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Starting at the source - engaging Trelleborg on sustainable rubber

In recent years, the prices for natural rubber have fallen sharply amid slowing demand. These depressed prices mean that smallholder farmers are struggling to pay rubber tappers anything close to a living wage. Hamish Galpin, Head of Small & Mid Cap Equities at Hermes Investment Management, looks at Hermes’ SDG-driven engagement with Swedish manufacturer Trelleborg, to encourage 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.

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 6 million smallholder farmers[1] 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 labour[2].

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, where it has significant exposure.

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 32 million tonnes of materials every year, of which only 25% comes from renewable sources[3]. 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.

This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. 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. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. 

[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] “Lower prices drive natural rubber producers into poverty,” published by Aidenvironment in October 2016

[3] “Michelin and the circular economy,” published by Michelin

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