Investors Flashcards
Wachenfeld
“Just as Nike has long since accepted that it has responsibility to work with its business relationships to address potential human rights harms in factories where its products are stitched, financial institutions are equally directly linked to human rights harms created by clients using the financing they provide. As for investors, there can be no more direct linkage between one organization and another than through ownership, even minority ownership.”
Freshfields
While conservative interpretations of fiduciary duty prevail, investors are increasingly paying attention to the link between ESG and returns. As explained by Freshfields back in 2005: “…the links between ESG factors and financial performance are increasingly being recognized. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”
OHCHR clarification about investors
Investor is directly linked to the impacts that the company is having.
Not causing, but means that you need to use your influence to mitigate and cease the behavior.
When you don’t have leverage as a minority shareholder you should work to get leverage.
Prioritize to address the most urgent concerns in operations.
Enabling legal environment for institutional investors
44% of countries have existing or proposed regulations “stipulating that pension funds can and, in some cases must, consider ESG factors as a part of their fiduciary responsibilities.”
New York University Stern Center, March 2017
Types of SRI
1. Social screening
Styles can include:
Exclusion - exclude anything that includes child labor, for example
«best in class» - you are a universal owner and you acknowledge that you will invest in every sector but you only pick those that are best in class; BUT is it possible to say that there is a “best in class” tobacco or mining or weapons company?
thematic funds - if you have a retirement fund through your employer maybe they give you the choice to invest in clean energy funds, funds that advance the interests of women, etc
Indexes - A basket of stocks where the companies are slotted into one index and you invest in that index (difficult to take out or add different companies)
Types of SRI
2. Shareholder engagement (active stewardship)
Proxy resolutions (filing, voting)
Blackrock example
Have to be very short - certain words that can’t be used, so have to be written with lawyers
Even if you don’t file a shareholder resolution, you can vote for the shareholder resolutions that are there if you are a shareholder
Direct dialogue with companies
This is more and more popular with institutional investors behind closed doors
Policy advocacy
Shareholder support for ESG proposal stats
Average support for ESG proposals (USA) more than doubled from 2003 (10%) to 2013 (21%). As of mid-2021, 34 ESG proposals (USA) had received majority support (50% or more). (Proxy Review 2021)
Society for Threatened Peoples vs. UBS
The Swiss acceptance of the case is significant because it represents the first time an NCP has recognized the responsibility banks have for their passive investments through index funds.
The complaint concerns the bank’s financial ties with Hangzhou Hikvision Digital Technology Co. Ltd. (Hikvision), a provider of modern surveillance technology that has played a key role in the mass surveillance of the Uyghurs and other Turkic minorities in Xinjiang, China.
The OECD NCP determined that UBS does not have a business relationship with Hikvision regarding its role as a custodian for client-held shares, interpreting that UBS’s involvement as a nominee shareholder does not constitute a direct business relationship with Hikvision, a stance criticized as a misinterpretation of the OECD Guidelines, which advocate for a broader definition of business relationships.
Barriers to SRI being impactful (1)
Outdated understanding of ‘fiduciary duty’ because of a narrow reading of ‘best interest’ of the shareholder.
Barriers include: “A conservative interpretation of fiduciary duty as solely focusing on the highest financial returns…and trustees are too focused on the short and medium term” (European Commission) Short-termism can deter investors from engaging with companies on human rights issues that require long-term solutions and investments.
Barriers to SRI (2)
Lack of information & clear performance metrics to manage responsible investing ‘at scale’
We still don’t have meaningful transparency from most companies in the world about how they are effectively managing human rights and environmental risks. Evolving legislation in the EU and other jurisdictions will eventually start to help fill this gap, but not comprehensively.
Barriers to SRI (3)
Lack of leverage
Large institutional investors often have more influence over corporate behavior than small investors or individual shareholders. The impact of individual or small investor actions can be diluted if not coordinated effectively.
Barriers to SRI (4)
Compliance risk & legislative/regulatory gaps
Despite growing investor demand for ESG strategies, the Trump administration—acting through the Department of Labor, which oversees employer-sponsored funds—issued a new rule emphasizing that ESG considerations are permissible only when “they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.”
Biden said the admin would not enforce the rule, but this shows the back and forth of executive actions that are not solidified in federal laws
Lawmakers in 46 states in the US introduced bills related to ESG investments in 2023.
Casey O’Connor Willis - if we had stronger regulatory moves, we would have a smoother shift to ESG investing
Overcoming barriers (1)
Outdated understanding of ‘fiduciary duty’ because of a narrow reading of ‘best interest’ of the shareholder.
Multi-stakeholder initiatives that actively participate in updating what ‘fiduciary duty’ means in theory and in practice. Moving on from Milton.
Education - taking off the blinders:
Investors, MBA students, lawyers and judges: The debate has moved on from artificial bifurcated view of reality that views investment portfolio in isolation from real world. A modern fiduciary must understand how the corporation affects health of systems it depends on for its long term survival. If you use my money to make a weapon that kills my child, don’t tell me that in 20 years I will retire with more money as a result (Kanzer 2013)
Civil society: We need to better understand the financial world in order to have a critical mass of activists to dismantle it.
Law firms (such as Fairfields) and investment consultants need to continue to build arguments (in conjunction with civil society) that outline the moral and financial implications of ignoring human rights.
Example: The DAPL case (Fredericks)
Civil society should continue to push strategic litigation and build up cases involving investor responsibility via NCPs
The NIIB & Posco case - Importance of explaining the application of the OECD Guidelines to different sectors and in different contexts – in this case the financial sector and more particularly, investors. Letter to SOMO/OECD Watch:
In situations where the minority shareholder finds it lacks leverage, it should consider ways in which it may increase its leverage to prevent or mitigate the human rights risk. This could, for example, involve filing shareholder proposals or entering into dialogue with other shareholders to build alliances for voting on the issue at shareholder meetings. Dialogue with authorities and relevant industry associations could also be considered.
Engage relevant expertise
Responsible divestment / exit
The cost for the entire project for ETP and other firms with an ownership stake was not less than $7.5 billion and the banks that financed DAPL incurred an additional $4.4 billion in costs. Further, at least $38 million accrued to taxpayers and other local stakeholders.
Kanzer
Whether they like it or not, pension funds, are in fact, agents of social change
The debate has moved on from an artificial bifurcated view of reality that views investment portfolio in isolation from the real world. A modern fiduciary must understand how the corporation affects health of systems it depends on for its long term survival. If you use my money to make a weapon that kills my child, don’t tell me that in 20 years I will retire with more money as a result
Divestment can be effective
Fredericks
DAPL case outlining the correlation with failed FPIC and losses in the share price was well as the costs of delays and other material financial implications for disrespecting rights.
The cost for the entire project for ETP and other firms with an ownership stake was not less than $7.5 billion and the banks that financed DAPL incurred an additional $4.4 billion in costs. Further, at least $38 million accrued to taxpayers and other local stakeholders.
