Divesting as a way to protect human rights

ESG indicators are becoming more and more relevant, and even if environmental issues are usually the most discussed and analysed, even social ones are gaining attention. Among these issues, one of the most relevant is how to behave in front of human rights violation from bond-issuing countries.

Since it is clear that financial investors play a fundamental role in the world’s economy, many human rights activists have suggested that fund managers could do far more than what they are currently doing to put pressure on countries that clearly violate human rights or are involved in terroristic regimes. Indeed, although it could seem obvious that financing unsavoury regimes is not a social sustainable choice, poor human rights level has usually been little barrier for these countries to borrow money from western investors.

Despite worldwide condemnation of their behaviours, many countries such as Saudi Arabia, Russia, Egypt and Belarus have been able to collect huge amount of resources through bond issues. And powerful funds often own many of these bonds. For example, a Financial Times analysis shows that 34% of bonds in a JPMorgan emerging market bond index, that uses ESG scoring, were issued by countries rated as “not free” by the democracy campaign group Freedom House. And the situation is similar in many other influential investors.

And the key point is that, as many fund managers want to highlight, excluding countries that violate human rights could deprive investors of high and profitable returns. In addition, while environmental features can be easily quantified, identify some human rights abuses could me more complicated, especially when the investor base comes from different parts of the world.

Of course, it is important to point out that some investors, like the Danish pension fund for academics AkademikerPension and the Germany’s Union Investment, are committed in divesting in unsavoury regimes and, for example, have sold out their portion of Belarus government debt.

Once investors have paid heed to the need of enacting a positive social change, many doubts arise about how to make that change possible. Indeed, even if divesting could seem an obvious strategy, many experts have questioned its effectiveness, since a divestment in the secondary market is often more a statement to please clients than an actual tool for change. Therefore, there is a great debate among economists and managers whether it is better, in order to achieve social goals, to divest or to introduce constraints and constantly badger the borrower. And this debate is also central in taking action to support environmental topics.  

Some academics (Broccardo E., Hart O., Zingales L.; “Exit vs. Voice”, first version, July 2020, revised, December 2020) claim that divesting is less effective than engaging in pushing companies to act in a socially responsible manner, since once bonds or shares have been sold up, incentives for issuers to reform themselves could quickly disappear. In addition, many economists point out that divesting could actually harm the poorer members of those societies, since even fewer financial sources would be allocated in improving their living standards.

On the other hand, some experts assert divestments send a strong signal to  governments and since these withdrawn financial sources must be replaced, a collective action can lead to surprising result. A clear example is the anti-apartheid divestment campaign that, form the 1960s through the 1980s, galvanized universities and corporations to divest their South African holdings. This campaign was so effective that, by 1990, more than 200 companies (including UN bodies and the European community) had severed ties with South Africa, resulting in a loss of $1 billion of investment. The financial burden pushed companies profiting in South Africa to urge changes on the Apartheid government, incentivizing deep social developments.

In addition, divestment supporters point out that bonds offer investors fewer managing powers than equities, therefore trying to achieve goals through constraints or by engaging with management is obviously more difficult.

In conclusion, despite the chosen kind of strategy, investors should pay more attention on what their money are financing and where their resources are going, in order to avoid indirectly financing human rights violation. Indeed, as Sarah Repucci, head of the research and analysis department at Freedom House, says “if investors are not aware of the human rights implications of their investments, they’re in a way complicit in the abuses”. And there is no need to say that avoiding contributing to the survival of human rights violation will always be more important than obtaining high yields.

Author: Edith Oldani

Divesting as a way to protect human rights

ESG indicators are becoming more and more relevant, and even if environmental issues are usually the most discussed and analysed, even social ones are gaining attention. Among these issues, one of the most relevant is how to behave in front of human rights violation from bond-issuing countries.

Since it is clear that financial investors play a fundamental role in the world’s economy, many human rights activists have suggested that fund managers could do far more than what they are currently doing to put pressure on countries that clearly violate human rights or are involved in terroristic regimes. Indeed, although it could seem obvious that financing unsavoury regimes is not a social sustainable choice, poor human rights level has usually been little barrier for these countries to borrow money from western investors.

Despite worldwide condemnation of their behaviours, many countries such as Saudi Arabia, Russia, Egypt and Belarus have been able to collect huge amount of resources through bond issues. And powerful funds often own many of these bonds. For example, a Financial Times analysis shows that 34% of bonds in a JPMorgan emerging market bond index, that uses ESG scoring, were issued by countries rated as “not free” by the democracy campaign group Freedom House. And the situation is similar in many other influential investors.

And the key point is that, as many fund managers want to highlight, excluding countries that violate human rights could deprive investors of high and profitable returns. In addition, while environmental features can be easily quantified, identify some human rights abuses could me more complicated, especially when the investor base comes from different parts of the world.

Of course, it is important to point out that some investors, like the Danish pension fund for academics AkademikerPension and the Germany’s Union Investment, are committed in divesting in unsavoury regimes and, for example, have sold out their portion of Belarus government debt.

Once investors have paid heed to the need of enacting a positive social change, many doubts arise about how to make that change possible. Indeed, even if divesting could seem an obvious strategy, many experts have questioned its effectiveness, since a divestment in the secondary market is often more a statement to please clients than an actual tool for change. Therefore, there is a great debate among economists and managers whether it is better, in order to achieve social goals, to divest or to introduce constraints and constantly badger the borrower. And this debate is also central in taking action to support environmental topics.  

Some academics (Broccardo E., Hart O., Zingales L.; “Exit vs. Voice”, first version, July 2020, revised, December 2020) claim that divesting is less effective than engaging in pushing companies to act in a socially responsible manner, since once bonds or shares have been sold up, incentives for issuers to reform themselves could quickly disappear. In addition, many economists point out that divesting could actually harm the poorer members of those societies, since even fewer financial sources would be allocated in improving their living standards.

On the other hand, some experts assert divestments send a strong signal to  governments and since these withdrawn financial sources must be replaced, a collective action can lead to surprising result. A clear example is the anti-apartheid divestment campaign that, form the 1960s through the 1980s, galvanized universities and corporations to divest their South African holdings. This campaign was so effective that, by 1990, more than 200 companies (including UN bodies and the European community) had severed ties with South Africa, resulting in a loss of $1 billion of investment. The financial burden pushed companies profiting in South Africa to urge changes on the Apartheid government, incentivizing deep social developments.

In addition, divestment supporters point out that bonds offer investors fewer managing powers than equities, therefore trying to achieve goals through constraints or by engaging with management is obviously more difficult.

In conclusion, despite the chosen kind of strategy, investors should pay more attention on what their money are financing and where their resources are going, in order to avoid indirectly financing human rights violation. Indeed, as Sarah Repucci, head of the research and analysis department at Freedom House, says “if investors are not aware of the human rights implications of their investments, they’re in a way complicit in the abuses”. And there is no need to say that avoiding contributing to the survival of human rights violation will always be more important than obtaining high yields.

Author: Edith Oldani

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