The trend towards environmental, social and governance (ESG) investing has gathered significant momentum in recent years, as investors recognise the importance of its long-term value. Even amid the Covid crisis, the value of assets in sustainable funds worldwide hit a record £3.1tn in 2021, according to financial services firm Morningstar. But, although fund managers have clearly focused on the environmental aspect of ESG, they have lacked the same level of interest in the social element.
Carlota Esguevillas is a responsible investment analyst at fund manager EdenTree. She reports that, “while investors have flocked to act on climate change, issues like human rights have received notably less attention”.
In their search for lucrative new opportunities, investors are looking ever further afield for opportunities. Some potential investees will be operating in countries where human rights abuses are common.
“Our concern about oppressive regimes is intrinsically linked to human rights,” Esguevillas says. “Identifying these countries helps us to decide how exposed a company may be to potential human rights abuses and how complicit it may be.”
Numerous corporations have come under fire in recent years for their links to regimes with poor human rights records. In 2017, for instance, Amnesty International urged Nigeria, the UK and the Netherlands to investigate Shell in light of the Nigerian military’s brutal crackdown during the 1990s on people protesting at the Anglo-Dutch firm’s activities in the oil-rich region of Ogoniland.
According to campaign group Ethical Consumer, many companies benefit from the very conditions that contribute to oppression, including weak labour protection laws, a lack of environmental regulation and a high tolerance for corruption. But growing pressure from activists and purpose-led investors is forcing companies to take notice. A survey of new investors in the UK by Triodos Bank has found that 90% want their fund managers to conduct in-depth research to ensure that all investments align with their personal ESG criteria.
But a key challenge is to decide what constitutes social injustice. Determining which territories to avoid can often prove difficult, says Matt Crossman, stewardship director at investment management group Rathbones.
“Investors should have some element of supply chain risk assessment in their ESG models, but human rights is a contested space. There are few examples of objective rights and wrongs beyond certain core areas,” Crossman notes. “People will draw their own ethical lines, which is why it’s important to have a range of products in the market with different emphases from a social point of view.”
Consider Egypt, for instance. Foreign investment has poured into firms operating there in recent years. But over that time President Abdel Fattah el-Sisi has overseen the suppression of dissent against his government. Tens of thousands of Egyptians have been detained in overcrowded prisons and denied access to healthcare.
“For too long, the financial sector has had scant regard for the ethics of its investments. Considering this question is the first step,” says Alex Crumbie, director at Ethical Consumer and a writer on its eponymous bi-monthly magazine. “There is much debate about which practices are ethical and which are not – there is a degree of subjective judgement. But there are certain things that most people would agree are unethical, such as not allowing a free press.”
Activists have long urged investors to push firms for greater disclosure about their risks and, where possible, withdraw their investment when unsatisfied with the response. In 2021, Danish fund AkademikerPension did just that when it announced that it would be selling off nearly £70m in bond investments in states including Belarus, Iran and Pakistan because their governments had engaged in systematic human rights violations.
Crossman says: “The question of whose responsibility it is to push the social aspect of investments is interesting. The United Nations’ guiding principles on business and human rights help here. Under these, states have a duty to protect human rights, businesses have a responsibility to respect them and affected parties have a right to an effective remedy.”
Indeed, the UN principles have come to be widely regarded as a global standard for dealing with the risk of human rights violations. But a key problem is that agreements often rely upon weak regulations and voluntary compliance by corporations. This can make it hard for investors to make informed choices and all too easy for abuses to occur without sufficient accountability.
While funds are obliged to conduct due diligence, Esguevillas admits that the issue is not always black and white.
“We acknowledge that businesses can sometimes be a force for good in these countries – for instance, by introducing better labour standards. Our ‘oppressive regimes’ screen therefore captures only a very specific set of corporate activities,” she says.
Crumbie agrees that the investment approach to addressing human rights risks requires a highly nuanced approach.
“Engagement can be successful, but often it is not. Continued investment does provide legitimacy. It’s therefore better to cut ties when there’s no sign of improvement,” he says. “But this can have unintended ramifications for parties other than the regime in question, so such decisions must be carefully considered.”
Some investors note that divestment can often be detrimental to countries where many citizens are facing poverty. Moreover, in highly liquid markets, where a single investor is unlikely to hold a significant stake in a company of concern, divestment can have a limited impact while also potentially damaging returns.
A possible solution could be to form a multi-stakeholder coalition in which asset owners and investors jointly challenge corporate behaviour that concerns them. There is little doubt that awareness of human rights risk is growing in the investment community, but whether its members can cooperate to drive lasting change remains to be seen.
As Esguevillas says: “The ‘S’ in ESG is often described as too difficult to define and act on. But, just because it’s tricky, it doesn’t mean that it shouldn’t be attempted.”