Bond funds grapple with the human rights dilemma



It’s easy to pretend to talk about human rights: promotional material from investment firms is full of references to these. It is much more difficult to determine how investors can best advance these rights.

Yet it is a task that bond fund managers increasingly have to struggle with, as activists call them on their rhetoric.

A Financial Times investigation in July found that several fund management companies that claimed to care about human rights were lending to countries that violated those rights. There was often little evidence that human rights were even mentioned when companies approached sovereign debt issuers.

The FT also found that 34% of bonds in a JPMorgan emerging market bond index that used environmental, social and governance (ESG) ratings were issued by countries classified as “non-free” by the Democracy Campaign group. Freedom House.

Divestment may seem like an obvious answer, but some experts question its effectiveness as a means of changing a country’s behavior.

“It may be heretical to say this when ESG is seen as a panacea, but a divestment in secondary markets is often more of an investment manager’s statement to his clients – using their money – than a tool for change, ”argues Dan Harris, partner at the law firm Chancery Advisors, which heads the firm’s ESG, boycotts and sanctions office.

What investors gain in ESG credibility, it is said, they lose in influence. Divestment “takes the responsible investor away from the conversation to make changes to the underlying security issuer,” says Petra Dismorr, managing director of ESG consultancy NorthPeak Advisory.

Stephen Liberatore, ESG / Impact Manager for Global Fixed Income at investment firm Nuveen, says simply selling is reminiscent of the ethical ‘with and without carrot’ investing seen in the mid-years 2000, with little incentive for issuers to reform once a manager has sold. Making a country behave differently, he says, “takes longer, it’s more complex”.

Even so, critics suggest that fund managers could be doing a lot more than they are currently doing to put pressure on struggling countries. They say divestment sends a strong signal to a government and must sometimes be used, otherwise the exhortations of fund managers will lack bite.

“If a large sum of money is withdrawn from Egypt or Belarus, they will notice it,” says Sarah Repucci, head of Freedom House’s research and analysis department, adding that the fund manager will make it clear to the transmitter what is behind the movement.

Engagement has to be part of the process, she says. “The right way is to give lots of warnings first. . . and, if there is no improvement, then you walk away.

Recent examples of divestment include initiatives by AkademikerPension, a Danish pension fund for academics, and Union Investment in Germany to sell off Belarus government debt. AkademikerPension now refuses to buy government bonds or invest in majority state-owned companies in 45 countries, including China and Saudi Arabia, due to corruption or human rights violations.

Fund managers already need to balance NGO pressure not to fund authoritarian regimes with the need to make money for investors. To complicate matters further, it is possible that the divestment of the bonds of certain countries will do more harm than good to the poorer members of these societies.

Egypt is an example often cited by fund managers. The country issued a “green bond” last year, designed to finance environmental projects. But the country has also experienced “its worst human rights crisis in many decades,” according to human rights group Human Rights Watch, with “tens of thousands” of government critics, including journalists and human rights advocates. human rights in prison for political reasons.

Freedom House considers the country “not free” and claims that “the security forces engage in human rights violations with impunity”.

Liberatore de Nuveen says he invested in the Egyptian Green Bond because the proceeds would go to wastewater and sanitation services, which would especially help the poor. “We felt that this particular agreement directly funded and improved the standard of living of those who needed it most,” he explains.

Patrick Scheideler, co-founder of MultiLynq, a fixed income trading platform, said the Egyptian green bond issue was not straightforward and the lack of attractive yields elsewhere “probably makes it a even more difficult problem to solve “for the greedy of yield. fund managers.

Ana Perez Adroher, Human Rights and Sustainable Investing Project Officer at the International Federation for Human Rights, explains that whether or not a bond is sold depends on a country’s specific situation and investors’ assessment of their power to influence it.

She equates the debate with that of sanctions: does the pressure they exert on oppressive governments outweigh the harm they inflict on ordinary citizens?

But she adds that fund managers have an obligation to exercise due diligence when speaking to NGOs and those who have suffered human rights violations. “The conversation is more and more open when it comes to bonds, but there is still a lot of work to be done,” she says.

Freedom House’s Repucci says investors are increasingly concerned about lending to regimes that violate human rights, adding that they should take action to understand where their money is going.

“If they are not aware of the implications of their investments on human rights, they are in a way complicit in the abuses,” she said.



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