The human face of ESG investing

Imagine, at the tender age of 25 — when most people are starting their first careers — you are appointed a UN spokesperson, you write and release your memoir to critical acclaim, and you begin to travel the world to tell your tale as a child soldier. This is the of life Ishmael Beach.

It’s a far cry from the life he lived over a decade ago, when volunteers and aid workers working with UNICEF plucked Beach from the rainforests of Sierra Leone after seven years of fighting as one of thousands of child soldiers in that country’s civil war. He had been abducted and brainwashed in 1991 when he was only 13 years old.

Now, at age 30, Beach is sharing his message of hope and inspiration to just about anyone who will listen, including the Million Dollar Round Table conference.

Traditionally, human rights issues were often low on the list of investment priorities. Even among the socially responsible investment crowd, the spotlight has largely been on environmental and health issues, but that may be changing.

In early June, a coalition of socially responsible investors, led by the Social Investment Forum (SIF), responded to a report submitted to the UN by professor John Ruggie, director of the Sharmin and Bijan Mossavar Rahmani Center for Business and Government at Harvard University, on the “fundamental challenge” for business “to narrow and ultimately bridge the gaps in relation to human rights.”

These investors wrote: “we believe that significant and urgent work must be undertaken by companies to scrutinize their own operations to minimize the possibility of complicity in human rights abuses. We also believe that greater disclosure of corporate information related to human rights policy and performance will enable investors to correlate the financial performance of companies with prudent management of human rights-related risks in general and to assess the possibility of human rights-related corporate liability in particular.”

More and more investors are turning to assets and companies that comply with environmental, social and governance (ESG) values, rather than simply socking away their savings in any investment vehicle. According to the SIF, this has prompted SRI assets to increase by more than 18% from 2005 to 2007.

Lauren Compere, director of shareholder advocacy for Boston Common Asset Management, a full-service, employee-owned social investment firm, and one of the letter’s signatories, also wrote, “we believe that socially responsible investors have played and continue to play a critical role in identifying early warning signs for companies related to human rights and potential reputational risks through their social screening and shareholder advocacy work.”

Advocacy work is what saved Beach’s life, he explained to 8,000 MDRT delegates on the last day of their 8th annual five-day conference.

Beach calmly told of his ordeal as a child soldier, and reminded the audience — many of whom sat quietly, almost motionless — that his story was not unique. He explained how rebels captured young Sierra Leoneans like himself, and forced them to kill their families, their neighbours and strangers in a bloody initiation rite.

“If you questioned [these rebels] you were shot on the spot,” explained Beach. “So you believed. You believed completely. And when that didn’t work, you used drugs and watched movies like Rambo: First Blood, so that the violence became more romantic and you no longer felt different; through these [and other methods] the violence became normalized.” All of these loyalty and shame techniques were carried out so that the rebels could control the diamond fields of Sierra Leone.

All of this is important to Anne Kvam, director of corporate governance, Norges Bank Investment Management (NBIM), Norway’s central bank.

In an article published in a UN newsletter in April, Kvam stated “it is important for us to reach a mutual understanding with the companies [we invest in] regarding the economic impact of social issues. From an investor’s point of view, poor education and health for the coming generation of workers and consumers provides a weak and inadequate basis for future production and employment, resulting in loss for investors and businesses.”

She continues by saying that with over 7,000 companies in the NBIM’s fund investment universe, “we have an obligation to safeguard the working arrangement of children, encompassing hazardous and physically/mentally damaging labour.”

In order to safeguard those rights and ensure “fundamental expectations of companies” were being met, NBIM started in the boardrooms. Kvam explains that “Norges Bank strengthened its role as an active share owner in 2007, and the level of direct dialogue with companies in the portfolio was stepped up.”

As a result, NBIM voted on more than 38,000 proposals at more than 4,200 companies in 2007.

NBIM is not alone. According to SIF, ESG investment assets increased from $639 billion in 1995 to $2.71 trillion in 2007 — an increase of more than 324%.

Still, there is resistance — a reaction Beach is keenly aware of, given his boyhood nightmares.

“When the UN workers came to rescue us, and told us to put down our guns, we felt that for a second time we were losing our family — so we fought,” recalled Beach. “We beat and stabbed the very people that were trying to help. What was powerful, though, is that these very people that we beat and stabbed, would return from the hospital. They told us it wasn’t our fault; they didn’t give up on us. That perseverance, despite our resistance, was eventually what prompted us to open up.”

Despite numerous UN and independent reports indicating that incorporation of ESG into a company’s fiduciary responsibility is good for the bottom line, many corporations and mutual fund companies are resisting. This resistance came to a head last year when a proposal to screen out investments that conflict with human rights standards was launched by U.S. shareholders against Fidelity Investments. Fidelity fought the move by attempting to block the proxy. Their argument was that their primary responsibility was their fiduciary duty to all shareholders — not to police the companies in which it invested.

In January, the proxy-block battle reached the Securities and Exchange Commission (SEC), which quickly ruled that Fidelity could not block shareholders from launching and subsequently voting on proposals that would require boards and managers to screen out investments that were deemed to be tied to human rights violations.

While the proxy did not pass, Fidelity’s C-suite executives, as well as industry pundits, were shocked to see that despite defeat, the shareholder resolution garnered support from roughly 25% of the shares in each of the four targeted funds — a substantial number given that Fidelity opposed the initiative and that shareholder resolutions, especially those dealing with social issues, usually fail.

“For a long time, institutional money managers were concerned with fiduciary duty and would only look at this in terms of maximizing profits,” explains Sucheta Rajagopal, LLB and CFP at Hampton Securities in Toronto. “These investors never looked at environmental, social and governance (ESG) factors. Then the UN decided to create the Principles of Responsible Investing [in 2006] and commissioned the Freshfield report. This report concluded that taking ESG factors into consideration was not in violation of a manager’s fiduciary responsibility. To this extent, the report showed that ESG can and does impact stock prices and must be taken into consideration.”

These must be welcome words for a man like Beach, who firmly believes that we all “have a responsibility to expose ourselves to our world, to see our common humanity, to learn about other people — not only in times of war, but in times of peace.”

Beach went on to challenge all investors and financial professionals to make their investment decisions in the context of broader social considerations.

“When we tell a story of war, we sensationalize the story,” Beach explained. “Without that human face, there is no context, no hope. But if my experience has taught me anything it’s that the human spirit is strong enough to find hope in the hopeless. That is our challenge.”

Originally published on Advisor.ca on May 30, 2008