Past crimes and tricky questions: When has a company become ‘good’ again?

Pardon the Interruption

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How far back into the past should pension funds’ screening of companies for ethical and ESG compliance reach?
 
Last month, South Korea’s state pension fund confirmed it is reviewing more than $1bn of investments in Japanese companies that it says may have committed war crimes during Japan’s colonial rule over Korea, the FT reported. The decision follows a worsening spat between the two countries, after a Korean court ruled that Japanese companies must pay reparations to Korean victims of forced labour.
 
Apart from such pension funds being vulnerable to use as political pressure tools, the South Korean fund’s statement also raises the question of retrospection in ethically motivated investment decisions. When has a company redeemed itself? Can you ever redeem yourself as a chemical company from having supplied the Zyklon B used in Nazi gas chambers, for example, or as a bank from having lent money to the apartheid regime? If so, how? 
 
Activists are currently focused on present issues such as divestment from fossil fuels, but should one of the darker chapters of history become more prominent in the media for one reason or another, they could well start to turn their attention to companies with a less than glorious past.  
 
Unless companies face up to those eras and accept the role that they themselves played in enabling oppression or death – and this might involve reparatory payments – it will be difficult for ethical investors to hold their shares or lend money to them without closing both eyes. 
 
Good governance and social factors are both part of ESG; the reasons are partly – some might say exclusively – financial. Opioid producer Purdue Pharma has just offered between $10bn and $12bn to settle thousands of cases against it amid the US opioid crisis. Purdue is family-owned, but listed companies are not immune to class action – Volkswagen, BP, Visa/MasterCard and many more had to pay multi-billion dollar reparations. The $206bn Master Tobacco Settlement Agreement tops them all. Firms that don’t have US operations might be less at risk of being pursued for such sums, but they are also less likely to be among the larger ones most commonly found in pension fund portfolios. 
 
But perhaps pension funds, despite the growing focus on ESG, are being selective with their ethical lens anyway, particularly when it comes to regimes which boast impressive economic growth at a time when negative interest rates in the West are pushing investors ever further afield in search for return. 
 
Should pension funds hold stocks in companies that might be involved in monitoring dissidents in one-party states? What about US tech giants that rely on cobalt mining in war-torn African countries where child labour is commonplace? These are tricky questions for investors as well as consumers, and many might prefer to avoid digging too deep. 
 
It is perhaps impossible for pension funds to ever construct a ‘pure’ portfolio, but the focus on ESG matters is clearly increasing. The South Korean example shows that future generations will look back and judge companies for their actions – and possibly the courts might, too. 
 

Is there a place for retrospective judgment in ESG investment? 


Nick Spencer

Karen Shackleton

Gerald Wellesley

Richard Folland