In recent times, American investment funds have been witnessing an unexpected, but growing practice: shareholder activism. Though their usual experience runs more along the lines of strong-arming companies into implementing return-enhancing measures, many of the industry's heavyweights, such as Fidelity, Vanguard, American Funds and Franklin Templeton have had to address some unusual issues at their shareholders' meetings – which are generally used to decide trivial matters, like manager elections. One of these issues is removing investments from companies that operate and pay taxes in Sudan, whose government was responsible for the massacre of more than 400 thousand people in the Darfur region. According to a survey by Investors Against Genocide (IAG), a nongovernmental organization which tries to dissuade investors from putting money into companies that are indirectly connected to the Sudanese slaughter, 43 fund meetings discussed "genocide-free" investment in 2009 (by October 20), in addition to another 72 that will vote on the theme by the end of the year. In 2008, 21 funds discussed the killings in Sudan, as opposed to zero such discussions in previous years.
Oil, the Sudanese economy's main product, is at the center of these discussions. With a daily production of 500 thousand barrels, the country is Africa's fifth largest oil producer. Giants such as PetroChina, Petronas, Sinopec and the Oil and Natural Gas Corporation fatten the coffers of dictator Omar al-Bashir, who rose to power in a coup d'état in 1989. The UN accuses the Sudanese government of using more than 70% of the funds obtained from the oil to finance slaughters in Darfur, where local ethnic movements against al-Bashir arose, targeting the Arabic minority.
None of the proposals against investments in Sudan achieved the necessary majority of votes for approval. In meetings held in July and August, votes in favor of ending investments in Sudan ranged from 7.18% to 23.4%. Nevertheless, IAG chairman Eric Cohen is celebrating the results. "In Fidelity alone (the world's largest asset manager, with US$ 1.25 trillion in equity), more than 2 million shareholders voted '‘no' to genocide", he reveals. "It won't be long until a fund is forced to disinvest", he says.
His optimism is not unfounded. In March, the organization achieved one of its most significant victories when TIAA-Cref, one of the largest American pension funds, with over US$ 390 billion under management, announced that it will initiate active measures against the situation in Darfur, following several talks with the NGO. The institution promised to call meetings with the pertinent companies and pressure them for change. "We will see how the talks go. If no improvement is seen within nine months, we will disinvest", the entity said in a press release.
"Divestment should only happen when all attempts at engagement have failed"
PRO-PALESTINE — The genocide in Sudan is only one of the humanitarian issues that outrage investors. In September, Norway’s sovereign wealth fund sold its shares in Elbit, a company involved in selling surveillance systems to Palestinian territories occupied by Israel. The systems are used in the barriers erected by Israel to separate its occupied lands from Palestinian homes. The fund wrote a letter to Elbit in March, questioning their participation in the occupation – which is considered illegal by the UN – but the company refused to provide explanations. "We will not fund companies like Elbit, which is directly associated with violations of human rights", said Kristin Halvorsen, Norway's finance minister, in an official release on September 2.
This is not the first time that the sovereign fund has made a stand in episodes with international repercussion. In March, the fund announced that it would remove all investments from a Chinese truck manufacturer, Dongfeng, due to its sale of military vehicles to Myanmar. The Asian country has been governed since 1962 by an authoritarian military regime which violently represses any manifestations in favor of democracy. Arbitrary imprisonment, torture, murder and forced labor are some of the crimes attributed to the administration of General Than Shwe.
In February, the Church of England, which holds more than £ 4 billion in stock investments, announced the disinvestment of US$ 3.3 million from Caterpillar, a construction equipment manufacturer. Although the official justifications for terminating investments in the American company were purely economic, the Church has apparently given in to public opinion pressures, which condemn Caterpillar for selling tractors and machinery to Israel, where they were used to demolish Palestinian buildings within conflict areas. A few days before the disinvestment decision, the British press published a letter signed by 23 theologians, criticizing the Anglican's stake in Caterpillar. "The Church of England should be coherent with its policy of socially responsible investments and immediately disinvest from companies that profit from the misery of millions of Palestinians", read the letter.
Berkshire Hathaway, an investment company owned by billionaire Warren Buffett, protagonized a similar case in 2007 regarding its stake in PetroChina. Under pressure from NGOs to remove investments from the Chinese oil company, Buffett was reluctant. At the shareholders' meeting held in May that year, Berkshire's managers received a proposal of disinvestment, but recommended voting against it after considering that the solution "would have no beneficial effect on the behavior of the Sudanese government." Similar to the incident faced by the British church, Buffett realized that his image was at serious risk of damage from the imbroglio, and decided to disinvest from the Chinese company's shares. The operation, conducted between July and October 2007, amounted to more than US$ 3 billion. The megainvestor didn't throw in the towel, however: he claimed to have sold the stocks for purely economic reasons.
OUTDATED TERM — The higher number of initiatives in favor of investments that do not violate human rights reflects a trend among investors, namely that of taking social responsibility increasingly into account when choosing where to invest. A report published in July by Principles for Responsible Investing (PRI), a group of socioenvironmentally responsible investment principles created by the UN in 2006, shows that the topic of human rights has been gaining relevance among investors. Among the 372 respondents of the survey, 52.4% addressed the theme during engagements with companies over the year. That percentage was 48% in 2008 and 25% in 2007.
The reflections about the subject are not only about image preservation and the obvious moral issues involved. Many companies around the world require that the entire production chain, including suppliers and service providers, be free of human rights violations. "Ultimately, the loss of opportunities will be much more relevant that any other gain that a company could accrue from these bad practices", says Marcel Gomes, coordinator of the agrofuels monitoring center at Repórter Brasil, an NGO which fights slave labor in the country.
"Today, major investors are already starting to consider the term ‘'activist' outdated, for practically all of them are concerned with the risks associated with any issues that involve companies", says James Gifford, a PRI executive. According to Gifford, a sign of this is that the number of PRI signatories has more than tripled. In 2007, there were 180. The following year, that number jumped to 362, and in 2009 it rose to 560 signatories, representing over US$ 18 trillion in assets.
Christian Brothers Investment Services (CBIS), a fund targeting Catholic institutional investors — one of the largest socially responsible funds in the United States, with more than US$ 3 billion in equity — performed a client survey in 2008 and found that the theme 'human rights' is the main concern of its investors, with 33% of answers, ahead of the environment (21%) and financial aspects (15%).
Instead of simply banning a company from its portfolio, CBIS attempts to use its power as a significant shareholder to implement change. A recent victory in this field took place in August, when more than 20 apparel companies, including giants such as GAP, Levi Strauss and Target, assumed a commitment to engage in actions that will guarantee the absence of Uzbek cotton in their clothes, after a movement orchestrated by the fund. The country is the world's third largest cotton producer and still deliberately maintains child labor, a part of its Soviet heritage.
In a coordinated movement with other major investors, CBIS wrote letters throughout the year to the apparel companies in its portfolio, pressuring them for solid and verifiable action against Uzbek cotton. "Divestment would have allowed us to wash our hands of this, but it wouldn't have achieved the same improvement obtained through engagement", says Julie Tanner, CBIS's responsible investment director.
James Gifford agrees that divestment should be used only as a last resort. In most cases, engagement with the company's leaders usually produces better results. "Simply selling your stake could be counterproductive compared with the benefits that an investor can achieve by mobilizing the company", he says. Investors may attempt to promote change both through shareholders' meetings and through private meetings. "Divestment should only happen when all attempts at engagement have failed."
According to Gifford, the pro-divestment approach must be viewed with caution, even in the Sudan, given that pressuring for change has also been generating results. French oil giant Schlumberger was part of a blacklist of companies directly or indirectly involved with the genocides in Darfur, produced by the Sudan Divestment Task Force (SDTF), an NGO. In 2007, the company made it off the list after being influenced by shareholders – CBIS among them – to implement measures against the killings. The company installed a policy that requires all its business partners to have no association whatsoever with the conflicts.
In cases such as PetroChina's, the owner of oil extraction fields in Sudan, attempts at engagement are ineffective because the company makes little room for dialogue. Tanner reveals that CBIS has made countless attempts to arrange a meeting with PetroChina's heads. "They never answered us. In this case, there is no alternative but divestment", she says.
Eric Cohen from IAG warns that the engagement excuse is often used as a pretext to maintain investments in PetroChina. In a shareholders' meeting held in August, the representative of a large investment fund justified the stake in the Chinese oil company by saying that, in this manner, the fund could use its political power to force changes in management. "When I asked which practices they were effectively adopting to exert such pressure, he simply said that he wasn't allowed to say", he says.
The funds defend themselves. "Our engagement practices are confidential because new investment decisions depend on them", claims Chuck Freadhoff, spokesperson for American Funds, which will hold 15 meetings in November to vote the end of investments associated with the genocide in Darfur.
UNAWARE OF THE DISCUSSION — In Brazil, social activism among investors is still in its infancy. In June, the courts granted an injunction forcing the Usina São Martinho sugarcane mill to improve the work conditions of its sugarcane cutters. In addition to not providing safety equipment, the company offered subhuman hygiene conditions and forced the cutters to work exhaustive hours. Another company in the sugar and ethanol industry, Cosan, has two public civil suits filed against it by the Labor Public Prosecution Service for subjecting its workers to slave-like conditions. When contacted by CAPITAL ABERTO, the companies did not answer our requests for an interview.
"Unfortunately, human rights are still less in the spotlight than other socioenvironmental criteria, such as the environment and corporate governance", admits Walter Mendes, Itaú Unibanco's equity investments superintendent. Although they are part of questionnaires for the inclusion of companies in responsible investment funds and in the Bovespa's Corporate Sustainability Index (ISE), items such as slave and child labor do not enter the agenda of investors when something goes wrong. Evidence of this is the absence of any mention in Cosan's and São Martinho's websites about the ongoing lawsuits against them.
Mendes prefers not to comment on specific cases, but affirms that the fund asks all companies whether their suppliers or service providers are accused of violating human rights. "The company only remains in our portfolio if it cancels its contract with such partners", he says. Such questions could have been applied to Metalúrgica Gerdau, which is part of Itaú Unibanco's Social Excellence portfolio. In May this year, more than 170 workers were found working in semi-slavery at a coal pit in Jaborandi, in the interior of Bahia state. Not only did they live in filthy shelters near the furnaces – increasing the risk of intoxication – the workers also had not been paid for the past three months. Rotavi Industrial, the coal pit's proprietor, supplied light alloy to major companies, Metalúrgica Gerdau among them. As soon as it heard of the accusation, the metallurgical company ended its association with Rotavi, according to the company's press relations department.
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