Environmental, Social, and Governance Considerations...

Zooming in on the S in ESG Investing

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Florian Wettstein is professor of business ethics at the University of St. Gallen in Switzerland and the editor-in-chief of the Business and Human Rights Journal. He has written a book, Business and Human Rights: Ethical, Legal, and Managerial Perspectives, that deserves some attention from a wide range of potential investors and their advisors. Perhaps this will become a reference book regularly found on the shelves of the latter.

Investment professionals around the world speak of “ESG” as either a filter or a guide for investments. The initials refer to “environmental, social, and governance” considerations, especially as they apply to firms issuing stocks or bonds. An environmental concern might be: is the issuer working to reduce its carbon emissions, and beyond that the carbon emissions in the whole lifecycle of its services and products? A governance consideration on the other hand: how independent is the board of directors of the corporate management? How open is the board to discussion with shareholders who may have their own considered views about the right direction for the company going forward?

Thinking about the World Cup in Qatar

But the concerns of this book belong within the “S” of ESG investing. A potential investor in a company ought to know if that company has gotten itself on the wrong side of social concerns, which preeminently include disputes about human rights.

One of the case studies in this book involves a major international sporting event: the FIFA (Soccer) World Cup. This year (November) the World Cup takes place in Qatar. As with the Olympics, the host countries eagerly seek an opportunity to host the World Cup because, in Wettstein’s words, “countless businesses are involved in, contribute to, and benefit from” the festivities. For Qatar in particular the impending World Cup has required construction of new state-of-the-art stadia, a new airport, hotels and so forth.

But the manual labor for all this infrastructure is the work of sponsored migrants, coming in from Kenya, the Philippines, Sri Lanka, Pakistan, etc. And Qatar has a distressing record in the way foreign manual laborers are treated. Michael Posner, another scholar in the field of international human rights, has pointed out that such migrants “routinely toil for long hours in blazing heat and often-unsafe work environments” for wages that are “paid late or subject to illegal deductions.” Those wages sometimes go missing altogether.

Until quite recent reforms (enacted precisely with the World Cup in mind) a migrant worker was effectively prohibited from quitting a job or switching employers under threat of deportation. There are elements of the worst of human trafficking in the system, known as “kafala,” a sponsorship system that grew out of adoption law. 

Suppose specific investors are interested in a stake in an international construction company, and in the course of due diligence they or their advisors discover that the international construction company will be drawing upon the established pool of kafala migrants. If our investors are concerned about the human rights of those migrants, and don’t want to contribute to their violation, they have two choices: exit or voice. They can avoid the investment, or divest themselves of it if it has already been made. Or they can seek to add their own voices to others in constructive engagement with the management of the companies involved, and with Qatar itself, in the hope of mitigating the dark side of kafala.

As Wettstein observes, Amnesty International has taken the side of constructive engagement in this matter. But in a progress report, AI has expressed concern that the recent changes loosening the kafala restrictions on the workers — in particular allowing them a right to quit or change employers — exist mostly “on paper,” not “on the ground.”

Transnational Business, and Transnational Liability 

The United Nations has declared a set of “general principles” (the UNGP) on the responsibilities of businesses in respecting human rights. This declaration is sometimes known as the Ruggie Framework, because former Secretary-General Kofi Annan farmed the work out to John Ruggie, a professor at the Kennedy School of Government at Harvard University.

Wettstein devotes a chapter to laying out the Ruggie framework. It sees business corporations as “specialized economic organs [with] distinctive responsibilities” that should not be taken to be simply mirrors for the duties of the member States.

Sometimes transnational businesses are held responsible in court for human rights breaches, even in courts of countries far distant from the real or alleged human rights violations. Wettstein highlights a case of violence in Guatemala and the litigation of responsibility in Canada.

Hudbay Minerals, a Toronto headquartered multinational, had operations in Guatemala in the period 2009-11. In that period, security guards employed by Hudbay Minerals are alleged to have murdered an indigenous activist, Adolofa Ich Chaman; shot and severely injured another, German Chub Choc; and gang-raped eleven women during the forcible eviction of their village.

While criminal proceedings were pending for these offenses in Guatemala, a court in Ontario ruled (2013) that Hudbay could be held civilly liable, in Canada, for the same actions. Litigation on the subject continues.  

A Collective Sense of Oughtness

One ought to note here that even the single-minded pursuit of the maximization of risk-adjusted profit is consistent with concern about how corporations conduct themselves in regard to their employees, or neighboring villagers, or activists who may end up on the radar of security personnel. The existence of a liability of indefinite extent has been hanging over the investors in Hudbay since the 2013 decision, and few analysts would argue with the proposition that this has depressed the performance of the stock.

Further: should investors be so single minded? Wettstein follows Ruggie, who saw the corporate responsibility to respect human rights as extending beyond the scope of the law. In some instances, this responsibility might be recognized and enforced by law. But as a whole it should be seen as a social norm, which Professor Russie called “a collective sense of ‘oughtness’ with regard to the expected conduct of social actors.” Investors, of course, are among the social actors he had in mind.

This book seems chiefly intended as a textbook, created at this time because the interface of human rights concerns with transnational business operations has become a subject of growing academic concern, with courses in many institutions devoted to the multidisciplinary subject matter. But, as noted above, it may also be of value as great for investment advisors working for clients who are concerned with the “S” in “ESG.” One doesn’t have to be a student, after all, to continue learning. 



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