Week 4: Why human rights are a nightmare in the ESG world

In this issue: ▸ Where’s the Human Rights Score? ▸ Our energy comes from autocratic regimes ▸ We love Russian gas, but for human rights we stand! ▸ A recurring nightmare

Dear all,

Light. Sticky, bright, proud. Light as a symbol. The source of life, source of hope. Produced, described, painted on canvases of 16th and 17th century painters with such authenticity, breathtaking. At the end of each tunnel there is light, at least that’s what many people say.

The geopolitics of light is not a well-known ESG theme, neither as a symbolic nor as a reality-based feature. But that will change soon. We need light, much more light, but to understand that we need to feel what the sunset really means. 

Where’s the Human Rights Score?

Last week’s continuous media bombardments on the Russia and US muscle contest about which one of them really rules over the sovereign country of Ukraine has not by any means echoed in the ESG world.

As we know, in the ESG world human rights are paramount “for every investment decision”. They are deeply and thoroughly “integrated” and regularly “evaluated” to provide “insight” to any ESG manager or capital owner worth mentioning.

All of this is then packaged and reported back to clients. The messaging in these “reports” is important. It is a “process”. And “by engaging we change and influence”. And we have “excluded” a couple of companies and sovereign bonds from our investments. (North Korea and Sudan are the most common).

In principle, “we do what we can”. Rome wasn’t built in a day. Yeah, but Rome was not built on false promises either. Myriads of UN abbreviations are used as reference points to underline the importance, relevance and seriousness of human rights. Well.

The question is what does it really mean, if anything at all. There are still a few managers out there, mostly in the US, that do not use UN abbreviations and reference the Human Rights etc, and the more I think about it the more I can see why.

Better to call spade a spade. Investments are all about profits, full stop. 

If we look at the EU ESG landscape there is no such thing as a Human Rights Score for the funds. Human rights are usually bundled together with S factors, but the industry is willingly or unwillingly misinterpreting this.

Put simply, respect for human rights is not just an ESG factor, but a global standard of expected conduct for all companies, including institutional investors. Human rights are not a subset of discrete social topics to be addressed, but a globally agreed upon standard of achievement for all people, covering a wide range of interdependent civil, political, economic, social, cultural, and environmental rights.

Let’s look at why the beacon of light in the financial industry (ESG) has nightmares about human rights…

Our energy comes from autocratic regimes

The 27 member states of the European Union currently rely on Russia for almost 38% of their imported natural gas. This dependency will become significantly greater if the European states implement their currently formulated energy policies.

With plans to lower greenhouse gas emissions, and the depletion of domestic sources of gas, reliance on Russia will rise to 50 to 60% of all gas imports within the next two decades if different energy policies are not adopted. The EU and greater Europe will soon find themselves in an extremely dangerous position due to the ever-increasing dependence on Russian natural gas.

The stability of the EU’s energy supply may be threatened if a high proportion of imports are concentrated among relatively few external partners. In 2019, almost two thirds of the extra-EU’s crude oil imports came from Russia (27 %), Iraq (9 %), Nigeria and Saudi Arabia (both 8 %) and Kazakhstan and Norway (both 7 %).

A similar analysis shows that almost three quarters of the EU’s imports of natural gas came from Russia (41 %), Norway (16 %), Algeria (8 %) and Qatar (5 %), while over three quarters of solid fuel (mostly coal) imports originated from Russia (47 %), the United States (18 %) and Australia (14 %).

Now, let’s mention some of the ‘democracy’ champions on the list: Russia, Iraq, Nigeria, Saudi Arabia, Kazakhstan. About 47% of Europe’s total energy supply and indirectly its industry is powered by energy sources from these countries.

We are deeply and truly dependent, intertwined, connected, with countries that by all western liberal democratic standards are, mildly expressed, “complex” countries from a human rights perspective.

Less mildly, we depend on autocratic regimes who oppress and often violate human rights.

We love Russian gas, but for human rights we stand!

As an investor or capital owner you can “engage” and “exclude”, or you can consider all of this from the start and do something that very few do. That is, to do it the right way from the start when you construct your investment strategy – which is then later translated into a product.

But this is not easy to do. Benchmarks, sovereign bonds, stocks, listed, unlisted, tracking errors, sector deviations, absolute-relative games. All of it makes it hard.

“One of the largest asset managers in the world engages government of Country X over human rights violations”

Have you ever seen a headline like that in the newspapers? Never. But the asset manager is nevertheless investing in sovereign bonds of that very country. 

Here’s a telling example: The German automotive industry is heavily powered by Russian gas. Most of the German companies are regarded as good ESG investments. We buy their products and we will continue to buy their products.

Gerhard Schroeder, the former prime minister of Germany, sits at the board of Gazprom. Convenient by all means.

So far so good. The fact is that many business models in Germany are powered by energy from a country that the EU has sanctioned due to a number of human rights related issues is. What? Not a problem at all. How? Magic, true magic!

And yes, the EU has imposed a number of sanctions against Russia. This is the latest one. And here’s part of what the sanctions document says: 

The sanctions in place, first introduced on 31 July 2014 in response to Russia’s actions destabilising the situation in Ukraine, limit access to EU primary and secondary capital markets for certain Russian banks and companies and prohibit forms of financial assistance and brokering towards Russian financial institutions. The sanctions also prohibit the direct or indirect import, export or transfer of all defence-related material and establish a ban for dual-use goods for military use or military-end users in Russia. The sanctions further curtail Russian access to certain sensitive technologies that can be used in the Russian energy sector, for instance, in oil production and exploration.

Now, pay attention to the last part of the last sentence. It says “oil production”. It doesn’t say “gas”.  But, conventional gas is accessible because it is trapped under a permeable layer of rock. In most cases, it occurs together with oil reservoir deposits and sometimes it floats on top of the oil, forming a layer on it. If you extract oil, you most likely extract gas too…

So, in principle, the EU is saying: “We are not supposed to help Russian oil companies (oil and gas companies, really), but we can import gas produced by the very same companies we sanction in the first place.”

In a simple language, all of it is B.S. 

A recurring nightmare

So we love Russian gas, but we equally love to support Russian dissidents and Putin critics! No, we love gas more. And we know it.

But it looks so noble when we support dissidents, we stand for something, united.

Our picture in the mirror gets that shine, that light. For human (gas) rights we stand.  

Here’s an excerpt from EU’s latest statement on Alexei Navalny:

The European Union has been outspoken in considering the prosecution of and the verdict against Mr Navalny as politically motivated. We reiterate our call on the Russian authorities for his immediate and unconditional release without further delay and to comply with the interim measure granted by the European Court of Human Rights with regard to the nature and extent of risk to Mr Navalny’s life. We deplore that the Russian legal system continues to be instrumentalised against Mr Navalny, as he now faces new criminal charges. The EU continues to condemn in the strongest possible terms the attempt to assassinate Mr Navalny through poisoning using a military chemical nerve agent of the “Novichok” group. We call on the Russian Federation to investigate it in full transparency and without further delay, and to fully cooperate with the Organisation for the Prohibition of Chemical Weapons (OPCW). The European Union also condemns the consistent disinformation campaign against Mr Navalny and his associates in Russian state media. We deplore the persecution of members of Mr Navalny’s network, including the arrest of Liliya Chanysheva, the former head of Alexei Navalny's office in the city of Ufa. We call on Russian authorities for her immediate and unconditional release.

Put simply, the ESG industry doesn’t have a problem with Russia or any other country for that matter. 

Referring to human rights in corporate reports, ESG funds, presentations and webpages as something that is respected and truly integrated needs to be viewed with a huge portion of scrutiny. Why? Because intentionally or unintentionally the ESG industry violates them every day, and for the ESG industry this is and will be a recurring nightmare.  

Russia has recently intervened in Kazakhstan’s internal affairs. Kazakhstan is the largest producer of uranium grade which we need for “sustainable” nuclear energy in the world.

We are dependent on gas, and we are dependent on uranium.

So what do human rights have to with all of this?  

No, Rome wasn’t built in a day. And no, it wasn’t built on empty promises either.

Kind regards,
Sasja