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ESG investing: how the rise of data can undermine human rights

ESG investing: how the rise of data can undermine human rights

Many investors do not know the details of their underlying investments and if a fund manager is not transparent enough, they could be unwittingly contributing to human rights abuses.

The rise of environmental, social and governance (ESG) is leading to increased scrutiny of where client money is being invested, but avoiding countries with poor human rights records is not always an option.

This is especially true for emerging markets managers, considering the universe includes Turkey and China.

‘It is possible to conclude that investing in any company that has a presence in a country with an oppressive regime is in some way contributing to propping it up,’ said Perry Rudd, head of ethical research at Rathbone Greenbank.

‘This is either through the payment of corporate or personal taxes, licence fees and royalties (eg, mining or telecoms companies), supply chain exposure, or simply by its presence as a foreign investor being viewed as lending credibility to the government in question.’

When assessing companies, Rudd and his team track where the firm’s primary subsidiary undertakings are located and map it to data published by Transparency International and Freedom House.

Rudd explained: ‘An example of potential conflict in this area was the Arab Spring protests that took place across the Middle East in 2010/11 when governments requested that mobile phone operators shut down their networks to prevent communication between protest organisers.

'We subsequently took part in engagement with telecoms companies to understand their policies on ensuring balance in safeguarding privacy and assisting with legitimate law enforcement requests versus political interference.’

He added: ‘We do not expect investee companies to act as quasi-governmental bodies in tackling the underlying causes of abuse or breaches where they are outside their direct control.

'However, in line with the UN’s ‘Protect, Respect, Remedy’ framework, we do expect companies to have appropriate policies, risk assessment procedures and operational controls to ensure they respect human rights and have accessible mechanisms for stakeholders to raise grievances and seek remedy should issues arise.’

Exacerbating inequalities

In a note highlighting ethical challenges in 2019, the Rathbone Greenbank team also pointed out that the rise of data, if not properly regulated, can ‘exacerbate inequalities, undermine human rights and be used as tools of oppression’.

The team gave the example of Google’s re-entry into China, which raises questions around censorship, privacy and ‘how the firm can build the search engine without infringing its own commitment to “advancing privacy and freedom of expression” for users’.

They noted: ‘Google is just one example of how big data firms and algorithms feed into a number of ethical considerations for social and human rights, and reaching an agreement and understanding on what is right and what is wrong will be crucial.’

Closer to home, Rudd’s colleague Kate Elliot, senior ethical researcher, pointed out that UK gilts also do not meet the firm’s ethical criteria.

‘We do not buy UK gilts and other general purpose government bonds in the Rathbone Ethical Bond fund because they do not pass our ethical screening process.

‘While government bonds can be linked to spending on positive activities such as healthcare, we can’t take this into account without also considering defence spending, which would breach the fund’s negative exclusions.’

Guinness Asset Management’s Edmund Harriss, who runs the Emerging Markets Equity Income and Asian Equity Income funds, argues that because fund managers have a responsibility to make money for their clients, judging them on moral grounds is not right.

Harriss said: ‘An asset manager cannot unilaterally apply their own value judgements to determine strategic allocations.

'Thus, to call money managers heartless is a misnomer. It is to throw a set of moral imperatives against legal obligations. Social or institutional change at a national level is rarely brought about by financial pressures alone.

'Have financial sanctions ever proven to be effective?’

He added that where they can, managers should use their influence to improve standards.

He said: ‘It is at the individual company level, through engagement, that asset managers can make the most difference.

'The decision to withhold investment from certain areas has to be made with clients.

'It is important for the asset manager to be objective in their responsibilities to their clients but I agree that should not be used as reason to sidestep where we can make a difference.’  

Human right Description Example of how business might be involved with an impacton the right
Right to life Right not to be unlawfully or arbitrarily deprived oflife. The right to have one’s life protected, for example from physical attacks orhealth and safety risks.
  • Lethal use of force on peaceful protesters by security forces to protect company resources, facilities, or personnel.
  • Operations that expose communities or workers to toxic chemicals.
  • Manufacture and sale of products with lethal flaws.
Right to health Right to highest attainable standard of physical andmental health, including control over one’s health and body, and freedom frominterference.
  • Pollution from business operations that affects basic health of workers or neighbouring communities.
  • Sale of products that are hazardous to health.
  • Failure to provide a safe environment for workers.
Right to freedom of movement Individuals who are lawfully in a country have the rightto move freely throughout it, to choose where to live, and to leave.
  • Employers withholding workers’ identity documents (for instance, wheremigrant workers are relied upon by companies or their suppliers).

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