“Blood bonds” – the headlines were clear and crisp in late spring 2012 when Berlingske – one of Denmark’s largest newspapers – described how pension funds invested in sovereign bonds issued by conflict-affected states like Angola, Democratic Republic of Congo and Ivory Coast. NGOs, politicians and some academics (and consultants of course) grabbed the opportunity to give their take on right and wrong and claimed that although the total exposure was small, investors have neglected their corporate responsibility by financing ruthless dictators and oppressive regimes.
Danske Capital, as other of our colleagues in the asset management business, relied on sanctions imposed by the UN and the EU as ‘the’ exclusion list of countries; just as we have an exclusion list of companies that by different reasons violate international norms.
The sanctions that are currently imposed on four countries: Iran, Syria, Ivory Coast and North Korea[1] are not only a voluntary guideline to investors, they are actually hard law.
The media coverage and following response clarified that to embrace our clients’ concern regarding other conflict-affected countries, the sanctions list proved too limited for us. But the discussion is complex and it differs from the responsibility discussions on companies.
Something different
If the product or operations of a company conflicts with international principles for corporate responsibility we can exclude it, easily. It is a common approach in the Nordic, side by side with engagement efforts to make a difference.
When we discussed countries and exclusion of the poorest countries, which might need the investments the most – even though they are subject to controversial regimes – as the cure of concern, the sentiment was markedly different and hesitant. The potential harmful effects on staying away from poor or fragile countries seemed to moderate the demand for exclusion.
But there was a call on us to address the concern beyond the sanctions list and beyond the risk in relation to returns. The debate and the concerns from clients was a question about risk in relation to being complicit in human rights violations committed by states.
As our clients, we want to respect human rights and want to avoid being complicit in human rights violations – and live up to the spirit of UN Global Compact and UN Guiding Principles.
Still a matter of principles – and due diligence
Even though human rights evaluation of sovereign bonds has not yet been considered from the perspective of the UN Guiding Principles, there are other indicators that encourage us to implement a due diligence framework to embrace the topic.
The UNCTAD’s ‘Principles on Promoting Responsible Sovereign Lending and Borrowing’ state the following: “All lenders … should conduct due diligence or obtain assurances from the Borrower State to ensure that the loan funds will not be wasted through official corruption, economic mismanagement or other unproductive uses in the Borrower State. If any such eventuality is reasonably foreseeable under the circumstances, lenders should not provide the loan or continue with the disbursement of the loan.” . “Lenders should not finance activities or projects that violate, or would foreseeably violate, human rights in the Borrower States.”
How it specifically applies to (the primary and secondary market of) sovereign bonds is not clear – but the intention seems clear enough.
Our approach
Our ambition is to meet the fair expectations of clients and our stakeholders that we can explain our investment decisions in a way that allows respect for returns and for human rights in this complex area.
We found the World Governance Indicators a helpful place to base our due diligence framework. The WGI do not reflect the official views of the World Bank or the UN, but they provide a rating methodology in relation to e.g. political stability and rule of law.
For us it is reasonable methodology on which we can add research and supplementary views by organizations like the EU, OECD and the UN. So far we have decided to exclude 10 countries from the investment universe. They rate as the poorest in the WGI rating and we haven’t found other official statements or indicators that justify decision to investments – yet.
We do not claim this process to be neither superior nor authoritative. But we see it is a step forward in our work with Responsible Investments, and we see it as a constructive framework on which, we can deal with our clients’ concerns and gradually improve on the topic.
Thomas H. Kjaergaard, Head of RI and Corporate Governance in the Danske Bank Group and former Chairman of DANSIF.
(source: Ministry of Foreign Affairs of Denmark, www.um.dk)
