Bond investors need to step up on human rights

Institutional investors have made big strides in trying to tackle climate change through their investments. They now need to show similar progress on human rights.

Pressure from investors has helped drive companies such as Unilever and Spanish airports group Aena to offer shareholders regular votes on efforts to tackle climate change, while institutional investors are pushing big US tech firms to disclose more about environmental risks.

But when it comes to human rights, it is a different story. A Financial Times investigation last month showed that fund firms with strong rhetoric about tackling human rights abuses were also lending money to regimes carrying out abuses. Often there was little sign that they were raising these issues when talking to these countries.

What is more, activists with experience of such abuses had little success in getting some financial firms even to respond to their requests for help.

In fairness, tackling this issue is not straightforward, for two reasons. Firstly, bonds offer investors fewer natural points of engagement than equities, where there are shareholder meetings and more informal conversations with management. And when they do, talking to a government’s representatives on a bond roadshow is not the same as talking directly to a company’s chief executive.

Secondly, while some human rights abuses may be clear cut, other situations can be more complicated. Fund managers have tended to prefer focusing on climate change, a topic that many Western investors agree on and where progress can be quantified. When you have an investor base from different parts of the world, deciding which social values you should prioritise can be trickier.

“The E and G [of ESG] are fairly clear cut,” says Daniel Harris, partner at law firm Chancery Advisors, talking about environmental, social and governance investing. “When it gets to the S, that’s the Wild West, there’s no consensus.”

He adds that “investors are routinely applying double standards”, for instance by turning a blind eye to China and Russia, while taking aim at other countries “by invoking a home-made version of international law based on emotion and politics”.

Much of this is rooted in the age-old problem of the finance industry: a lack of accountability. Exactly whose responsibility is it to push these issues? Asset managers often argue they are merely carrying out the requests of end investors. Consultants to investors such as pension funds see their duty as providing the framework to consider all the issues, not pushing clients to change their beliefs. Investors, in turn, may not know or have the time to examine every single security that their fund managers are investing in.

“If you’ve got half an hour in a trustee meeting to question a manager, there’s no guarantee that everything will be put on the table in that space of time,” said Joanne Holden, global head of investment research at consultant Mercer.

But a large part of the problem is also how ESG has come to be viewed in the asset management industry.

Many fund managers focus on ESG risks. What that means in practice is that ESG is used as a way of spotting previously under-appreciated risks and reducing the chance of losing money. For example, if a government crackdown on its opponents leads to civil unrest, that could hit the price of the country’s bonds.

Guidance given to investors has been in that direction. The Law Commission’s review of fiduciary duties, for instance, states that “where trustees think ethical or environmental, social or governance (ESG) issues are financially material they should take them into account”.

But while focusing on ESG risks can make investment firms appear virtuous, it does not always tackle the underlying ESG problem. Take Uzbekistan, where concerns have been growing over the pace of reform and the state of human rights.

An ‘ESG risk’ approach would overlook the case of 69-year-old former diplomat Kadyr Yusupov, who was put in a tiny prison cell infested with scorpions and snakes and subjected to alleged psychological torture, in spite of a UN working group’s call for his immediate release.

His case is unlikely to move the price of Uzbekistan’s bonds. But that does not mean fund managers should not be raising the case when they talk to the country’s representatives. Taking a stance on human rights and sovereign bonds will be an even bigger challenge for institutional investors than pushing companies over their climate impact. And it could, at least in the short term, cost them returns.

But as Adam Gillett, head of sustainable investments at Willis Towers Watson, notes: “Just because it’s tricky doesn’t mean it shouldn’t be done.”

laurence.fletcher@ft.com