Financiers beware / Advocates take note

In 2023, I worked with Inclusive Development International (IDI) to engage some of the world’s largest financial services providers including asset managers, index providers, and rating firms about their ESG-labeled products which are linked to companies supporting, arming, and legitimizing the Myanmar military. The Myanmar military is responsible for serious human rights abuses, including genocide and a violent suppression of the pro-democracy movement in the country. This is despite calls upon businesses and investors to cut ties with the military from the United Nations (UN) and human rights organizations.

Engagement was initiated with three index providers and rating firms for stocks and bonds investing and five asset managers which followed the publication’s of IDI’s March 2022 expose How “responsible investment” is enabling a military dictatorship and associated database documenting the significant exposure of ESG-labeled funds to companies facilitating human rights abuses while doing business with Myanmar’s military junta. IDI’s incredible research found that at the time ESG-labeled funds held at least $13.4 billion worth of shares in 33 companies with links to the Myanmar military ranging from weapons suppliers to direct financiers via rental payments.

Major ESG index providers and research and rating firms play a key role in greenlighting ESG investment into these companies, including those that make it into the “ESG” funds and products offered by major asset managers.

An issue is that these financial services providers are not appropriately responding to documented human rights abuses and reflecting that information into products marketed as “ESG” nor fulfilling their responsibilities to respect human rights under the UN Guiding Principles on Business and Human Rights (UNGPs) and the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises.

All companies have a responsibility to conduct due diligence and exercise leverage, whenever they have it, to prevent or address human rights violations under the UNGPs and under both international standards they must exercise this leverage to prevent or address the human rights impacts they are linked to through their business relationships. Asset managers have immense leverage given their significant power to control the flow of global capital.

The organization has since filed a human rights complaint against the index providers through the OECD’s grievance mechanism—the first of its kind—to the United States, United Kingdom, and Dutch National Contact Point offices.

This is a strong warning to financial institutions and service providers that regardless of the ‘vigor’ of their ESG methodologies and research they are not immune from their responsibility to respect human rights. In fact, as a start in the European Union for example, a proposed rule would require index providers to be more transparent about how indices are constructed.

This is an evolving trend that deserves attention from financial institutions and services providers and strategy worthy of further exploration from civil society looking to address similar, but other egregious abuses.