Supreme Court rules on Nestlé USA, Cargill child labor case

Today, in an 8-1 ruling, the Supreme Court issued a decision in favor of two corporations accused of links to child slavery in the Ivory Coast. The case, Nestlé v. Doe, was a lawsuit brought by six Mali citizens against the companies Nestlé USA and Cargill. The lawsuit claimed that the chocolate makers aided and abetted child slavery on African cocoa farms, reversing a ruling that allowed the claims to proceed under the Alien Tort Statute (ATS). Writing for the majority, Justice Clarence Thomas said the companies’ activities in the United States were not sufficiently related to the alleged abuses to be subject to suit under the ATS. The decision, the latest in a series of rulings, sets increasingly strict limitations on federal lawsuits based on foreign human rights abuses. Justice Samuel Alito wrote the lone dissent.

I wrote about the December 2020 oral arguments here. The decision feels like a setback, especially as we observed World Day Against Child Labor just last week (June 12th), and, yesterday, the U.S. State Department heralded the 10th anniversary of the UN Guiding Principles on Business and Human Rights (UNGPs):

These principles recognize a three-pronged approach to protecting human rights in the context of business activity: States have the duty to protect human rights; businesses have a responsibility to respect human rights; and victims affected by business-related human rights issues should have access to remedy. We commemorate the achievements made over the last decade in these areas, and take heed of the substantive work that still needs to be done toward realization of these principles.

Antony JBlinken, Secretary of State, Press Statement

While the Supreme Court ruled in favor of Nestlé USA and Cargill, hope is not lost. The majority of justices rejected a notion of corporate immunity under the statute. The ruling continues to hold that corporations can be sued under international law for actions within their supply chain. The case will be remanded to a lower court where the six trafficked children will seek to amend their case in such a way as to satisfy today’s ruling. I join in the hopes that they have their day in court and that justice is done.

Taking “heed of the substantive work that still needs to be done,” SGI urges Nestlé and Cargill to take action to action to eliminate the grave crime of child slavery from their supply chain, and we will continue to call upon all companies with whom we engage to see and act on their responsibility for protecting and respecting human rights and providing remediation for those instances were human rights have been violated.

Webinar: Proxy Voting

On April 16th, SGI’s quarterly member webinar examined how the engagement season will be shaped by the pandemic and racial justice issues. We are grateful that Michael Passoff of Proxy Impact and Meredith Miller of the UAW Retiree Medical Benefits Trust joined us to enrich our conversation. We had some great interaction in the question and answer period, and, if a member missed it, please, email a staff member for a link to the recording.

Every year, billions of shares are voted at more than 3,000 shareholder meetings of public companies. “Proxy plumbing” is an informal name for the system by which proxy materials land in shareholders’ mailboxes each year. The name is apt. Today’s proxy plumbing is confusing, inefficient and expensive, much like some interconnected jumble of water pipes, joints and faucets. Michael and Meredith helped give us a clearer understanding of how shareholders can better navigate the maze.

Again, we are very grateful for the presence of Michael and Meredith in this webinar, for their commitment to this work, and their generosity in sharing their wisdom and experience with us. As always, we welcome your feedback via a confidential evaluation found here. Slides are available here.

Socially Responsible Investing requires effort

Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, made a startling confession in a recent USA Today editorial:

In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.

Fancy went on: “In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”

It’s quite an indictment from a significant voice in the ESG sector, but, based on my personal experience working for Seventh Generation Interfaith for the past several years, I do not believe that it conveys the whole truth of the matter.

Yes, there are asset management firms that over-hype their ESG product. They slap an ESG label on a fund that screens out certain sectors and perhaps speak to a few companies about their climate actions and sell it at a higher price than non-ESG products. A recent Wall Street Journal article reported 43% higher fees for ESG products in one class of assets. Visit a grocery store, and a higher-priced item with a “Naturally Raised” or “Fresh” label may attract more consumers, even if neither quality is in any measurable sense true. The old Latin adage holds: Caveat Emptor! Buyer beware!

When we look under the hood, so to speak, at many ESG funds, there are reasons to be concerned.

Even as investors demand ESG investments, those funds labeled ESG may not always reflect investor preferences in their proxy voting. Last month, a study from Robeco Asset Management and the Erasmus University of Rotterdam School investigated a decade of proxy voting data, and concluded that large, passive asset managers vote the least in favor of ESG proposals. Further, PRI signatories in the U.S. did not even vote their proxies as well as other U.S. firms that did not describe themselves with an ESG label. Fiona Reynolds, CEO at PRI, recently responded to the report with a commitment to take action. Reynolds went on to give an unusual warning: “being a PRI signatory should not be the only due diligence test for investors.” 

Asset owners who rely on negative screens and “ESG” funds can be misled. Vincent Deluard of StoneX authored a recent report entitled “The ESG Bubble: Saving the Planet and Destroying Societies.” Deluard points to blind spots in customary ESG screens. He notes, “companies with a high ESG rating pay a much lower tax rate than their less virtuous peers.” As well, he observed that “ESG funds are biased against humans: the 15 most highly-rated companies employ just 1.9 million workers, versus 5.1 million for the 15 worst-rated ones.” He concludes: “By channeling more money towards these (already wealthy) companies, ESG funds are unconsciously worsening the social and political crisis associated with automation, inequality, and monopolistic concentration.”

While Deluard’s study can cause suspicion of all ESG products, there are hopeful signs on the horizon. Last week, acting SEC chair Allison Herren Lee spoke to the proxy voting issue, saying, “We know investors are demanding ESG investment strategies and opportunities, but funds may not always reflect those investor preferences in their voting” and suggested that the SEC may need to take action on proxy voting disclosure. Further, Gary Gensler, the nominee to lead the Security and Exchange Commission, has indicated that he favors greater ESG disclosures, and the SEC as a whole is making ESG a priority. Most importantly, there are firms that do the hard work. For an asset owner, asking good questions of an asset manager can help discern if the firm is committed to doing this work. [We will soon have a blog post that examines some good questions to ask.] 

The faith community, with ICCR leading the way, has pioneered socially responsible investing for fifty years. Many asset managers and advisors who are ICCR members are not doing the greenwashing that Mr. Fancy called out. And SGI members recognize their fiduciary responsibility and power of ownership to change the system for the better. SGI members create value by improving the conduct of portfolio companies and, at the same time, create real world impact for people and planet.

Essential Workers: COVID-19 and Racial Equity

On February 19th, SGI’s quarterly member webinar examined how the engagement season will be shaped by the pandemic and racial justice issues. We are grateful that Corey Klemmer of Domini Impact Investments and Hanna Lucal of Open MIC joined us to enrich our conversation. We had some great interaction in the question and answer period, and we added some resources that were shared in the webinar’s chat feature to a final slide in the slide deck.

At the start of the COVID-19 pandemic, many Americans were shocked at the sight of empty shelves in stores as global supply chains sputtered to keep up with the demand for a variety of products. The fragility of these supply chains has suddenly become evident to a lot of Americans who expect them to always operate seamlessly. Global supply chains connect people worldwide, from garment workers in Bangladesh to consumers in the United States. They are built to be ruthlessly efficient, manufacturing and delivering goods exactly when and where they are needed. The ability to move quickly and seamlessly across the globe also helps companies find cheaper labor or other opportunities to make products more cheaply. While this system may be good for corporate owners and supply chain managers, it takes a toll on workers. In the face of COVID-19, poultry workers literally put their life on the line every time they punch in to work. The opportunity of 2021 is to place worker dignity at the center of supply chain transformation plans.

The Black Lives Matter movement has also created an unprecedented urgency for a more genuinely diverse and inclusive workforce. The COVID-19 pandemic has inflicted devastating effects on the U.S. economy, with job losses, especially concentrated among women, minorities, and low-wage workers. It illustrates the systemic racism that lives in our financial institutions. Corporations are making statements in support of Black Lives Matter, but statements are easy. Ensuring that People of Color are hired, paid, promoted, and retained equitably is less so. We cannot allow the corporate response to be merely words. Together, we can compel action.

Again, we are very grateful for the presence of Corey and Hannah in this webinar, for their commitment to this work, and their generosity in sharing their wisdom and experience with us. As always, we welcome your feedback via a confidential evaluation found here. Slides are available here.

Writing letters is easy; Will BlackRock act on it?

Today, BlackRock’s Larry Fink issued his 2021 letter to CEOs. As usual, the New York Times devoted significant coverage to it. Again, we at SGI are heartened by Fink’s words. I’ll call your attention to this nugget near the letter’s conclusion:

Questions of racial justice, economic inequality, or community engagement are often classed as an “S” issue in ESG conversations. But it is misguided to draw such stark lines between these categories. For example, climate change is already having a disproportionate impact on low-income communities around the world – is that an E or an S issue? What matters is less the category we place these questions in, but the information we have to understand them and how they interact with each other. Improved data and disclosures will help us better understand the deep interdependence between environmental and social issues.

I loved this line: “And now, business leaders and boards will need to show great courage and commitment to their stakeholders.”

At the same time, I am reminded of the “Peanuts” comic. Time and again, Lucy tells Charlie Brown that she will hold a football while he runs up to kick it. Initially, Charlie Brown usually refuses to kick it, not trusting Lucy. Then, Lucy says something to persuade Charlie Brown to trust her. Charlie Brown runs up to kick the ball, but at the very last moment before he can kick it, Lucy removes the ball. As a consequence, Charlie Brown flies into the air, falls down on his back, and hurts himself.

We’ve seen these letters each year from Fink, and we have written about our reactions to them before. Nonetheless, when it comes to voting their proxies, BlackRock, like Lucy, yanks the ball away (See: BlackRock voted against climate resolutions over 80% of the time in 2020). To be honest, I hope that I am wrong. I pray for an abundance of “great courage and commitment.” Time will tell if 2021 will be any different.

COVID-19 and Racial Justice: Pharmacy Deserts

We know that our healthcare system does not work well for those who are poor. Studies report that socioeconomic disparities in health care are significantly worse in the U.S. than in other wealthy countries. These disparities have daily real-world implications. Over the last ten months, we’ve seen how those who are poor are more likely to be infected with COVID-19 and, ultimately, to die from it, especially people of color.

The pharmaceutical industry deserves praise for producing safe and effective COVID-19 vaccines so quickly. However, drugs don’t work if people can’t afford them. Those pharma companies have been pursuing monopolistic deals with the fruits of taxpayer-funded innovation, rather than volunteering to share their know-how to get those vaccines to everyone, everywhere, at the lowest cost possible and as quickly as possible. This is why SGI members joined other investors in asking pharma companies to take into account public financial support for development and manufacture of vaccines or therapeutics for COVID-19 when making decisions on access and prices.

Similar to the term “food deserts,” research has also disclosed a phenomena of “pharmacy deserts” in the journal Health Affairs. Frankly, it is foreign to my experience. I live within ten blocks of four pharmacies: a CVS, two Walgreens, and an independent pharmacy. Meanwhile, neighborhoods in cities like Chicago increasingly are places where people are unable to fill medical prescriptions locally because their drugstores have closed or will not accept Medicaid. A pharmacy desert is the result of basic economics: because pharmacies get the lowest reimbursements for filling Medicaid prescriptions, companies are more likely to close stores in low-income, minority neighborhoods and open them in wealthy ones.

According to new research published this month in the Journal of the American Medical Association, racial disparities in mortality are not improving despite an increasing awareness of the problem and a focus on social determinants of health. Apart from COVID-19, Black mortality remains far higher than white mortality in America’s 30 largest cities. Add in COVID-19, and Axios reports that, in the U.S., 22,000 Black and Latino Americans would still be alive today if their coronavirus mortality rates were the same as white people.

Systemic racism has found its way into vaccine distribution as well. To address these concerns, Dallas County, Texas aimed to prioritize COVID-19 vaccine doses to “the county’s most vulnerable ZIP codes, primarily in communities of color.” The plan drew the ire of state officials who threatened to cut off the county’s vaccine supply, and county officials quickly retreated. In Dallas, as in other major Texas cities, distribution sites are more commonly located in white neighborhoods, and early data showed that Dallas County had distributed most of its shots to residents of whiter, wealthier neighborhoods.  Black and brown people who are disproportionately affected by the coronavirus are also least likely to get vaccinated. There are lots of reasons why, but access to the internet to sign up for shots, and access to pharmacies and hospitals to receive the shots, are significant issues.

To beat this virus as quickly as possible, the Biden administration, state and local governments, and corporations must work collaboratively to prioritize the distribution of the vaccine to those communities most at-risk, especially people of color. 

SGI Board Elects Officers for 2021

SGI  is pleased to announce the election of board officers for the year 2021. These include:

  • President: Cindy Bohlen, Riverwater Partners
  • Treasurer: Peg Groth, Sisters of the Sorrowful Mother International Finance, Inc.
  • Secretary: Ann Roberts, Dana Investment Advisors

Both Peg and Ann are continuing in their positions as officers. Cindy Bohlen, Chief Mindfulness Officer at Riverwater Partners, leads the firm’s sustainability practice and does primary research for the health care and technology sectors. Cindy has prior research experience at Robert W. Baird and M&I Investment Management. She added a sustainability lens to her investment process while working for another private firm and for a local foundation. Cindy earned a B.B.A. in Finance and a B.A. in Spanish from the University of Wisconsin – Madison. In addition, she is a CFA® charterholder. Cindy joined SGI’s board this year.

The outgoing board president is Dan Tretow, Director of Financial Services in the International Office,  School Sisters of St. Francis. Dan, who served as board president from 2018 through 2020 remains on the SGI board and will participate in the development committee.

Frank Sherman, executive director of SGI, said, “I congratulate Cindy on her election as president of the SGI Board of Directors.  Her commitment to ESG issues and her professional experience are great assets to SGI.  We value her leadership at SGI and know that she will help guide us in our work for people and planet.”

The entire team at SGI thanks Dan for his service as president. Under his leadership, we have grown in members, hired staff, expanded our corporate engagements, and commenced our annual conference. We are grateful for Dan’s generous service to our organization since the 1980s and to the School Sisters of St Francis, one of our founding members.

The SGI board is elected by SGI members in staggered three-year terms. Board members elected in the October 11th member meeting were: Caroline Boden (Mercy Investment Services), Ed Fitzpatrick (The Fitzpatrick Group, Wells Fargo), Ann Roberts (Dana Investment Advisors), and Sr. Carmen Schnyder  (Sisters of the Precious Blood). The board officers are elected by the board, as per the Articles of Incorporation and Bylaws. To learn more about SGI’s board, click here

Supreme Court to weigh in on Child Slavery

Today (December 2nd) is International Day for the Abolition of Slavery.

Yesterday, in a cruel irony, the U.S. Supreme Court heard consolidated oral arguments in Nestlé USA, Inc v. Doe I, Docket number 19-416 and Cargill, Inc v. Doe I, a consolidated case on U.S. corporations and liabilities for alleged child slave labor violations abroad.

The basic facts of what happened are beyond dispute: six Africans were trafficked out of Mali as children, where they were forced to work long hours on Ivory Coast cocoa farms and locked at night into shacks. Attorneys for the six Africans argued that the companies should have better monitored their cocoa suppliers in West Africa and have liability. The countries of the region grow about two-thirds of the world’s cocoa, and child labor is endemic.

Looking at the docket files for the case, one finds amicus briefs from Coca-Cola, Chevron, the U.S. Chamber of Commerce, and a joint filing for three trade associations (National Confectioners Association, the World Cocoa Foundation, and the European Cocoa Association), all in support of Cargill. As well, the Washington Legal Foundation and the Cato Institute filed amicus briefs in support of the corporations.

Cargill and Nestle selected a lawyer well-known to MSNBC aficionados to represent them: Neal Katyal, a former Acting Solicitor General of the United States, and the creator of an inspiring TED Talk.  Both companies have strongly worded policies against child labor and human trafficking and the like. All of the amicus briefs stated that they abhor child slavery and the corporations actively take steps to eradicate such practices among their suppliers.

The broad outline of the companies’ argument is found in the second page of Katyal and his team’s brief:

Plaintiffs’ brief confirms that all they have alleged (and can allege) is that Nestlé USA lawfully purchased some cocoa from Côte d’Ivoire and exercised some generalized supervision. The true wrongdoers are the Malian and Ivorian traffickers, farmers, and overseers who injured Plaintiffs in West Africa.

In other words, the practices of Nestlé, Cargill and, by extension, Chevron, Coca-Cola, and all multi-national corporations with dispersed supply chains are sufficient. The terms of their contracts are clear and exclude child labor, human trafficking, and all forms of modern slavery. Occasionally, they do audits of their suppliers. Isn’t that enough? How can a company be responsible for all the actions of their suppliers?

At issue, according to the briefs, is liability under the Alien Tort Statute, a part of the Judiciary Act of 1789.  It has been enshrined in U.S. law for more than 230 years. To me, the most interesting exchange during the hearing was between Justice Elena Kagan and Katyal (pages 19-21 of the transcript):

JUSTICE KAGAN: Mr. Katyal, is child slavery, not aiding and abetting it but the offense itself, is that a violation of a specific universal and obligatory norm?

KATYAL: We’re — we’re not – yes, I think we’re not challenging that here. It’s just the aiding and abetting.

JUSTICE KAGAN: Okay. So, if that’s right, could a former child slave bring a suit against an individual slaveholder under the ATS?

KATYAL: So they — if it were – if it weren’t extraterritorial and it wasn’t a corporate action, yes.

JUSTICE KAGAN: Yeah, no problem extraterritorial, no problem aiding and abetting, just a straight suit.

KATYAL: Correct.

JUSTICE KAGAN: Okay. And could the same child — former child slave in the same circumstances bring a suit against 10 slaveholders?

KATYAL: You know, if they – if they met the — you know, the requirements under the — the law, yeah, sure. I mean, if they —

JUSTICE KAGAN: Okay. So if —

KATYAL: — if it was a plausible allegation.

JUSTICE KAGAN: — if you could bring a suit against 10 slaveholders when those 10 slaveholders form a corporation, why can’t you bring a suit against the corporation?

KATYAL: Because the corporation requires an individual form of liability under a norm, a specific norm, of — of – under international law, which doesn’t exist here. I think Sosa in Footnote —

JUSTICE KAGAN: I — I — I guess what I’m asking is, like, what sense does this make? This goes back to Justice Breyer’s question. What sense does this make? You have a suit against 10 slaveholders, 10 slaveholders decide to form a corporation specifically to remove liability from themselves, and now you’re saying you can’t sue the corporation?

Justice Kagan was pointing toward an amicus brief from the Yale Law School Center for Global Legal Challenges filed in support of the six Africans. In the brief, Oona Hathaway sets forth a compelling argument that:

Slavery, forced labor, and human trafficking constitute the worst forms of human exploitation. The law of nations has long prohibited these practices in specific, universal, and obligatory terms. Indeed, these prohibitions are among the most longstanding, deeply rooted prohibitions in international human rights law. Each of these prohibitory norms of international law extends, moreover, to natural and juridical [corporations] persons alike. (p. 33)

Citizens United v FEC decided that corporations are people, when it comes to political spending, but corporations are now arguing that they are not people when it comes to child labor, human trafficking, and modern slavery.

I won’t pretend to know how this court will decide the case, but it should go without saying that aiding and abetting slavery is wrong, whether it is done by an individual or a corporation.

Webinar: Fossil Fuels: Engage or Divest

On Monday, November 9th, the U.S. Federal Reserve Bank recognized climate as a risk. Investors of all types can no longer afford to be on auto-pilot concerning investments in fossil fuels. This webinar explores two options: active engagement or divestment. We hear from Rob Berridge and Morgan LaManna of Ceres on how the recommendations of the CA 100+ and the Task Force on Climate-related Financial Disclosures (TCFD) can enhance engagement with companies. We hear from Fr. Peter Bisson, S.J., former provincial of the Canadian Jesuit province. Under his leadership, the province became the first province to divest from fossil fuels shortly after Laudato Si’. Again, we are very grateful for the presence of Rob, Morgan, and Fr. Peter in this webinar, for their commitment to this work, and their generosity in sharing their wisdom and experience with us. As always, we welcome your feedback via a confidential evaluation found here. Slides are available here.

SEC’s rule changes set back transparency and shareholder voice

Today, the SEC approved in a 3-2 party-line vote new rules that severely restrict shareholders’ access to the corporate proxy by limiting the filing of resolutions. These new rules are a consequence of lobbying by powerful industry trade associations that have sought to limit shareholder engagement with corporations on critical environmental, social, and governance issues.

The shareholder resolution process, governed by the SEC’s Rule 14a-8, has been effective for decades and has allowed smaller shareholders who had held at least $2,000 of shares for over one year to file proposals asking companies to consider non-binding proposals that may raise questions of environmental and social impacts of corporate policies and practices, or governance best practices.

Today’s new rules will significantly limit investors’ ability to submit these proposals. The new rules raise the thresholds of ownership both in terms of the number of shares and length of time they must be held. Under the new rule, new purchasers of stock must hold $25,000 in shares for at least a year, or hold $2,000 in shares for at least three years.

As well, the new rules make it much more difficult to refile a proposal that has been voted on. The prior rule required 3% support on a first-year vote, 6% on a second vote, and 10% on a third vote to keep a proposal before a company’s shareholders. Now resubmission will require 5% on a first vote, 15% on a second vote and 25% on a third vote. Emerging issues will be much more difficult to bring to the proxy.

SGI’s executive director, Frank Sherman said, “The choice to approve the new rule aims to fix something that is not broken. A half-century of evidence shows that shareholders have an important voice that companies need to hear. Pioneers like Fr. Mike Crosby have helped companies pay attention to environmental, social, and governance concerns that they were missing. To the detriment of U.S. companies, this rule restricts that important voice.”

In a press release, ICCR executive director, Josh Zinner said: “The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their priorities and concerns to management, with little economic analysis supporting the needs for these substantial changes. The new rules appear to be based on a wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary.”

Over many decades, the shareholder proposal process has served as an efficient way for corporate management and boards to gain a better understanding of shareholder priorities and concerns, particularly those of longer-term shareholders concerned about the long-term value of the companies that they own.  Engagement by shareholders has served as a crucial “early warning system” for companies to identify emerging risks and there are hundreds of examples of companies changing their policies and practices in light of productive engagement with shareowners.

For more information:

  • ICCR’s press release can be found here.
  • Joint letter from investor groups regarding the shifting interpretation of 14a-8 No-Action Challenges can be found here.
  • Case Studies showing the impact of the new rules on shareholder engagement can be found here.
  • For more information on the history of comments submitted to the SEC regarding these rule changes visit ICCR and Shareholder Rights Group
  • See also SEC’s Proposed New Rules Threaten Shareholder Democracy
  • See as well SGI’s formal comment submission to the SEC here.