It’s a welcome development that so many pension fund managers are increasingly preoccupied with the ethical implications of their investments and incorporating data to ensure that funds adhere to the environmental, social and governance criteria.
Described by Mirza Baig, global head of ESG research and stewardship at Aviva Investors, as the “year ESG came of age,” 2020 saw record sustainable fund sales. By the end of the year, the total assets in sustainable funds hit a record of almost $1.7 trillion, which was a 50 per cent increase on the previous year. It’s also worth noting that ESG funds outperformed their competitors.
Pension funds are making real strides in taking action on the climate, divesting from the oil sector and pivoting towards green and renewable technology. Human rights and the social side of investment, the S in ESG, is often the unspoken awkward child in the room.
While increasingly there are common standards being developed to measure environmental impact, social impact is perceived to be more subjective, meaning some pension funds, despite being signed up to protect human rights under the United Nations’ Guiding Principles on Business and Human Rights, do little to fulfil the responsibility they have to ensure that public money isn’t going to companies complicit in gross human rights violations.
The growth of passive investing, using index tracking funds, exacerbates the problem as fund managers tend to be less rigorous in their due diligence of the component members of indices provided by firms like MSCI Inc., FTSE Russell and others. This is particularly the case of the ESG products produced by those firms.
The combination of a lack of rigour in assessing the social impact of investment, combined with passive investment strategies, perhaps explains how some of Canada’s largest public pension funds in 2020 were found to be investing in Chinese companies on U.S. sanctions lists and complicit in the building of the surveillance apparatus and concentration camps that house over a million Uyghurs or companies effectively run by the People’s Liberation Army.
A recent report by Hong Kong Watch, looking at three of the largest pension funds — the British Columbia Investment Management Corp., the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan — found that two out of the three were invested in Chinese companies on the U.S. sanctions list and all three were invested in companies where human rights groups have raised concerns about their complicity in human rights violations within China.
No doubt many pension fund managers are alarmed at reports that the pensions of school teachers, civil servants and Canadian pensioners are invested in companies accused of participating in what a recent motion unanimously passed in the House of Commons has labelled as a “genocide” taking place against the Uyghurs. But what steps should be taken to ensure funds don’t invest in companies complicit in human rights violations?
First, investors should give human rights and social factors a greater weighting when it comes to ESG data modelling. Human rights have to play a bigger role in the conversation about ethical investment and can’t be an afterthought. That includes pension funds being more transparent about the companies and countries they invest in.
Regulators, firms and governments should be drawing on the UN’s Guiding Principles on Business and Human Rights as an authoritative benchmark. In the words of Professor John Ruggie, the architect of the principles: “In sum, for the S in ESG, internationally authoritative standards and high-level guidance exist. They don’t need to be reinvented. They have been endorsed and are used by governments as well as leading businesses and other stakeholders. The intellectual and practical challenge for us all is to assist the traditional investment community in seeing connections it might not have imagined before: that human rights are the core of the S and that the S is the core of the social sustainability of business itself.”
Second, a more hands-on approach is required from pension fund managers investing in China. It’s no longer justifiable to passively invest in Chinese equities. Increasingly, there are huge reputational and legal risks in investing in Chinese companies closely aligned with the Chinese Communist Party state and on U.S. sanctions lists. One only needs to look at the recent story in the South China Morning Post, which found that some giant U.S. mutual funds are heavily invested in firms linked to slave labour in Xinjiang, to see the risks associated with passive investments in China.
Finally, investors should work with regulators to ensure there’s clarity when it comes to investments involving companies that are complicit in human rights violations. One way to offer clarity for pension fund managers would be the adoption of a U.S.-style entities list, barring investment in companies where there’s substantial evidence of human rights abuse. Working with parliamentarians and the government, this list would be regularly updated and pension fund managers notified of the companies to avoid.
Much like tobacco and oil, a time is fast approaching where investing in firms complicit in genocide, ethnic cleansing and modern-day slavery will be considered as equally unacceptable and even a sin stock.
Ignorance is no longer an excuse. Fund managers have a duty to educate themselves about the makeup of their portfolios in China and ask themselves: What are the ethical implications of investing in companies complicit in human rights violations?