WISE RESPONSE TAKES ACTION AGAINST UNETHICAL INVESTMENT FUNDS
Professor Liz Slooten, Co-Chair, Wise Response*
Dr Robert Howell
Wise Response has taken initiatives against investment funds which falsely claim to be responsible or ethical. The funds to date have been Pathfinder, Simplicity and the New Zealand Superannuation Fund (NZSF). A complaint against Pathfinder has been made to the New Zealand Financial Markets Authority. A complaint about the NZSF has gone to the Minister of Finance. Simplicity has accepted the Wise Response analysis and have committed to making a number of changes.
The main concerns of Wise Response are that these Funds do not follow a responsible ethical investment process and use unvalidated standards. Being responsible means that moral obligations concerning human-human and human-Earth relations are identified and used to assess the moral character and behaviour of companies and assets that are considered for investment. Where these investments options fall short of the ethical standards required, a responsible investor will either avoid investing in them, or engage with them with a view to changing their behaviour. These endeavours should be regularly reported on. Where engagement does not take place, a responsible investor will report that there are companies or assets in their portfolio which may not be ethical.
Responsible investors will only use validated moral standards and frameworks that enable them to invest in companies and assets that meet those moral obligations. Establishing the validity of a measure means showing it actually measures what it claims to. There are two steps to establish this: content and construct. Content validity requires consideration at a conceptual level: does the measure make sense? Is the standard or framework comprehensive: does it include all the dimensions of human-human and human-Earth behaviour; and is it rich enough to generate the secondary concepts, schema and sets of obligations to be able to define a relationship that guides behaviour? Construct validity requires empirical considerations: is the application of the measure consistent with other empirical evidence?
An example of failing the content validation test is the NZSF. It never defines what it means by responsible; its engagements are limited and its reporting is inadequate. All three funds fail the construct validation test. NZSF makes numerous unethical investments, such as in Aerojet Rocketdyne (US nuclear weapons), Genting Plantations (Malaysian palm oil production) and Page (Indian textile manufacture). It also invests in banks, such as Citi, Wells Fargo, Barclays, Bank of China, and the major Australian banks, which, since the Paris Agreement about climate warming, have invested heavily in fossil fuel companies.
Simplicity invests in JPMorgan Chase. In the 5 years since the Paris Agreement, the world’s 60 biggest banks have invested $3.8 trillion in fossil fuels. JPMorgan Chase was the worst of those with a total of $316.74 billion.
Pathfinder invests in Macquarie who have loaned $5026M to fossil fuels globally since 2016. Macquarie (via Macquarie Investment Management and other subsidiaries) also holds more than $2.5 billion of shares in numerous coal, oil and gas companies, including Peabody 6 Energy Corp, BP, Chevron and Shell (shareholdings current as of latest filing date reported by financial data provider Refinitiv Eikon in June 2020).
Macquarie’s Environmental and Social Risk Policy is based mainly on international guidelines of the International Finance Corporation Performance Standards and the Equator Principles. The inadequacy of these standards have been illustrated with the financing by banks of the Dakota Access Pipeline Project. It was shown in 2016 that no fewer that 14 of the 17 banks financing the Dakota Access Pipeline in the USA were signatories to the Equator Principles. This project was fiercely opposed by the Standing Rock Sioux Tribe and their allies because of the threat it posed to their water sources and led to human rights violations when these protests were quelled.
All three funds have inadequate engagement activities. Divestment in itself is not necessarily effective. Under intense pressure from investors and activists to take more action on climate change, some of the world’s biggest oil and gas companies are putting billions of dollars’ worth of assets up for sale. As many energy companies try to shift from oil to gas and lower carbon technologies, INEOS and others are buying up unwanted fossil fuel assets. (INEOS is a financial sponsor of the All Blacks.) Around $140 billion is in play .
According to the Reporting Exchange there were more than 1700 different Environmental, Social and Corporate Governance (ESG) – related guidelines worldwide in 2019 . The confusion is well illustrated by the United Nations Principles of Responsible Investment (UNPRI). There are six principles for the UNPRI .
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices.
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the Principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the Principles.
- We will each report on our activities and progress towards implementing the Principles.
The problem with this approach is that these are not moral terms and measures. What social behaviour, environmental impact or governance behaviour is morally right or wrong? Other frameworks that do not pass the validation test include B Corporation and the United Nations Global Compact.
New Zealand’s values are the responsibilities, obligations and moral rules and standards that it has established over many years to encourage behaviour necessary for New Zealanders to live together for the benefit of life. This includes responsibilities to humans, animals, and our natural world (of which we are a part) that is essential for continuing life on our planet. New Zealand strongly supported the establishment of the United Nations’ Universal Declaration of Human Rights (UDHR). In 1977, New Zealand set up the Human Rights Commission, working under the Human Rights Act (1993). Its purpose is to promote and protect the human rights of all people in Aotearoa New Zealand.
New Zealand was a founding member of the International Labour Organisation (ILO), joining in 1919. It has a unique record on issues of labour and social justice. In 1893 New Zealand became the first country in the world to give women the vote. It was also the first to legislate for an eight-hour working day, so paving the way for the ILO’s Hours of Work (Industry) Convention in 1919. New Zealand has consistently maintained an active and visible presence in the ILO, and its representatives have attended the annual ILO conferences since 1935.
In New Zealand, the moral domain includes many aspects of human-animal and human-environment relationships. It is illegal to abuse domestic and farm animals. There is a Wildlife Act regulating the behaviour towards animals, birds and aquatic life. It is recognised that there is a need for the protection of a number of non-domestic animals and plants: the Department of Conservation has active programmes to these ends. New Zealand has recognised the interests of trees, such as kauri, and other trees that we give protection from opossums. There is recognition given to endangered species, such as the Maūi Dolphin. New Zealand has acknowledged the need for protection of wilderness locations, such as national parks.
In addition, there are a number of international and multinational Conventions and Agreements that New Zealand has signed up to. Examples include the Convention on Biological Diversity, and the Convention in International Trade in Endangered Species. These practices and Conventions and Agreements provide the content validation for deriving the measures to be used to assess the ethical nature of the human-Earth relationship.
It is time that investment funds took the threat of ecological degradation (of which climate warming is but one manifestation) seriously and faced up to the need for both adaptation as well as mitigation strategies. It is time for investment funds to invest in ways that recognise New Zealand’s values and encourage behaviour necessary for New Zealanders to live together for the benefit of all life.
** Wise Response is a broad coalition of academics, engineers, lawyers, artists, sportspeople etc who are calling on New Zealand’s Parliament to comprehensively assess imminent risks to New Zealand and to draw up plans to deal with them. Its website – www.wiseresponse.org.nz – contains full details (with references) of the case studies and its other initiatives.
Patrons: Sir Alan Mark and Sir Geoffrey Palmer
 Financial Times. A $140bn asset sale: the investors cashing in on Big Oil’s push to net zero. July 6 2021
 UNPRI. Retrieved from https://www.unpri.org/pri/about-the-pri