Divesting from Genocide: A Fiduciary Duty?

The TakeAway: Congressional hearing on ways to improve the Sudan Accountability & Investment Act proposes using the UN “Protect, Respect, Remedy” human rights framework to define fiduciary duty.

The moral case for flexing investment muscle (from shareowner engagement to outright divestment) against companies complicit in crimes against humanity, such as the genocide in Sudan, should be clear enough.  To bolster this, the fiduciary case – that corporate complicity in genocide represents a material risk that investment trustees must address – is gaining steam as well.  So said four expert witnesses at yesterday’s hearing on “Investments Tied to Genocide: Sudan Divestment and Beyond” before the House Subcommittee on International Monetary Policy and Trade.  The goal of the hearing: review progress and recommend improvements to the 2007 Sudan Accountability and Investment Act (SADA), which authorizes state and local governments to divest assets and prohibit contracts with firms doing business with Sudan, a country the US State Department has listed as a State Sponsor of Terrorism since 1983.One witness called for application of the draft Guiding Principles for the UN’s “Protect, Respect, Remedy” Framework, recently proposed by John Ruggie, United Nations Special Representative to the Secretary-General (SRSG), to a federally-sanctioned fiduciary framework.

To set the context, Government Accountability Office Director of International Affairs & Trade Thomas Melito cited statistics from the GAO’s June 2010 report on Sudan Divestment: since SADA’s passage, fund managers from 23 states have divested or frozen about $3.5 billion in assets primarily related to Sudan. “The value of US holdings in six key foreign companies with Sudan-related business operations fell from $14.4 billion at the end of March 2007 to $5.9 billion at the end of December 2009, a decline of nearly 60 percent,” Melito testified.  He then elaborated on three factors driving investor decisions: fiduciary responsibility; the difficulty identifying operating companies with ties to Sudan; and the possible effects of divestment on operating companies and the Sudanese people—which sometimes leads to engagement as a viable alternative.

Eric Cohen, Chairperson of Investors Against Genocide (IAG) identified two problems with SADA’s implementation.  First, despite sanctions against US firms, American financial institutions continue to invest in foreign oil companies that “help the repressive government of Sudan fund its campaign of genocide and crimes against humanity in Darfur.”  Well-known firms such as Fidelity, Franklin Templeton, and JP Morgan have invested in PetroChina, a major target of activists due to its holdings in Sudan, Cohen said.  Second, while most Americans “are opposed to having their hard-earned savings tied to genocide … millions are investing, unknowingly, inadvertently, and against their will in companies funding genocide.”  To remedy this, Cohen proposed several legislative actions:

• Establish a standard framework for “genocide-free investing”, and require funds to use simple language in communicating whether or not they use it;

• Establish transparency and disclosure rules regarding investment policies relative to human rights abuses; and

• Generalize SADA provisions regarding fiduciary responsibility to other investments in companies tied to genocide and crimes against humanity.

Adam Kanzer of Domini Social Investments asserted that securities regulation is “not generally placed in the context of the State’s duty to protect against human rights abuses, but it can be an effective tool for mitigating these abuses.”  Indeed, both the SEC’s materiality standard and the GAO recommendations focus “on a tactic, not a long-term strategic goal [of] an end to genocide in Darfur [and] stabilization of the region”.  Merely disclosing ties to Sudan is a first step in a longer process of meeting obligations outlined in the Ruggie Framework, which is specifically framed in the context of the State’s duty to Protect—and so serves as the best guide for Congress to improve SADA and, beyond Darfur, address “corporate human rights performance more generally,” Kanzer said.  He made several other recommendations, including:

• A Congressional directive that the SEC adopt a mandatory disclosure framework including “key aspects of issuers’ human rights policies, procedures and performance”, with a “particular focus on genocide and other crimes against humanity”;

• Closing the SADA loophole that permits US government contract relationships with affiliates or subsidiaries of companies otherwise subject to sanctions; and

• Alignment of fiduciary duty with the Ruggie Framework—backed by a Department of Labor interpretive guidance for ERISA (corporate and union pension) funds.

This focus on systemic (instead of symptomatic) solutions fits into the larger context of sustainable investing serving as a proactive force for progressive change – with the goal of preventing human rights abuses before they occur, in addition to redressing them after they’ve caused damage.