Wildlife Fund.
  2. Systematically consider sustainability and circularity in product development processes, particularly for tyres. The tyre industry uses 32m tonnes of materials every year, of which only 25% comes from renewable sources3. Trelleborg has acknowledged that there is scope to adopt a more consistent approach to prolong the life of rubber products or collect and recycle them at the end of their life.
  3. Establish a group-level target for renewable energy in the next iteration of the company’s sustainability strategy. We welcomed the efforts Trelleborg has made so far to drive down energy consumption and encourage it to set ambitious renewable energy usage targets, aiming ultimately to be fossil-free.

Already, the company has demonstrated a willingness to continue these discussions. Through our ongoing engagement, we believe that Trelleborg can create positive impact by aligning its sustainability programmes towards the SDGs, while delivering robust financial performance.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested.

Any investments overseas may be affected by currency exchange rates.

Past performance is not a reliable indicator of future results and targets are not guaranteed.

Investing in smaller/medium sized companies may carry higher risks than investing in larger companies.

Investments in emerging markets tend to be more volatile than those in mature markets and the value of an investment can move sharply down or up.

  1. 1 “A small-scale farmer leads the way for big changes to rubber farming in Myanmar,” published by the World Wildlife Fund in March 2018.
  2. 2 “Lower prices drive natural rubber producers into poverty,” published by Aidenvironment in October 2016.
  3. 3 “Michelin and the circular economy,” published by Michelin
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Will Pomroy Lead Engager Will joined Hermes in 2015 and, in addition to overseeing and leading the engagement programme for the SDG Engagement Fund, provides ESG analysis for and engagement with stocks in the firm’s small- and mid-cap strategies. He chairs the Corporate Governance Expert Group of the Quoted Companies Alliance and is a member of the Corporate Governance Committee of the Institute of Chartered Accountants in England and Wales. Will holds an MSc in Public Policy and Management from Birkbeck College at the University of London and a BSc (Hons) in Forensic Science from the University of West of England.
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