In June last year, Britain’s largest asset manager Legal & General announced that it would remove Japan Post Holdings (JPH) from its $6.7billion Future World index funds. It added that any of its funds that still held shares would be instructed to vote against the re-election of JPH’s chairman. L&G justified the move by saying that JPH had ‘shown persistent inaction’ to address climate risk.
L&G’s decision to take action did not come out of the blue. It was the result of pressure on global financial institutions generated in the last few years from American college campuses and subsequently by allies across the US and Europe. They demanded that university endowments and major banks, insurers, and pension funds prove they are serious about climate change by exiting ‘extreme carbon’ such as coal and Canadian oilsands.
These campaigns were modelled on the effective US campus divestment battles of the 1980s intended to undermine the economy of apartheid South Africa. The campaigns helped make South Africa a pariah investment until elections and black majority rule in 1994.
That is how an NGO campaign made in America and endorsed by a financial institution in Britain, can end up punishing a major institutional investor in Japan.
The ‘pariah’ strategy that helped end apartheid in the 1980s is killing coal today. In the US, JP Morgan Chase, Bank of America, Wells Fargo, Citi, Morgan Stanley and Goldman Sachs have all announced coal exits. BNP Paribas, AXA, Allianz, RBS, Munich Re, ING, Rabobank, Standard Chartered and HSBC are among the institutions that have made similar moves in Europe.
Africa becomes a target
As Africa is increasingly integrated into the global economy, it has not escaped the wrath of climate activists. Development banks have long been put under pressure to stop financing coal-related developments in Africa. Now we are seeing Western banks and global multinationals such as GE also being pressed to walk away from African fossil fuel projects. Export banks are being lobbied not to support major project finance deals, with the result that in April last year, South Africa’s Nedbank became the first global south bank to announce an end to coal financing. Meanwhile China’s banks and power companies are being lambasted for stepping in where their Western counterparts fear to tread.
The ‘global ripple’ of NGO campaigning is not confined to carbon. Western activists have learnt from the climate divestment movement that support from sympathetic financial institutions is a highly effective way to give a campaign ‘bite’. In the last two years we have been tracking campaigns targeting investments in Africa in palm oil, logging, mining, water privatisation, private education, eucalyptus plantations, biofuels, mobile phone networks – even wind farms (which most NGOs support) when built in the ‘wrong’ places. These campaigns often try to put pressure on both foreign and local investors to pull out or reconsider terms.
The growth of ESG
One reason for the greater role of financial institutions is the ‘mainstreaming’ of ethical and sustainability concerns by investment funds and banks. Once the preserve of socially responsible investment (SRI) and clearly denominated ethical funds, exclusion policies on environmental, social, and governance grounds have been adopted by most leading financial institutions.
The world’s largest asset manager BlackRock has just announced a range of exchange-traded ESG-focused funds in the US and Europe. Meanwhile in the vanguard of this movement, investment funds are behaving increasingly like activists, actively lobbying companies to raise sustainability standards and threatening to vote down managements or divest should they refuse.
It is also now commonplace for financial institutions, especially those in Europe but increasingly in the US too, to consult with NGOs before drafting or revising policies on environmental and social issues. NGO support for reforms is actively sought and NGO criticism is taken seriously, right up to board level.
Much of this change in attitude by financial institutions is in reaction to pressure from political stakeholders and customers. The 2008 crash left banks bereft of public sympathy and deserted by political friends. Beefing up ESG policies and engaging with NGOs was an obvious way to recover some of their reputation. African financial institutions need to start doing the same, if they are to avoid being caught on the wrong side of increasingly fierce arguments concerning rapid economic development, such as agriculture encroaching on wilderness and self-determination for indigenous peoples.
Sustainability, human rights, labour standards and even animal rights will become more important for financial institutions, as they develop ever more expansive ESG policies and standards under pressure from NGOs and other stakeholders. This will have major implications for the firms and industries in Africa in which these institutions invest, and make it hard for African financial institutions not to follow suit.