Do You Consider Yourself To Be An Activist?

By Frank Sherman

I was at a sustainability conference last week that was attended mostly by business and academia. After introducing myself and SGI at our table, I was asked “Do you consider yourself to be an activist?”

I hesitated for what felt like an eternity. What a loaded question! Was this a trap? Did he think I was going to the Milwaukee Art Museum after the conference to throw tomato soup on the paintings and glue my hands to the wall?

Given all the buzz about “anti-ESG,” “woke capitalism,” and “socialist political agenda” these days, I didn’t want to play into the culture war narrative. Republicans candidates for financial offices in Arizona, Florida, Illinois, Kansas, and Minnesota have all taken anti-ESG positions. They and other Republicans say big financial firms are abusing their power to advance a liberal agenda on issues like diversity, social justice and, especially, climate change. One Senator even accused Blackrock of breaking antitrust laws by being a member of the Climate Action 100+ coalition (which includes SGI, by the way). 

Most of the general public don’t understand what ESG means. The simplest description is a set of environmental, social, and governance considerations that investors use to try to understand risks and opportunities that aren’t accounted for in traditional financial models. For example, environmental risks like climate change present physical and transition risks that are not reflected in a company’s P&L or balance sheet. Another risk unaccounted for in the company’s financial statements are their impacts on human rights: to their employees, suppliers, customers and society at large. Although not recognized in financial reporting, these risks are very real…to individual companies and to the economy as a whole. They vary by region, industry, and individual company. Most investors and the public are blind to the magnitude of these risks. As society’s awareness of these risks increases, asset managers large and small are taking them into account in their portfolio management and corporate engagements.

Companies like Blackrock are pushing back on state laws which try to protect the fossil fuel industry (e.g. TX, WV) by explaining that ESG strategies are part of their fiduciary duty to manage material risks for their clients. But is that why SGI members use the ESG strategies? Is our sole incentive to manage long-term financial risks?

That’s part of it, no doubt. We are responsible for managing these funds as an obligation to our community members or clients. But SGI’s mission statement states that we also want to “to build a more just and sustainable world for those most vulnerable.” Our fiduciary duty goes beyond getting an adequate return on investment to also promote human dignity, act justly, enhance the common good, and provide care for the environment. The recently updated USCCB SRI guidelines speak to this double objective. The Guidelines are based on two principles: responsible financial stewardship and ethical & social stewardship based on Catholic moral principles. They espouse three strategies: Avoid Doing Harm, Actively Work for Change, and Promote the Common Good.

In addition to managing financial risks, SGI members view shareholder engagement with corporations as a powerful catalyst for social change. ICCR’s tag-line – “inspired by faith, committed to action” – sets forth our pledge to be active owners. Although I wouldn’t label SGI members as “activists,” we have been active owners for nearly 50 years. And I wouldn’t describe our capitalism as “woke” yet, but people are starting to wake up to the fact that the economy is supposed to serve society rather than the other way around.

Back to my conference table… I don’t think I answered the question posed to me very well at the time. With more time to reflect, I would respond that rather than an activist, I would describe SGI members as active owners inspired by faith!

Some helpful resources concerning the pushback on ESG investing:

Keynote Remarks: Corporate Human Rights Due Diligence in Conflict-Affected and High-Risk Areas

By Bennett Freeman

Keynote remarks from the Seventh Generation Interfaith Coalition for Responsible Investment 2022 Conference (October 11, 2022) at Fox Point Lutheran Church in Fox Point, Wisconsin

Thanks to Chris Cox and Frank Sherman for inviting me to address the 2022 SGI Conference. I am delighted to be followed by a panel of four colleagues and friends who are leaders in this field: Pat Zerega, Anita Dorett, Shari Gittleman, and Sam Jones.

Seventh Generation Interfaith’s mission and work—and your faith-based commitment to human rights—is more important and urgent than ever: at a time when the peace of the world has been disrupted by naked aggression and the values of the international community are under attack; at a time when our nation’s democracy has come under assault and our commitment to racial and social justice remains unfulfilled; at a time when even decades of progress in socially and environmentally responsible investment is now not only questioned by skeptics but also confronted by the forces of reaction.

It is a cliché to observe that amidst crisis there is opportunity. But now is such a time of opportunity if we apply our powers of reason to the challenges at hand—and if we keep the faith in our collective mission and work.

Let me describe the broader global context of our theme of corporate human rights in conflict-affected and high-risk areas in ways that I hope will give texture to the challenges we face and help frame the panel discussion. I will focus on challenges facing multinational corporations from both my former responsible investor perspective and broader international relations experience.

Two parallel sets of pressures and expectations, tensions and conflicts, have intensified, converged and in turn challenged multinational corporations:

First, ESG pressures and expectations:

  • Pressures and expectations are mounting from a range of stakeholders, especially institutional investors and employees as well as civil society and local communities.
  • The historic events of the last two and a half years have sharpened the focus on “S” issues—inequality and racial injustice, labor and human rights—even as the climate crisis intensifies.
  • Companies to take stands on controversial social, even political issues (especially not exclusively in the U.S.) as political polarization intensifies.
  • A backlash has gained momentum this year (again especially but not exclusively in the U.S.)  focused both on ESG investing and “woke capitalism” with decades of progress now on the line.

Second, Geopolitical tensions and conflicts:

  • Major democracies have faced challenges of legitimacy and efficacy as some have shown illiberal tendencies that threaten constitutional democracy and undermine civil society/civic space as well as “peace, justice and strong institutions” (in the words of SDG 16) both within and among states.
  • Major autocracies have acted with greater impunity as the major democracies became distracted and the international community has at times faced paralysis, both reflecting and reinforcing the degradation of human rights standards, norms and institutions.
  • China’s mass incarceration, forced labor, invasive surveillance, religious and cultural desecration of Muslim minorities in Xinjiang has been so severe and systematic that the UN High Commissioner for Human Rights concluded last month “crimes against humanity” may have been committed.
  • Russia’s invasion of Ukraine violated the principle of not using force to alter national borders and in the ensuing carnage has killed thousands of civilians, committed war crimes and at the same time has not only destroyed much of Ukraine’s infrastructure but also disrupted the global economy.

What is new is not only the parallel, concurrent intensification of both ESG pressures and expectations, geopolitical tensions and conflicts but also the convergence of these pressures and expectations, tensions and conflicts.

This convergence has forced many multinational corporations and institutional investors to weigh tough trade-offs, make hard choices and take public stand in these four situations:

  • U.S. democratic stability and legitimacy—unprecedented intervention by Corporate America/Wall Street before and after the November 2020 presidential election to support a peaceful transfer of power followed by condemnation of the January 6 insurrection and support for voting rights.
  • But dilemmas: taking what may appear to be partisan stands; acting to stem systemic risk for the U.S. economy and global financial system; accepting responsibility to protect American democracy as a cornerstone of the international rules-based order.
  • China/Xinjiang—unprecedented decoupling from Xinjiang cotton suppliers by western apparel brands, now required of U.S. companies and those exporting into the U.S. market by the UFLPA.
  • But dilemmas: willing to make statements as well as take actions; responsibility for employee security in China; balancing commercial interests and ethical values, profits and principles in the world’s largest economy/consumer market.
  • Russia/Ukraine—unprecedented exit of western companies (not just those subject to sectoral sanctions by home country governments) from Russia almost immediately following the invasion.
  • But dilemmas: few companies willing to offer explicit principled, human rights-related rationales for exits; determination of a potential basis to reenter a post-conflict Russia; precedent for other potential situations and scenarios, especially involving China (and a possible attack on Taiwan)
  • Burma/Myanmar—unprecedented brutality by the military dictatorship over the last 20 months since the coup in early February last year followed by the exit of some major multinationals that established operations with the lifting of sanctions and the transition to democracy a decade ago
  • But dilemmas: stay or go; balancing a disinclination to enable the regime through revenue or resources with a commitment to local employees and stakeholders; weighing the elements of “responsible exit” that respect human rights/humanitarian considerations and consequences.

The trade-offs weighed, choices made and stands taken are not easy for multinationals and investors. They all present dilemmas—commercial and political—that challenge roles and responsibilities of companies and investors. Some of these dilemmas result in zero-sum—not win-win—outcomes that may divide companies’ shareholders and stakeholders, home and host governments.

At stake for multinational corporations and institutional investors is no less than the continuity and efficacy of the rules-based international order on which they fundamentally depend, even if not always acknowledged and embraced. Individual companies and entire industries share a stake in defending and supporting this order at a time when its stability and even legitimacy face severe challenges—and with the global economy and the international community under severe stress.

Human Rights Due Diligence:

I have identified and described these two parallel, converging sets of factors and forces facing multinational corporations: ESG pressures and expectations; geopolitical tensions and conflicts.

Human rights due diligence (HRDD) sits precisely at this convergence of ESG and geopolitical issues. HRDD is an analytical framework and operational approach that has gained traction and momentum over the years, especially in recent months:

  • HRDD’s foundations and precedents—including in conflict and high-risk settings— extend back over two decades to the Voluntary Principles on Security and Human Rights (2000) and the first-ever HRIA commissioned by any company in any industry by BP for the Tangguh LNG project (2002).
  • HRDD was consolidated and elevated during the two Ruggie mandates (2005-08 and 2008-11), culminating in the Guiding Principles on Business and Human Rights (UNGPs) and have ever since become the driving force in the field and emerging priority for ESG investors.

Plus, significant work has been spurred by the Russian invasion of Ukraine and undertaken by:

  • Business and Hunan Rights Resource Centre (BHRRC) published in the early weeks of the war two timely and useful papers: Advancing business respect for human rights in conflict-affected areas through the UNGPOs; Why conflict must be included in mandatory due diligence laws. The Resource Centre also actively tracks the decisions and actions of international companies to exit Russia whether fully, incompletely or not at all.
  • The Investor Alliance for Human Rights (IAHR) has highlighted conflict risk tools to manage related investment and human rights risks and plays an active role in the new Business for Ukraine (B4U) Coalition together with the Heartland Initiative.
  • The Heartland Initiative has emerged over the last half dozen years as the most visible and influential voice and force in mobilizing responsible investors to address human rights in conflict zones. It is also a co-founder and critical driver of the new Business for Ukraine (B4U) Coalition since its inception early this spring and formal launch in mid-summer.
  • Business for Ukraine (B4Ukraine) called in its Declaration for the foreign companies that have exited Russia to remain out until the conflict is resolved on terms acceptable to an independent, sovereign, democratic Ukraine—and called on companies still partly or fully operating in Russia to leave completely. The Declaration also pointedly called on companies claiming that they remain in Russia to deliver “essential services” to undertake and disclose HRDD to try to justify their stance up against a very high bar of expectation that they exit fully. Companies that have exited are also called on to undertake human rights due diligence to determine whether, when and in what form they may return to a post-conflict—or better a post-Putin—Russia.

Russia’s attack on Ukraine is giving fresh impetus to mandatory HRDD, which in turn is gaining traction and momentum through the EU and beyond. The current political and legislative outlook in the U.S. is conducive only to incremental issue-by-issue progress. Yet we have salvaged Dodd-Frank sections 1502 (conflict minerals) and 1504 (extractive revenue transparency), so there is a basis on which to build while the SEC in the meantime focuses productively on climate-focused disclosure.

Yet HRDD is a stepping-stone to a broader sensibility that should inform our engagement with multinational corporations and large institutional investors alike. The Russia-Ukraine war should encourage a fusion of what they have already known and done for decades—political and geopolitical risk analysis— with the human HRDD that they know and do far less. In my experience working with multinational corporations and institutional investors, I have learned that progress can be made at a pivot point that lies part or mid-way between where they are and where we want them to be. The convergence of political and geopolitical risk analysis with HRDD strikes me as such a pivot point.

Russia’s attack on Ukraine is also giving impetus to a new notion that an even greater responsibility is at stake. The B4U Declaration hit it on the head: “Russia’s attack on Ukraine is an attack on the rules-based international order” on which both the global economy and the international community depend. Multinational corporations have been among the greatest beneficiaries of that international rule-based order over the last three-quarters of a century since its creation amidst the ashes of WWII. Yet at times they appear to take its existence for granted when their trade and investment, innovation and entrepreneurship, markets and customers, all depend on its continuity and vitality. That was at times apparent in the U.S. during the previous Administration when the occupant of the Oval Office appeared neither to understand nor to accept the international community nor many rules of any kind.

I believe that the time has come for companies and investors to explicitly support and defend not only democracy here at home but also the international rules-based order aboard. Support for the rules, norms and institutions of American democracy and support for the rules, norms and institutions of the international community are—pardon the cliché—two sides of the same coin that are indeed necessarily complementary and mutually-reinforcing.

Indeed, support for the international rules-based order may point to a new geopolitical corporate responsibility. While indeed idealistic, it can be activated as a pragmatic agenda that can help multinational corporations and institutional investors address the dilemmas inherent in this convergence of intensified ESG pressures and tensions with geopolitical tensions and conflicts.

Companies and investors can and should:

  • Avoid situations where they cause, contribute or are directly linked to human rights abuses through the UNGPs and heightened human rights due diligence (HRDD)
  • Advocate for the “shared space” of the rule of law, accountable governance and civic freedoms.
  • Demonstrate a sustained commitment to enhance equity, transparency and accountability.
  • Diminish inequality by tackling poverty and ensuring sustainability by arresting the climate crisis.

The elements of this agenda are not entirely or even mostly new, having emerged over the last decade. But while embraced to varying extents by leading companies, none are implemented with the priority and urgency necessary to address the global problems and opportunities that underly them. Moving this agenda forward could bring incremental progress element by element, but transformational progress if moved forward with that priority and urgency.

Yet this rules-based order has faced its own contradictions as some of its original architects and longstanding champions (including the U.S. and UK) have been among those states which have transgressed the sovereignty of others without full support of the international community through the UN (as with the 2003 invasion of Iraq). Moreover, the international rules-based order is perceived by many in the Global South as inherently western despite its universal aspirations and applications.

Finally—to add a further complication and intensification of the dilemmas that multinationals face—the ESG agenda has come under challenge, even attack, especially in recent months in the U.S. The debate extends from the methodological and technical aspects of ESG metrics and investing to the ideological and indeed political underpinnings of the entire corporate responsibility, accountability and sustainability agenda as it has evolved over the last two decades.

The ESG agenda is now on the defensive exactly at a time when we must be on the offensive to meet both the crises and opportunities we face. Let me briefly describe the two distinct prongs that have converged to put the ESG agenda on trial:

The challenge: methodological and technical; valid issues that are critical to acknowledge and address.

  • Data consistency and comparability must be improved; metrics must be clarified, and standards must be aligned; corporate green-washing, blue-washing and white-washing must be exposed and expunged; portfolio construction and fund names must be subjected to the same degree of transparency and accountability as their holdings.
  • We must fix these problems and if we do not rise to this challenge, we will lose the credibility and legitimacy to withstand the more fundamental attack that is the real agenda for some of the ESG critics who are less interested in methodology and more interested in ideology.

The attack: ideological and political; fundamental differences that are essential to counter even if they cannot be entirely reconciled.

  • The attack is not only on ESG investing but also on “woke capitalism”—the distorted, pejorative epithet applied to the agenda that has moved forward—incompletely but progressively—over those last two decades. The attackers would take us back half a century to Milton Friedman who infamously but influentially asserted that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”   Half a century may be an understatement; even Milton Friedman accepted the need for basic regulation of business. The attack on ESG—as distinct from the challenge to how ESG is defined and implemented—would take us back to a crude world of markets over people, of private interests over public values, of unfettered capitalism over accountable democracy.
  • We must see the attack for what it is and the stakes for what they are: the role of responsible business and investment in shaping the kind of society and economy, country and world, that we want and that we work so hard to create.

As we undertake human rights risk assessment and due diligence—especially in conflict-affected and high-risk areas—let us do our research and analysis with probity and consistency. But let us not forget that our business is not just minimizing risk to companies and industries, to portfolios and fiduciaries. Let us remember that our business is protecting and promoting rights, saving and lifting lives.

Let me end with my favorite line in the quarter century history of the contemporary business and human rights field. The late great Sir Geoffrey Chandler, former Shell executive and then founder of the Amnesty International UK Business and Human Rights Group, made the business case for human rights more persuasively than anyone in the Nineties. But he was fond of saying “to hell with the business case, it’s about doing the right thing.”  Sir Geoffrey was right then and he remains right now.

Keep the faith and thank you.

A PDF of these remarks is available here. Full coverage of the conference is available here, including video from the conference.

What Happened on Tuesday?

By Frank Sherman

The busy news cycle didn’t give enough attention to the signing of the Inflation Reduction Act (IRA) by President Biden this past Tuesday, representing the single largest action ever taken by Congress and the U.S. government to combat climate change. It has been a long time coming since the first Congressional hearings on the topic in 1988. Not that Congress hasn’t tried. There have been plenty of false starts on legislation to tackle GHG emissions; however, various forces profiting or otherwise benefiting from the fossil fuel economy have prevailed…..until Tuesday.

While the size of the package is a fraction of the Build Back Better Act passed by the House in November, the emissions reduction components are nonetheless robust and effective. The climate solutions and environmental justice provisions in the $369-billion package will impact nearly every corner of the US economy. Given the unanimous opposition to the bill by Republicans and the slimmest of margins in the Senate, the Democratic reconciliation bill also contains some financial support for the fossil fuel sector, but, as a whole, it represents a major step forward in the fight to preserve a livable planet.

What does $369 billion buy you (EarthJustice)?

  • Accelerates the clean energy transition and lowers energy costs by…
    • Expanding access to clean energy by making clean energy tax credits more accessible and extending them by 10 years.
    • Creating jobs and increases our country’s energy security by investing $60 billion in manufacturing solar panels, batteries, and other clean energy technologies in the U.S.
    • Providing funding for low-income families to electrify their homes, including $9 billion in home energy rebate programs.
    • Removing barriers to community solar.
  • Helps transition the transportation sector away from fossil fuels by…
    • Proving tax credits for electric vehicles;
    • $3 billion for the U.S. Postal Service to electrify its fleet;
    • $1 billion for clean school and transit buses, garbage trucks, and other heavy-duty vehicles, prioritizing communities overburdened by air pollution; and
    • $3 billion to clean up air pollution at ports by installing zero emissions equipment and technology.
  • Supports communities of color and low-income who face disproportionate harms from pollution and the climate crisis with…
    • $3 billion for community-led projects;
    • $315 million for air monitoring; and
    • Reinstatement of the Superfund Tax.
  • Advance practices that make farming climate-friendly with…
    • $20 billion to help farmers and ranchers shift to sustainable practices like crop rotation and cover crops; and
    • $300 million for research into the climate impact of agricultural practices.
  • Support natural climate solutions with…
    • $2.6 billion in coastal resilience grants to fund projects;
    • $1 billion to ensure federal agencies can conduct robust environmental and NEPA (National Environmental Policy Act) reviews;
    • $250 million to implement endangered species recovery plans; and
    • $50 million to advance protections for mature and old-growth forests.

Individuals will see these benefits with a 30% tax credit for installing residential solar panels; up to $7,500 tax credit for purchasing an electric vehicle; up to $14,000 credits for home energy efficiency upgrades, including up to $8,000 to install a heat pump; and an average savings $1,800 per year on energy bills and make their costs more stable and predictable compared with volatile fossil fuel prices.

The IRA represents major progress by Congress, but more action will be needed for the US to meet its 2030 target of reducing emissions by 50-52% below 2005 levels (Rhodium Group). This restores some credibility to the US to maintain global leadership on climate change. The effort is by no means over. Eve with the IRA enshrined as law, we must advocate, and ask our portfolio companies to do the same, with federal agencies and states, as well as Congress, to pursue additional actions to close the emissions gap.

You may have missed it, but Tuesday was a great day for people and planet.