The Necessity to Perform Investor Human Rights Due Diligence

In this difficult time, we continue to follow the crisis in Ukraine from afar. The war itself and its humanitarian and economic fallout pose some tough questions. Good stewardship may come down to posing and answering difficult questions.

For at least two decades, we ignored Russia’s globalized corruption and localized aggression. Ignored may be too soft– some even welcomed it. On March 4, 2018, Putin’s agents poisoned former Russian spy Sergei Skripal, then residing in the United Kingdom. Investors and global companies were willing to look the other way. Again, investors and global companies willfully ignored the attempted assassination of opposition leader Alexei Navalny in August of 2020. In fact, Germany, China, and the US topped the list of major investors in the Russian economy that year. On-going investments allowed Putin to entrench power, and, now, he is an unopposed dictator and global security threat.

The commencement of the Russian war in Ukraine has led to a corporate withdrawal from Russia that happened faster than anyone could have imagined. In less than four weeks, from American Express to YouTube, 380 global companies announced some kind of withdrawal from Russia, based on data compiled by the Yale School of Management. At the same time, Yale tracks 39 companies that will remain in Russia or have refused to disclose plans regarding their operations. [The Yale list does not include Koch Industries or its subsidiaries that, according to Judd Legum, also are continuing their operations in Russia.]

The motivations for abandoning business in Russia could be described in a handful of categories. Some companies have left on principle. Some have left as a consequence of sanctions. Others may have left for fear of boycotts and backlash. Still others didn’t want to be labeled as being on “the wrong side of history.” Some have only halted operations for now.

There was, obviously, another, earlier course of action: those who, based on human rights due diligence, found that investment in Russia was a risk that they would not undertake. Due to internal assessments of human rights and political governance risks, informed by the UN Guiding Principles on Business and Human Rights (UNGPs), those asset owners already had limited exposure to Russia. Since there has been an international armed conflict, internal armed conflict, and military occupation in Ukraine since 2014, enhanced human rights due diligence was required under the UNGPs. Change can be planned and gradual, or attempted in the heat of a crisis, but most would recommend the planned and gradual route.

Investors, like all business actors, are expected to respect human rights as outlined by UNGPs. Investor responsibility is increasingly embedded into legal frameworks (e.g. EU rules requiring investors to disclose steps taken to address the adverse impact of their investment decisions on people and the planet). ICCR’s Investor Alliance for Human Rights has developed a toolkit to help asset owners and managers address risks to people posed by their investments.

We should review the whole of our investments and use the IAHR toolkit and other resources to do so. Asset owners that expand investments in Saudi Arabia are willfully ignoring flashing warning lights about human rights risks. If Jamal Khashoggi’s brutal murder in 2018 did not persuade an asset owner or an asset manager, this weekend’s mass execution of 81 prisoners is not likely to be a deterrent either. Or consider Myanmar. Since the February 1, 2021 coup, gas revenues are the largest funding source for the Burmese armed forces. Foreign gas companies work hand-in-hand with Myanma Oil and Gas Enterprise (MOGE), which is under control of the Myanmar military. The same can be said for investments in the Xinjiang Uygur Autonomous Region (XUAR) of China and a host of other countries.

While the U.S. and international community have reacted with great speed and resolve to punish Russia’s most recent invasion of Ukraine, it is troubling that we have yet to levy a similar sanctions regime on the Chinese government for its genocide in Xinjiang.

The examples of Ukraine, Saudi Arabia, Myanmar, and XUAR China highlight the increasing severity and number of conflict-affected and high-risk areas across the globe. It is up to investors and companies to respond to these systemic risks with systemic solutions, putting conflict-sensitive policies and practices into place.

Our colleagues at Heartland Initiative developed the “Rights Respecting Investment in CAHRA methodology” as one resource to assist investors.

Rich Stazinski, executive director at Heartland put it this way: “Companies and investors have had nearly a decade since the Russian invasion of Crimea to grapple with the ongoing consequences of conflict and risk in Ukraine. While abiding by evolving rounds of economic sanctions and export controls is necessary to make companies and investors legally compliant, it is far from sufficient to fulfill their responsibilities under the UN Guiding Principles. In order to do so, they must adopt robust policy and practices that address the heightened risks of doing business in conflict-affected and high-risk areas, from Ukraine to Myanmar to Xinjiang.”

Asset owners need to ask difficult or controversial questions. The very issues facing our portfolios and, indeed, our planet are too important not to.

Time for a Say-on-Pay

The proxy statements for 2022 are arriving, and we debate anew: “How much is too much?”

Mandated under the Dodd-Frank Act, say-on-pay is a nonbinding, advisory shareholder vote on the compensation policies for the company’s executive officers. In their proxy statement, companies must disclose how their compensation strategy has considered the results of their most recent say-on-pay vote, but the law does not require the company to make any changes based on the vote. Nonetheless, the say-on pay vote is a barometer for shareholder perception of the company’s executive compensation practices.

For instance, Apple proposes a $99 million pay package for CEO Tim Cook this year, but shareholder advisory firm ISS has recommended a “no” vote. I understand the basis for ISS’ recommendation is because it is triple the package of peer median pay and serves no purpose for retaining Cook, as he will earn shares in retirement. On the contrary, Glass Lewis, the other large proxy advisor, recommended supporting the package.

It is almost certain that the Apple say-on-pay resolution will have a majority of support as most shareholders routinely vote in favor of these packages. This will have a cascading effect on executive compensation in 2023 as peer companies will try to keep up. Cook’s proposed salary may simply be keeping up with the Joneses as Alphabet’s CEO Sundar Pichai was awarded more than $280 million in 2019.

Last year, however, bore seeds of hopeful news. Failure rates on compensation packages in 2021 were considerably higher than 2020 and 2019 levels as numerous companies experienced a “failed” vote for the first time, including AT&T, Marathon, Starbucks, and Walgreens. A more complete list of failed say-on-pay votes can be found here.

There are, of course, better ways to ask the question than “How much is too much?” We hosted a webinar last year on Pay and Wealth Disparity. One of the participants, Rosanna Landis Weaver, will host her annual webinar on Thursday: “100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel?” (You can register here.) As well, one can turn to the AFL-CIO’s Executive Paywatch.

SGI has a long history in this space. From our founding in 1973, Fr. Mike Crosby, O.F.M., Cap. advocated for a living wage. SGI consistently advocates for increasing the federal minimum wage.

In 2013, President Obama said, “Rising income inequality is the defining challenge of our time.” Pope Francis, in the same year, noted, “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?” As a consequence, one of Fr. Mike’s final efforts was a campaign for pay equity in 2014, filing shareholder resolutions with 12 retailers. The SEC allowed companies to omit the resolution based on ‘micro management.’ SGI members continue to challenge retailers and restaurants to pay living wages, for their own workers and for those in their supply chain.

In hopes of building an economy that works for the many, not one that concentrates more and more wealth in the hands of a privileged few, we keep coming back to this issue to see if there are new ways that we can address income and wealth disparity. The Franciscan Sisters of Perpetual Adoration proposal in 2021 on racial equity & starting pay at the Walmart AGM obtained strong shareholder support for a first-time resolution (12.5% of total shares or 27% of independent shares voted). SGI members have joined this year’s ICCR campaign asking restaurants to raise their sub-minimum wage for tipped workers.

Increasingly, economists have come to see that wealth and income disparity harm the economy. Rising concern for pay and wealth disparity in proxy voting and changes at the SEC lead us to think the tide may be shifting, and so we call upon shareholders to act.

ICCR’s 2022 Proxy Resolutions and Voting Guide

Yesterday, ICCR hosted its annual webinar on member proxy resolutions and published its voting guide. If you were unable to watch the webinar (or simply want to review it), or want to download the slides and the proxy voting guide, simply visit this page.

The webinar spotlights investor concerns, maps out 2022 proxy season trends, and shows increasing investor support for ICCR member concerns. Published annually since 1974, the ICCR 2022 Proxy Resolutions and Voting Guide presents the 436 resolutions filed by ICCR members — whether as lead or co-filer — as of February 16.

Revised: The USCCB SRI Guidelines

For the first time since 2003, the U.S. Catholic Conference of Bishops revised and approved new Socially Responsible Investment Guidelines at their gathering in November of 2021. SGI’s first webinar of 2022 examined what is new in the guidelines, how an investor might implement them, and how the guidelines may call us to act in new ways. We were so grateful to be joined by Duane Roberts of Dana Investment Advisors and Katie McCloskey of Mercy Investment Services.

The USCCB staff under the leadership of a Bishops’ Working Group, chaired by the USCCB Treasurer, developed a draft of the guidelines over two years. Both of our speakers were consulted as external subject matter experts.

This revision to the USCCB Socially Responsible Investment Guidelines provides an opportunity for Catholic investors to review and update their investment policy, and perhaps their investment program as a whole. The bishops are explicit about seeing the guidelines as a “holistic framework that sees economic development intrinsically linked to integral human development and good stewardship of God’s creation.”

Like all Church documents, these guidelines need some contextualization. Officially, their scope is quite narrow: the document guides the USCCB’s investments and other activities related to corporate responsibility. Apart from that narrow scope, there is a broader mission: that they serve as an inspiration, helping to inform the investment decisions of religious communities, dioceses and archdioceses, colleges and universities, healthcare organizations, and Catholic foundations. One might say that it is a rather practical expression of a Catholic vision for the economy.

As people of faith stewarding the assets of Catholic institutions, many SGI members have a unique opportunity to develop and apply the USCCB SRI Guidelines for asset stewardship in the present, while ushering in a different form of stewardship altogether in the coming decades. Having begun in 1973, SGI sees this as a journey. We thank you who are our members for being on the journey with us, and we invite and welcome others who are interested to be on this journey with us.

We also offer thanks to Duane and Katie for being such great companions on this journey. Again, we are very grateful for the presence of Duane and Katie 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.

Bill Bars Forced Arbitration in Sexual-Assault, Harassment Claims

Congress has passed legislation to ban mandatory arbitration clauses for cases involving allegations of sexual harassment or assault. With the Senate having passed it yesterday, the bill, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), will now go to President Biden, who is expected to sign it into law.

EFASASHA will invalidate most contractual provisions requiring the arbitration of claims alleging sexual harassment or sexual assault. Once in effect, EFASASHA will apply to all pre-dispute arbitration clauses, including those in contracts executed before the law’s enactment.

The new law may have an outsized impact in the asset management industry, given firms’ reliance on arbitration to resolve all manner of disputes. Companies will need to re-examine their approach to dispute resolution and to their anti-harassment initiatives more broadly.

SGI is pleased to have been a part of earlier efforts to ask companies to remove these unjust clauses from employment contracts. Cindy Bohlen of River Water Partners led engagements with a number of companies in her firm’s portfolio, and she wrote about it here in SGI’s blog.

Of the bill, Cindy Bohlen said, “Corporations will be required to have strong policy regarding remedy following allegations of sexual misconduct, including the right to legal action. This change will ensure that employees feel comfortable coming forward in such cases, which will promote inclusive and healthy corporate culture, benefitting employees and corporations alike.”

In these partisan days, we believe that investor outreach contributed to the passage of this bill in both chambers by wide margins.

Revised: The USCCB SRI Guidelines

For the first time since 2003, the U.S. Catholic Conference of Bishops revised and approved new Socially Responsible Investment Guidelines at their gathering in November of 2021. 

Please, join SGI for our first educational webinar of 2022 to learn about what is new in the guidelines, how an investor might implement them, and how the guidelines may call us to act in new ways. We’ll gather at 10 a.m. (Central) on Tuesday, February 15th, and we’ll be joined by Duane Roberts of Dana Investment Advisors and Katie McCloskey of Mercy Investment Services.

Join the webinar on Zoom via this link

If the Zoom meeting is full, please, join the webinar via our YouTube channel which will also live stream the webinar. We will attend to questions from the both Zoom and the YouTube comment box.

Can Nestlé reduce or eliminate child labor? We hope so.

Today, Nestlé announced a new plan to tackle child labor risks in cocoa production. Child labor is not a new issue to the company—the U.S. Supreme Court ruled in the company’s favor in a case concerning child slavery in June of 2021. The plan is simple: Nestlé will pay cash to cocoa farmers if they send their children to school, rather than out to tend crops. Consequently, the company aims, by 2025, to purchase all of its cocoa through a fully traceable, directly sourced supply chain.

The company expects this new initiative to triple their costs to about $1.4 billion by 2030. To be honest, spending more to pay a just wage, a living wage seems like a good recipe to eliminate child labor. Naturally, SGI will be following the implementation process.

Don’t get your hopes up that other chocolate makers will follow suit. Hershey is fighting a resolution, led by the American Baptist Home Mission Society, that asks for a report assessing whether the company’s current program will eradicate child labor or not. For that matter, maybe Mars can do more than rebrand M&M’s (here is a surprising reflection from comedian Russell Brand on that one).

Think about that the next time you bite into a KitKat.

Crypto: The Fifth C

If you’ve been cooped up inside due to weather or COVID, you have probably seen a fair bit of football on television, along with a lot of high-priced advertising. Both will reach their apex on Super Bowl Sunday. A ubiquitous ad this season features Matt Damon touting how “Fortune favors the brave” in an ad for crypto.com. I’d urge us to think of another fact when we see this ad: “Trafficking preys on the vulnerable.”

Today, January 11th, is National Trafficking Awareness Day. Just yesterday, the U.S. Government Accountability Office released a new report: Virtual Currencies: Additional Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking. The report notes that human and drug traffickers increasingly turn to cryptocurrencies to facilitate their illicit businesses.

Often, when experts speak about trafficking, they refer to the four Cs: chocolateclothescoffee, and cellphones. Sadly, now, I need to add a fifth.

So when you see the ad this weekend, remember that Matt Damon also advocates strongly against food insecurity and for water stewardship. Remember, too, as Damon says in the ad, “History is filled with almosts.” With this glaring exception, his body of work almost gets it right.

2021 – A Year of Resilience

Likely, we all thought the pandemic would be over sometime in 2021, and our hopes rose and fell with the daily infection counts. The vaccines worked better than expected, restrictions were relaxed, and things started to return to normal. Then came the COVID variants, which threw a wrench into our hopes for a swift recovery, and Omicron raises the specter of a deadly winter.

While the year had its joys, we would be remiss if we neglected to recall that, in our personal lives, SGI members and staff also mourned losses, including one who endured the loss of a daughter, and weathered storms.

The great problems that we face, such as racism, poverty and the climate crisis, are structural in nature. With long histories, they are embedded socially in ways that are often masked in day-to-day life.

Sadly, we learned on January 6th that the U.S., like so many places around the globe, is an all-too-fragile democracy, vulnerable to demagoguery and the exploitation of populist sentiment. Aware that corporate donations contributed to the chaos, shareholder calls for greater corporate political spending and lobbying disclosure garnered higher support than usual.

This year we saw what is possible as the 2021 Proxy Season provided a watershed moment in shareholder advocacy with record-breaking support for environmental proposals (Exxon Mobil being a case in point). SGI members drove a series of significant corporate engagements including Walmart, Merck, Restaurant Brands International, Wendy’s, Yum! Brands, and Kraft Heinz.

After President Biden’s increased the 2030 NDC to reduce GHG by 50%, the 26th meeting of the UN Conference of the Parties (COP26) fell short of expectations. However, important pledges on deforestation and methane and the phase down of coal and fossil fuel subsidies were steps forward. Senator Joe Manchin’s declaration that he opposes the Build Back Better reconciliation bill makes the administration’s task of meeting its climate goals far more difficult. As corporations and asset managers make net-zero commitments, Milton Friedman is turning in his grave; but it would be unwise to trust that companies will deliver on their promises, without investor pressure and third-party verification.

As we wrap up 2021, we look back at an amazing year. SGI has grown to 36 institutional members, elected a new board president and added new board members, including at-large members. We refreshed our strategic plan and hosted a great conference on Resilience: Building a Just & Equitable Economy for All. Our mission to build a more just and sustainable world for those most vulnerable continues in 2022. In the New Year, SGI will be hosting events to better understand the revised U.S. Catholic Conference of Bishops Guidelines for Socially Responsible Investment. We will advocate for the critical components of the Build Back Better plan. And we will work with companies to live out their societal purpose. As we end another year marked by both pain and hope, we want to thank you, our members, for your contributions to our ministry. Shareholder advocacy works. May the holiday season refresh all of us for our important work for people and planet in the New Year.