Category Archives: News

Why we should care how Japanese pensioners’ money is invested

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This summer, the world’s largest pension fund expanded its focus on environmental, social and governance investing. Japan’s $1.26 trillion fund is so big it can actually drive the market. Immediately after the Japanese pension fund’s announcement expanding its ethical investment to 10% of its portfolio, stocks on the ESG indices spiked. In other words, pensioners and shareholders profited purely off of the ethical performance of certain companies.

A growing proportion of pension funds are going ethical – Norway, at $900 billion in assets, has long been a leader in ethical investing, as has California’s $323 billion fund, Calpers. In August, the UK Pensions Regulator warned that its trustees were creating long-term financial risk by failing to take climate change, responsible business practices and corporate governance into account when making investments. In response, the industry’s largest consultants pledged to pressure asset managers to improve ethical standards at listed companies.

Part of what makes Japan’s shift such a big story, beyond the enormity of its fund, is that the country has long been underrepresented in discussions of business and human rights. The pension fund’s move is likely to shape the business decisions of Japan’s major publicly traded companies. First, companies have an increased incentive to be listed on one of the three ESG indices the pension fund is now tracking. Since the fund has signaled a strong intention to make its investments ethical, companies that don’t meet ESG standards could rightly fear being left behind. The fund is already pouring roughly $29 billion into ethical investing – how much will that increase in the future? Additionally, the move is expected to prompt smaller Asian corporate and public pension funds, which have so far been slow to adopt ESG investments, to allocate more into such stocks.

Second, companies could face substantial reputational risk if they get cut from the indices for failing to meet ethical standards. The chief executive of FTSE Russel, which compiled one of the three indices, told Reuters he sees this as an opportunity “to improve the ESG practices of companies in Japan.”

Now that there is a major market incentive to get onto the indices, are companies going to try to game the system, or will they engage meaningfully on their human rights risks? It depends. As noted above, mere lip service won’t suffice if companies end up getting booted from the indices for poor ESG performance. However, many (western) companies have grown practiced at developing public reporting to present ethical operations, while concealing major social risks.  Two thirds of portfolio managers recently polled said they used corporate reports and statements to evaluate ESG performance – only 3% went beyond regulatory filings, corporate engagement and public information review. That makes ESG standards pretty easy to circumvent – particularly the Social standards, which cannot be legitimately benchmarked by carbon emissions figures, codes of conduct, and other internally drafted reports. What’s more, most firms (54%) outsource their ESG expertise to third parties – only 31% of portfolio managers have internal training on ESG issues in investment analysis. The FTSE index selected by the Japanese pension fund is developed by experts in ESG, but it relies on publicly available information, supplemented by company comment.  This gives companies an opportunity to refute NGO allegations, but it leaves no room for NGOs to provide a counterpoint. It has left FTSE’s ethical funds vulnerable to criticism that, in the UK, its largest holding is HSBC, the bank that laundered money in Mexico for drug cartels and manipulated LIBOR interest rates. Its second largest holding, Royal Dutch Shell, is currently mired in a $1.3 billion corruption scandal in Nigeria.

That’s not to undermine the value of ESG funds overall, but rather to stress that we do not have tried-and-true models for benchmarking actual ESG performance. To the credit of Japanese businesses, they are not looking to merely copy existing (western) approaches. Supported by consultants at EY and the Global Compact Network of Japan, some Japanese business leaders are looking to vet their own operations for risks, rather than rely solely on their CSR reports to generate good ESG scores. It will be worth watching how they approach ESG going forward.

The Tokyo Olympics are 1000 days away! We should have some concerns

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Forced evictions, bacteria-laced waters, corrupt contracts – the Rio Olympics caught plenty of flak for human rights risks. Though I won’t claim it ranks as popular literature, there’s now a substantial body of research exploring how the Olympic Games impact human rights. Sochi is renowned for environmental degradation and damage to local water sources. Vancouver was slammed for gentrifying poor neighborhoods and leaving the city’s poorest destitute and indigent. Each new Olympic Games carries new human rights perils and criticism.

However, there has been very little attention to human rights risks for Tokyo’s 2020 Olympics. Japan has no military that could carry out violent evictions. Its homeless population is estimated at roughly 6,000 nationwide, generating little fear that Olympic construction will exacerbate poverty. Japan’s waste management systems are among the world’s most efficient – incinerated waste is being used to create a habitable island in Tokyo Bay at present.

In theory, Tokyo 2020 could be the most human rights-respectful Olympic Games in modern history. In its sustainable sourcing code, respect for human rights is directly incorporated into contracting, sourcing and supply chains.

But, on closer inspection, there are some major risks. Over a third of Japan’s population is over 60 – too old to work in construction, manufacturing, security and most other jobs related to Olympics preparation. While Japan has no military, it has a pervasive police force, with private security companies responsible for providing video surveillance across the Olympic zone. Japan’s low homelessness rates conceal a poverty problem cloaked by high rates of inter-generational home sharing and fueled by a growing rate of unstable employment. A 2015 survey found that 40% of the nation’s workforce holds “irregular” work, meaning employers do not need to supply access to health care, pensions or full salaries. Opaque business dealings in Japan create a climate where corporations wield little influence over the labor conditions of their subcontractors.

All of these realities create human rights risks in the lead-up to the Olympics. The matter of labor conditions is perhaps the most pressing. A 2015 government report found that 30% of construction workers are over age 50, while less than 10% are under 30. Finding few viable legal and rights-respectful options for filling their employee ranks, firms have resorted to demanding excessive overtime hours and hiring foreign workers through questionable loopholes in Japan’s immigration law.

Excessive hours:

In March, a 23-year-old construction manager committed suicide after logging 212 hours of overtime the previous month. Tokyo recently revised the law to restrict overtime to 100 hours per month, but Construction is exempted from the overtime limits. Families can file insurance claims for “death by overwork” if their loved ones commit suicide after working more than 80 hours of overtime in a month. Last summer 37 Olympic construction firms violated that threshold. The companies face no penalties, and they have not been publicly named.

Exploitation of migrants:

Those were just the firms documenting and paying overtime hours. A spate of recent investigations have found firms turning to foreign, imported labor to fill stopgaps in manufacturing and construction supply chains. Reuters found that Subaru Forresters, for example, were being built by asylum seekers from Myanmar, Nepal, Turkey, India, Indonesia and Pakistan. Reuters also interviewed Kurdish asylum seekers in 2016, who were working both on government public works projects and at private construction sites.

Separately, Japan also has a “Technical Intern Training Program”, which was originally designed as a skills-transfer program for workers from developing countries but is now used to fill unskilled jobs. The “Trainee” program is exploitive in its own right. Workers are not permitted to change jobs or companies, they often pay over $10,000 to recruiters, who garnish their wages and misrepresent their job prospects, and dismiss them if they become sick or injured, leaving them indebted both to medical facilities and to labor brokers.

There are now one million foreign workers in Japan, and while companies are legally required to pay them Japanese minimum wage rates, business owners have found work-arounds. For example, asylum seekers are not registered as employees, and thus can be paid less. “Trainees” can see up to a third of their wages garnished by the brokers that recruit them from their home countries. Some workers come on student visas, professing to be studying Japanese.

These laborers are vulnerable, and it will be extremely difficult for Olympic contractors to guarantee that such workers are not among their ranks. Instead, perhaps they should focus on reporting transparently on the demographics of their workforce and the opportunities for integrating these foreigners into Japanese society.

Why we should all care about what the Dutch development bank just did

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This month, the Dutch Development Bank went public with its commitment to “explicitly and systematically address human rights” across its investment process. The announcement accompanies a detailed plan already underway to conduct human rights “due diligence.” It also comes alongside the implementation of human rights respectful procedures undertaken by the entire Dutch banking sector.

Last year (and the year before, and the year before, and the decade before…we wrote about the collision course between human rights and international banking. Most multinational companies need loans and investment to expand globally, so adding human rights strings to their financing options creates good leverage. Additionally, development banks actually seek out investment and loan opportunities in complex contexts, and we think they should know what they’re getting into before they enter these risky transactions.

Development banks were created to reduce poverty in low-income countries. Increasingly, they recognize that poverty-reduction is a complex aim, and that equitable development can be hard to achieve. The World Bank has put power and wealth imbalances at the core of its current mission, and many banks have followed.

But the human rights policy of the Dutch Development Bank (FMO) is a game changer in international development finance, and we should all be watching.

Why? First, FMO is prioritizing human welfare using data, real-time evaluation and risk assessment to guarantee it. Second, it faces pressure to be a true leader in rights-respectful finance, as the whole Dutch private banking sector is expected to follow suit. Third, it gives them a policy position to stand up against the international banks that, as partners, would pressure them to overlook human rights risks in the name of profit.

On the third point, one Dutch bank has learned firsthand that human rights risks could also create financial risks. Dutch bank ABN-AMRO published its first human rights report in 2016, eight years after getting burned by a transaction with Goldman that turned out badly both for human rights and business. The “Abacus deal” with Goldman exacerbated the global financial crisis (specifically hitting Dutch and German pensioners, not to mention the mortgage holders left homeless), and cost ABN $840 million.

ABN’s flagship human rights report acknowledges the bank’s need for new personnel with a human rights focus. Banks are accustomed to working within financial reporting frameworks and benchmarked standards and have historically bypassed direct engagement with affected rightsholders. Yet at a minimum they will need to learn to vet the quality of engagement processes implemented by clients.

FMO’s new human rights policy has the potential to show them how.

 

Full disclosure: NomoGaia assisted FMO in developing its policy and intends to provide ongoing support as needed.

What do Sprint and Facebook have to do with Philando Castile’s shooting?

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This month, as a court acquitted Minnesota police officer Jeronimo Yanez in the death of Philando Castile, additional details of the shooting and ensuing investigation emerged.

Gizmodo and the Minnesota Star Tribune reported that more subpoenas and search warrants were issued on Castile’s girlfriend, Diamond Reynolds, than on Yanez. The Minnesota agency tasked with investigating his death sought seven warrants on Castile and Reynolds. Gag orders accompanied the subpoenas to third parties holding the couple’s data, requiring that Facebook, Apple, Sprint and others not tell Reynolds her data was under review.

Sprint and Apple complied. Facebook didn’t.

Law enforcement has sought data from telecommunications companies since Alexander Graham Bell invented the telephone. Phone companies have complied with subpoenas and warrants, sometimes offering up data without requiring an official request at all. What is notable is that, while Sprint and Apple have followed a long-standing tradition of relying on law enforcement (or courts) to determine whether customers’ privacy needs protection, Facebook, taking on a proactive role, has not.

Times are changing in telecommunications. Data requests from telecoms companies have increased as the data they hold has become more detailed. Between January and June 2016 (its most recent data), Sprint received 125,000 data requests from US law enforcement. In the same period, Facebook received 24,000 and Apple received 6,000.

Collaboration between law enforcement and social media or communications companies has come under increasing scrutiny, as these firms can provide, essentially, surveillance, on millions of people. Revelations from the Snowden leaks that the government makes sweeping data requests of companies have heightened concern. A product AT&T sells to law enforcement agencies makes use of the company’s years of backlogged GPS, telephone and text data. AT&T’s product, called Hemisphere, was supposed to be used only for apprehending drug traffickers. It has been used far more broadly. Eight states are even using it to track Medicaid fraud.

In essence, taxpayers and customers are paying AT&T to spy on them. Sprint has not said whether it runs a comparable program to Hemispheres, but it has certainly profited from working with government.  Sprint provides paid services to the Department of Homeland Security Secretariat, the United States Citizenship and Immigration Services (USCIS) department, TSA, immigration and customs (ICE) and Customs and Border Protection (CBP) – and that’s just within the DHS. Right now, it may be more committed to retaining its ties to government than to protecting the rights of its customers.

Reynolds said she felt treated “like a criminal, like it was my fault” after the shooting. Officers handcuffed her in a potential breach of her freedom from arbitrary arrest. But businesses also had a responsibility to respect her human right to privacy. Sprint and Apple held to old standards. If the tech media outcry is any indication, those old standards fail modern tests of corporate ethics.

What Facebook did, in contrast, is rather noble. In a series of email correspondences, Facebook lawyer Gavin Corn bucked the gag order, writing “Facebook then intends to provide notice to the users (including the deceased user’s next of kin and legal representative(s)) and to allow the users a minimum of 10 days to submit any objections they may have to the Court over the basis for, or scope of, these warrants.” In essence, Facebook championed Reynolds and Castile, investing company resources in their privacy rights.

This isn’t unheard of — Apple fought a government search warrant on the telephone of a San Bernadino shooter. It joins Yahoo, Facebook, Google and Microsoft in updating its policies “to expand routine notification of users about government data seizures, unless specifically gagged by a judge or other legal authority.” But Facebook’s only interest in rejecting the gag order was in securing Reynolds’ and Castile’s rights. That Facebook is safeguarding human rights is not an unmitigated good. Its commitment to transparency for Reynolds could provide guidance to its human rights team about how Facebook could make its own human rights approach less opaque. Regardless, in this case Facebook’s corporate ethics merit real praise.

United’s Human Rights Problem is the Same as Nestle’s and Nike’s: Supply Chain

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The United Airlines passenger removal fiasco is a microcosm of global supply chain problems.

(Full Disclosure: Our Executive Director, and the author of this post, is married to a United pilot)

By now cell phone videos of a United Airlines passenger being dragged from an airplane have crisscrossed the globe. His great wrong was refusing to give up his purchased seat to a crew member. The event has been characterized as a signal that corporations prioritize money over humanity, that police brutality is persistent and that United doesn’t care about its customers.

It’s actually a case study in how supply chains are set up to fail human rights.

United Has a Systemic Human Rights Problem in its Supply Chain

Supply chain abuses can be more harrowing than the victimization of one person, although they rarely hit so close to home. The past year has been rife with examples. Nestle sourced its seafood from enslaved Asian fishermen. FIFA turned a blind eye to the trafficking and deaths of construction crews building World Cup stadiums in Qatar. Children were found mining cobalt for batteries in Apple, Samsung and other companies’ electronics products. Resisting corporate will is particularly deadly in South America – over 50% of attacks on human rights defenders between 2015 and 2016 were committed in just 6 Latin American countries. Standing up for human rights is deadly in the Philippines, too. In 2015 Benilda Santos was shot dead for opposing the construction of a beverage plant in her neighborhood.

Nestle, FIFA, Apple and Samsung have strong policies for protecting consumers and employees. Training regimens focus on the importance of positive workplace culture. United has the same. It even has a human rights policy.

But all these entities have contracts with subsidiaries that carry out essential functions for name brands. The suppliers benefit from contracts with big companies, and those companies get to claim ownership of the products generated by suppliers.

Whole Foods, for example, stamps pineapples with a “Whole Foods” label, but those fruits are actually grown by Dole. In the same way, United stamped that Louisville-bound flight with its logo, although it was operated by a regional carrier called Republic Airlines.

How Regional Carriers are like Sweatshops

United holds Republic to its social standards in vague terms, but it only pays Republic to fulfill contractually agreed flights. A canceled flight is a canceled paycheck for Republic. Likewise, Nike pays its Asian suppliers to make a designated number of sports items by a designated deadline, not to promote women’s empowerment and labor rights. If the supplier misses the deadline, it loses the income.

Much has been written about the shortcomings of contracts for upholding rights-respectful principles, and about the limitations of supply chain audits. Part of what went so wrong in United’s response to the incident was its failure to see that the situation never should have arisen. Republic’s crew should not be reassigned on such short notice that the plane they needed to catch was already fully boarded by the time they reached the gate. If Republic cannot turn a profit without being so short-staffed and time-pressed (which, based on its current $0.20 stock price, it can’t), then its contracts need to be worth more.

Republic’s pilots fought for a living wage and won in 2015. But American, Delta and United didn’t step up to support the costs, even as a nation-wide pilot shortage looms. Without building out the pipeline in regional carriers, the majors will run out of pilots in a matter of years. But in the meantime, Republic alone foots the bill for paying pilots fair wages while watching its revenues and share price plummet.

The Many Victims of United’s Failed Supply Chain Relationships

The clearest victim of United’s failed supply chain relationship with regional carriers (and with aviation security forces) is Dr. Dao, who was still hospitalized as of Tuesday. But there are other victims, too.

The crew reassigned to fly a plane out of Louisville the next day probably got short-changed. They probably thought they were headed home when, upon landing in O’Hare, they learned that they would actually be headed to Louisville to fly another trip the next morning. The crew working the flight likely received insufficient training in client interactions or insufficient sleep to complete the interpersonal part of their jobs. United has worked hard to improve customer service among its direct employees over the past 18 months, but that work has not extended to regional contractors. United employees now face a chilly reception as they walk through airports across the US, considered complicit in the attack on a passenger that, to their mind, wasn’t on their flight and wasn’t mistreated by their colleagues.

Republic’s contract with United is at odds with United’s human rights policy, which claims that United “is not complicit in human rights abuses.” United’s policy that personnel may not touch passengers created a scenario where a force with a weak record for de-escalation training handles passenger removal, even in cases where the passenger has committed no offenses. Chicago Aviation Security violated Dr. Dao’s Security of Person on United’s contractor’s behalf. That’s complicity.

United’s position that Chicago aviation police, not United, committed the abuse doesn’t pass muster. Exxon Mobil is fighting a 16-year lawsuit for the crimes of Indonesian military personnel committed while protecting Exxon’s assets in that country. Name brands own the actions of their subsidiaries and contractors.

How to Fix It

  1. Create more flexibility for the supplier: Republic shouldn’t be penalized for the weather, which is what happens when thunderstorms make it impossible for crew to fly their scheduled Louisville leg (necessitating emergency reassignment of some other crew).
  2. Extend training to suppliers in customer engagement, de-escalation, and problem solving to reduce the need to involve aviation security.
  3. Evaluate security relationships and polices for calling in external security forces. Chicago isn’t the only city where police training has been found to lack focus on community policing and de-escalating tensions. United and its subsidiaries fly to Mexico, the Dominican Republic, Nigeria and Turkey – all countries where security personnel have a track record of committing abuses. United might need a new policy on calling in security.

The PR campaign United will soon launch, and the management strategy review consultants will soon bill, won’t change the way subsidiaries do business unless United makes it a priority to protect its outsourced workers and its outsourced clients.