Memorandum submitted by Bonita Meyersfeld
1. This evidence is submitted by Dr Bonita
Meyersfeld in response to the Joint Committee on Human Rights'
call for evidence on Business and Human Rights. Dr Meyersfeld
is an international human rights lawyer, specialising in business
and human rights. She is a parliamentary advisor to Lord Rana
and was involved in the United Kingdom government's recent confirmation
that pension fund trustees are not prohibited from considering
social, environmental and ethical issues in their investment decisions,
provided they act in the fund's best interests. This was incorporated
into John Ruggie's most recent report to the UN Human Rights Council,
"Business and human rights: Towards operationalizing the
'protect, respect and remedy' framework", 22 April 2009 (para
25).
2. This submission follows the John Ruggie's
structure, focusing on institutional investment and human rights.
3. Institutional investment refers to the
investment by highly specialised institutions, such as banks,
insurance companies, retirement or pension funds, hedge funds
and mutual funds, of large sums of pooled money in companies or
financial instruments. Group investment has the advantage of spreading
risk, maximising return and protecting wealth creation. There
are risks too, as is evident from the recent sharp decline in
asset and debt instruments, with the result that many people's
investments have devalued significantly.
4. The most well known form of institutional
investment is the investment of pension fund contributions. This
submission refers mainly to pension funds, although the rationale
regarding rights, responsibilities and the role of the UK apply
to all forms of institutional investment.
1ST PRINCIPLE:
THE DUTY
OF THE
STATE TO
PROTECT HUMAN
RIGHTS
How do the activities of UK businesses affect
human rights both positively and negatively?
5. Institutional investors have significant
influence in the management of corporations, either by virtue
of voting rights in a company or by influencing conduct and providing
capital. As a result, institutional investors are often called
upon to engage with their portfolio corporations (ie corporations
in which they invest) about their corporate governance, human
rights or environmental practices.
6. Investors usually experience this pressure
where a portfolio company either commits human rights violations
directly or supplies goods or services to regimes with poor human
rights records. For example, during apartheid, institutional investors
were urged to engage with their portfolio companies operating
in South Africa. The UK (and other EC member states) adopted a
scheme requiring UK companies with more than 50 percent shareholding
in a South African subsidiary to report annually to the UK government
on steps taken to implement a code of conduct and to report on
discriminatory employment practices.[266]
Today, UK investors are regularly called upon to engage with or
disinvest from corporations providing goods and services to the
Sudanese Government in connection with the ethnic cleansing of
civilians in Darfur.
7. Institutional investors are in a powerful
position to ensure that businesses protect and respect human rights.
Despite rapid development in so-called "responsible investment"[267]
practices and the adoption of global, regional and sector-specific
voluntary principles, responsible investment still remains on
the fringe of mainstream institutional investment practices.[268]
How do these activities engage the human rights
obligations of the UK?
8. There are several international instruments
regarding business and human rights but most of these are voluntary
principles or guidelines. As regards institutional investment,
the most authoritative instrument is the United Nations Principles
on Responsible Investment (the UN Principles). The UN Principles,
launched in 2006, were developed by institutional investors, and
are supported by the UN Global Compact and the UN Environment
Programme, with the direct support of the UN Secretary-General.
They are intended to develop and promote best practice in the
area of responsible investment, through facilitating the integration
of environmental, social, and governance issues into mainstream
investment practice. The Principles have now been signed by over
400 institutional investors, representing some $15 trillion
of assets under management.[269]
9. The OECD Guidelines and OECD Declaration and
Decisions on International Investment and Multinational Enterprises
1976 are also relevant. These include recommendations and
voluntary principles and standards for responsible investment
conduct in a variety of areas including human rights.
10. The UK is also bound by the International
Covenant on Economic, Social and Cultural Rights (ICESCR) to take
steps through international assistance and co-operation, especially
economic and technical, to the maximum of its available resources,
with a view to achieving progressively the full realization of
socio-economic rights.[270]
It is well-established that international cooperation for development
is linked to the realization of these rights and is an obligation
of all states, particularly those which are in a position to assist
others in this regard.[271]
11. It is unlikely that the Human Rights
Act is directly engaged by this framework. However, the UK is
bound to comply with international obligations notwithstanding
the absence of specific incorporating legislation.[272]
Gaps in the legal and regulatory framework
12. There is very little effective regulation
of institutional investment in general, and almost none in respect
of human rights.
Common Law
13. Institutional investors are bound by
common law principles of fiduciary duties to (i) act in the best
interests of their beneficiaries; and (ii) be prudent in their
financial evaluation of investments, taking into account the highest
rate of return at the lowest risk. Part of this is the requirement
in respect of pension schemes to retain a diverse portfolio for
the purposes of spreading risk as widely as possible.
14. Until recently there was uncertainty in the
law regarding the extent to which investors' fiduciary duties
allow them to take into account additional factors, such as human
rights, when making investment decisions. As a result of long-standing
and narrowly interpreted case law, it was generally accepted in
the UK that all other considerations—including human rights—were
extraneous to investors' legal powers. Human rights therefore
could not be a consideration when making an investment decision.[273]
15. The legal position was clarified by
Lord McKenzie during the passage of the Pensions Act 2008, confirming
that:
"There is no reason in law why, in making
investment decisions, trustees cannot consider social, ethical
and environmental considerations, including sustainability, in
addition to their usual criteria of financial returns, security
and diversification."[274]
16. The position is improved in that investors
can feel more confident in considering corporations' human rights
impact but human rights considerations still are entirely optional.
Statutory Law
17. Section 244 of the Pensions Fund
Act 2004 requires trustees of a scheme to prepare a written
statement of principles governing their investment decisions.
The Pension Protection Fund (Statement of Investment Principles)
Regulations 2005 is really the only statutory instrument
that refers to "social" and "ethical" considerations.
Clause 4(2)(g) requires the statement of investment principles
to cover "the extent, if at all, to which social, environmental
or ethical considerations are taken into account in the selection,
retention and realisation of investments." (emphasis added)
18. There is no statutory duty that requires
institutional investors to prevent or even consider the human
rights impact of their investment decisions.
Guidance
19. In March 2000, the government asked
Paul Myners to examine whether there were distortions in the investment
decision-making of institutional investors. This resulted in the
Myners Principles,[275]
published in 2001 and revised in 2004. The Myners Principles
codify best practice in investment decision-making. While they
are voluntary, pension fund trustees are expected to consider
their applicability to their own fund and report on a 'comply
or explain' basis how they have used them. The Myners Principles
do not cover social, environmental or human rights considerations.
20. In practice, most institutional investors
tend to include social (or human rights) considerations in their
statement of investment principles. Very few, however, actually
engage their portfolio companies on human rights issues.
Role of Government departments and UK National
Human Rights Institutions
21. In his 7 April report to the UN
(Protect, Respect and Remedy: a Framework for Business and
Human Rights), Ruggie stressed the importance of governments
employing joined-up thinking, across departments, as regards its
business and human rights policies. Ruggie indicates that the
business and human rights agenda should not be segregated or "kept
apart from, or heavily discounted in, other policy domains that
shape business practices, including commercial policy, investment
policy, securities regulation and corporate governance."
(emphasis added)
22. Far greater guidance and leadership is needed
from government departments such as the Department for Business
Enterprise and Regulatory Reform, the Department for Works and
Pensions, the Foreign and Commonwealth Office and the Department
for International Development. These departments should require
institutional investors (including the soon to be established
Personal Accounts Delivery Authority) to adopt a meaningful policy
of responsible investment, following the example of state funds
in France, Norway, New Zealand, Canada and Ireland.
23. The National Human Rights Institutions
in the UK should monitor and require investors to retain a diverse
investment portfolio and proactively engage with companies on
human rights and environmental issues. I necessary, their remit
should be extended to include human rights violations abroad or
a specialised body should be established to monitor the human
rights impact of international investment (such as that proposed
by the CORE Coalition).
2ND PRINCIPLE:
THE RESPONSIBILITY
OF BUSINESSES
TO RESPECT
HUMAN RIGHTS
24. The human rights impact of institutional
investment often reaches beyond the borders of the UK, affecting
the human rights of people in other countries, usually developing
states. But the protection of human rights does not stop at the
water's edge and the wellbeing of UK pensioners and investment
beneficiaries need not be dependent on the violation of human
rights abroad, the degradation of the environment or corrupt corporate
practices.
How should UK businesses take into account the
human rights impact of their activities?
25. There are a number of ways in which investors
can influence corporations to operate ethically, without compromising
healthy profits for UK beneficiaries:
(i) Investors can engage with companies
in which they hold shares. Recommendations from major shareholders
will certainly turn a corporation's "mind" towards human
rights standards, thereby limiting the negative fall-out from
poor governance, lax safety standards or climate change.
(ii) Investors may use positive screening.
Investors may require corporations to demonstrate environmental,
social and governance standards in return for their business.
(iii) Investors may disinvest. Usually
investors sell shares if the corporation fails to perform financially.
Increasingly, however, investors are being asked to disinvest
where a corporation is complicit in the severe violation of human
rights, such as war crimes, crimes against humanity or genocide.
(iv) Some investors are now turning to litigation.
For example, Lothian pension fund is suing BP for the damage to
its investment after an oil spill, which it said was caused by
BP's negligence.
26. The emphasis should be on engagement
with portfolio companies to ensure that they comply with international
human rights standards, including poor governance, lax safety
standards, collusion in conflict zones and doing business with
unstable and unreliable regimes.
27. UK-based businesses are dominant players
in global financial services and are well placed to lead on institutional
investment and human rights.
Effect of the current economic climate
28. Responsible investment is not inconsistent
with profit maximisation. There is increasing evidence that effective
management of social issues has a positive impact on investment
returns.[276]
Good governance and transparent corporate practices tend to lead
to stable return and long-term profit growth. The European Commission
confirms that:[277]
"Socially and environmentally responsible
policies provide investors with a good indication of sound internal
and external management. They contribute to minimising risks by
anticipating and preventing crises that can affect reputation
and cause dramatic drops in share prices."
29. An example of this is the Co-op ethical
fund, which had one of the best performances of any all-shares
funds in recent times.
30. The economic climate reinforces the
need to improve the regulation of institutional investment. The
impact of sub-prime lending in the United States on the global
economy is an obvious example.[278]
The large number of people who did indeed end up defaulting on
payments, leading to the seizure of collateral, and foreclosure
on mortagages, was high, and has led to the current credit crunch
and possible worldwide recession. The human rights-to-financial
link is clear.
3RD PRINCIPLE:
EFFECTIVE ACCESS
TO REMEDIES
Does the existing legal, regulatory and voluntary
framework provide an appropriate remedy?
31. Apart from NGOs and transnational organisations
which "name and shame" corporations and lobby institutional
investors to engage with problem companies, there is no monitoring
of the human rights impact of institutional investment.
32. Because there are no enforceable human rights
guidelines or principles, there is no mechanism to hold institutional
investors to account for their investment decisions which contribute
to human rights violations.
33. The remit of most of the UK's National Human
Rights Institutions is limited to the protection of the human
rights of people in the UK. But institutional investment can impact
the protection - or violation - of human rights in foreign jurisdictions.
Often there is a governance gap in these jurisdictions, where
there is no access to judicial or other remedies.
Non-judicial enforcement: Emphasising long-term
investment v short-term valuations
34. The interests of pension funds and their
members are best served by longer-term valuation of companies,
given that most people's pensions will be invested for decades
before they are paid out. Pension fund managers need to be encouraged
to look beyond quarterly results as short-term thinking can lead
to lower total returns over a longer period.
35. Many institutional investors, especially
pension funds, rely heavily on index trackers, which, put simplistically,
follow a pre-determined pattern of investment. Investors often
rely on a computer model with little or no human input in the
decision as to which securities are purchased or sold. The lack
of active management usually gives the advantage of lower fees
and lower taxes in taxable accounts. But apart from the fact that
this has its own financial risks (known as "tracking errors"
or informally "jitters"), tracking usually covers very
short periods (usually three months) and obviously does not consider
the human rights impact of the portfolio company.
36. The performance of a company over a
three month period is very different from the performance of a
company over a 20 year period. And it is easy to envisage
a situation in which an activity that is profitable in the short
term may have negative impacts on the wider portfolio in the long
term.
37. Pension fund investors need to be more
concerned with the performance of a company over a much longer
period and should be encouraged to rely less on short-term tracking.
Regulatory/good practice proposal
38. Institutional investors should be required
to make human rights part of their investment policy and to demonstrate
the ways in which they comply with that policy.
39. UK NHRI should have the power to monitor
the impact of institutional investment abroad.
CONCLUDING COMMENTS
40. Combined with increasing evidence that
responsible investment brings performance benefits, this Minister's
statement regarding institutional investment shows that trustees
should be taking proactive steps to monitor and manage environmental,
social and governance risks and opportunities.
Dr Bonita Meyersfield
May 2009
266 See Department of Trade, Code of Conduct for Companies
with Interests in South Africa: Government Guidance to British
Companies on the Code of Conduct Adopted by the Governments of
the Nine Member States of European Community on 20 September 1977;
Cmnd 1-7233 (1978). Back
267
This is often referred to as responsible investment, socially
responsible investment or ethical investment. There is a debate
as to which label is preferable. For the sake of simplicity, I
use the term "responsible investment". Back
268
See "Identifying and Overcoming Behavioural Impediments to
Long Term Responsible Investment: A Focus on UK Institutional
Investors" by Danyelle Jann Guyatt, Doctoral Thesis, University
of Bath, July 2006. Back
269
See "Responsible investment: a force for poverty alleviation.
Framing the debate." Oxfam report by Rory Sullivan and Helena
Vies Fiestas. Back
270
Article 2. Back
271
General Comment 3 by the UN High Commissioner for Human Rights,
The nature of States parties obligations, art 2 para 1 of
the Convention, CESCR General comment 3. (General Comments), December
1990. Back
272
See "UK's International Obligations" by Anthony Lester
and Bonita Meyersfeld in "Human Rights Law and Practice",
Lester, Pannick, Herberg (eds), 3rd Ed, LexisNexis. Back
273
The case of Cowan v Scargill [1985] Ch 270 concerned the
proper investment of pension trust monies. Back
274
Hansard, Vol 705, 26 Nov 2008: Column WS160. Back
275
Revised Myners Guidelines:
http://www.hm-treasury.gov.uk/d/consult_myners_response_pu632.pdf
http://www.hm-treasury.gov.uk/d/consult_myners_response_pu632.pdf. Back
276
See, for example, the 2007 report of the UNEPFI Asset Management
Working Group and Mercer, entitled "Demystifying Responsible
Investor Performance", available at
http://www.unepfi.org/publications/investment/ Back
277
European Commission Green Paper, The Commission Green Paper
on Promoting a European Framework for Corporate Social Responsibility,
COM(2001) 366 final (18/07/2001). Back
278
In the United States, mortgage lending specifically, the term
"subprime" refers to loans that do not meet Fannie Mae
or Freddie Mac guidelines. This is generally due to one or a combination
of factors, including credit status of the borrower, income and
job history, and income to mortgage payment ratio. Back
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