Recent high profile cases of companies damaging the environment and abusing human rights call into question whether investors really are becoming more active on these issues, suggests Sigrid Rausing
The new UK Stewardship and Corporate Governance Code set out by the Financial Reporting Council on July 2, is a step in the right direction for human rights.
The code requires institutional investors to monitor the companies in which they invest, make public their policy on stewardship and, if they fail to do so, explain why.
However, it remains to be seen how much take-up there will be of this discretionary code, and the extent to which this will encompass social and environmental issues.
In this context, it is significant that a UK ethical investment research body, EIRIS, launched a report last week on a FTSE100 mining company, Vedanta Resources, at a seminar attended by some of the UK’s leading fund managers.
The company has come under international scrutiny for its plans to mine bauxite in the Indian state of Orissa. Responsible investors have been engaging with the company, and some of these have divested because of concerns about the lack of progress in addressing human rights issues.
Other investors have taken the decision to vote against Vedanta’s report and accounts and to oppose the reappointment of certain directors at the company's AGM this week.
New ground?
This is already new territory for shareholders who are usually cautious about sending such strong public signals of disapproval to companies that they invest in, particularly on an ethical issue that, at least in the short run, is unlikely to affect the share price.
Investors sometimes argue that they are ethically neutral, that it simply isn’t their job to police the actions of companies and that they are ill-equipped to do so even if they should. Is the case of Vedanta the exception that proves the rule?
Or are the sands beginning to shift in a way that might have considerable ramifications for the investment community as a whole, especially when it comes to dealing with companies that fail to respond to public pressure?
The trajectory of this particular case may be illustrative of what is to come. Opposition to the company’s proposed mining activities from those affected on the ground – the Dongria Kondh people - has existed for over a decade, but until three years ago with little impact on investors.
Norwegian moves
The Norwegian Government’s pension fund was one of the first to disinvest on ethical grounds in 2007. This coincided with a campaign of opposition mounted by several NGOs including Action Aid and Survival International.
In September 2009, the UK Government upheld a complaint lodged against Vedanta under a little-known mechanism established to give effect to the OECD Guidelines for Multinational Enterprises. Early in 2010 the Church of England and the Joseph Rowntree Trust divested their shareholding, generating considerable publicity in the process.
At the same time Amnesty International published a report stating that Vedanta’s plans to mine bauxite in Orissa’s Niyamgiri Hills, considered sacred by the indigenous Dongria Kondh people, will threaten rights to water, food, health and livelihood.
Divestment has spread
This combination of events led to concerted pressure on other investors to illustrate that their engagement strategy with Vedanta was effective in changing the company’s approach to addressing environmental and human rights impacts.
Dutch pension manager PGGM divested their £11m stake in the company earlier this month, stating that its "intensive effort" to urge the company to devote greater attention to the environment and human rights had failed to have the desired effect.
The Indian authorities are, of course, responsible for protecting the rights of people in India and its national law contains particular protections for tribal people. Yet until recently there has been little evidence of political will to provide such protection.
The State of Orissa is a partner in the Vedanta mining and refinery projects, and has granted the permits they have needed. India’s Supreme Court has also given the go-ahead to the mine, subject to certain conditions.
India awakens to mining risk
Now, however, the Indian government has announced an investigation into alleged breaches of regulations, and the likely impacts of mining activity on the Dongria Kondh people.
This unexpected delay in granting Vedanta their mining licence has forced the company to transport bauxite from other mines, leading to a loss of $90 per ton of Alumina produced by its Orissa refinery. At this point social and environmental considerations appear to be converging with shareholder concerns and business imperatives.
This may account for the willingness of more investors to signal their disapproval of the company’s handling of human rights and environmental issues by voting against the Board’s resolutions.
There remains a long way to go before ethical guidance become routine documents for investment managers, and before the Financial Reporting Council’s Stewardship Code begins to have traction.
Most investors, if they saw and felt the reality of ‘ethical issues’, would probably want to withdraw. The social and geographical distance to Orissa means that information only gradually seeps out.
A mandatory Stewardship Code, including environmental and human rights assessments, would be a step in the right direction, and give investors welcome guidance on ethical matters.
Sigrid Rausing is a publisher and philanthropist. She founded of the Sigrid Rausing Trust in 1995 to support Human Rights internationally. She serves on the international board of Human Rights Watch and the advisory board of the Coalition for the International Criminal Court. http://www.sigrid-rausing-trust.org