Any of our business? Human Rights and the UK private sector - Human Rights Joint Committee Contents

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.


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.


  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).


  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.


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.


  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:

276   See, for example, the 2007 report of the UNEPFI Asset Management Working Group and Mercer, entitled "Demystifying Responsible Investor Performance", available at 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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