Pension funds struggle with human rights dilemma

It is easy to pay lip service to human rights: the securities firms’ promotional material is rich in references to them. It is much more difficult to figure out how best to enforce these rights.

However, this is a task that bond fund managers are increasingly grappling with, as activists call them in their rhetoric.

An investigation by the Financial Times in July found that several fund management firms claiming to be concerned with human rights were lending to countries that violated these rights. There was often little evidence that human rights were even affected when firms talked to issuers of government bonds.

The FT also found that 34 percent of the bonds in a JPMorgan emerging market bond index that uses environmental, social and governance (ESG) ratings were issued by countries listed as “not free” by the Freedom House democracy campaign group. have been classified.

Divestments may be an obvious answer, but some experts question their effectiveness as a means of changing a country’s behavior.

“It may be heretical to say this when ESG is seen as a panacea, but an exit in the secondary markets is often more of a statement by an investment manager to its clients – with their money – than a tool for change,” argues Dan Harris, Partner Chancery Advisors law firm, who runs the firm’s ESG, boycott, and sanctions desk.

What investors gain in ESG credibility, the argument goes, they lose influence. The sale “removes the responsible investor from the conversation in order to make changes to the underlying security issuer,” says Petra Dismorr, managing director of the ESG consultancy NorthPeak Advisory.

Stephen Liberatore, Head of ESG / Impact for Global Fixed Income at investment firm Nuveen, says the mere sell-off is reminiscent of ethical stick and no carrot investing in the mid-2000s, with little incentive for issuers to reform a manager has sold. Getting a country to act differently, he says, “takes longer, it’s more complex”.

Still, critics argue that fund managers could do far more than they are currently doing to put pressure on problem countries. They say that a divestment sends a strong signal to a government and that sometimes help is needed, otherwise the fund managers’ admonitions will not hold up.

“If a large amount of money is withdrawn from Egypt or Belarus, they will notice,” says Sarah Repucci, head of research and analysis at Freedom House – adding that the fund manager will make it clear to the issuer what is behind the move .

Engagement has to be part of the process, she says. “The right way is to give lots of warnings first. . . and if there is no improvement, then sell. ”

Recent examples of the sale include the steps of AkademikerPension, a Danish pension fund for academics, and German Union Investment, which are selling Belarusian national debt. AkademikerPension is now refusing to buy government bonds or invest in majority state-owned companies 45 countries, including China and Saudi Arabia, for corruption or human rights abuses.

Fund managers already have to balance pressures from NGOs not to fund authoritarian regimes with the need to make money for investors. To make matters worse, the sale of bonds from some countries could do more harm than good to the poorer members of these societies.

One example often cited by fund managers is Egypt. Last year the country issued a so-called “Green Bond” to finance environmental projects. But the country also experienced “the worst human rights crisis in decades,” according to advocacy group Human Rights Watch, with “tens of thousands” of government critics, including journalists and human rights defenders, jailed on politically motivated allegations.

Freedom House classifies the country as “not free” and says that “security forces commit human rights abuses with impunity”.

Nuveens Liberatore says he invested in Egypt’s green bonds because the proceeds would go to sanitation and sanitation, which would help the poor in particular. “We felt that this particular deal was directly funding those most in need and improving the standard of living,” he explains.

Patrick Scheideler, co-founder of MultiLynq, a fixed income trading platform, says the question of Egypt’s green bond wasn’t easy and that the lack of attractive returns elsewhere “probably makes the solution even more difficult for those seeking returns.” Fund manager.

Ana Perez Adroher, project officer for human rights and sustainable investments at the International Federation for Human Rights, says that the sale of a bond depends on the specific situation of a country and on the assessment of the investors with regard to their influence.

She compares the debate to the debate about sanctions: does the pressure they put on repressive governments weigh the damage they do to ordinary citizens?

However, she adds that fund managers are required to conduct due diligence by speaking to NGOs and individuals who have suffered human rights abuses. “There is a lot of discussion about bonds, but there is still a lot to be done,” she says.

Freedom House’s Repucci says investors are increasingly concerned about lending to regimes that violate human rights, adding that they should take steps to understand where their money is going.

“If they are not aware of the human rights implications of their investments, they are in some way involved in the abuses,” she says.

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