In Depth - Investment Philosophy - Globalization, Human Rights & Social Justice Policy

Portfolio 21 Companies with Globalization Concerns

Summary

At Portfolio 21 we want to be clear about what we can and can not accomplish as a mutual fund investing in publicly traded companies. We can not 'make' companies be more environmentally sustainable—but we can invest shareholder money in companies that are well positioned to compete in a world of increasing ecological constraints. Similarly, Portfolio 21 can not solve the world's social problems, despite the depth of concerns we share with our shareholders. The global challenges of our time require the concerted and creative attention of a broad coalition of individuals, governments, and business organizations. We recognize our limitations to influence social change through our investments, yet we also recognize an opportunity to improve the understanding of these issues amongst our shareholders and other interested parties, and to deepen our awareness of how they specifically relate to investment in publicly traded companies.

Globalization, Human Rights and Social Justice Policy

Globalization, Human Rights and Social Justice represent extremely complex societal challenges for investors. We live in a world of growing local and global inequities; a world where human conflict, war and mistreatment continues, and in many places has intensified; a world where government, economic and social institutions perpetuate the disparity in wealth and opportunities.

Following is Portfolio 21's perspective on the issues of globalization, human rights and social justice, and a discussion of how these issues relate to Portfolio 21's investment philosophy. We close with a description of our investment strategy for addressing the risks related to these social challenges.

What do we mean by Globalization, Human Rights, and Social Justice?

Globalization: Global economic integration. Specifically, a constellation of processes by which nations, businesses, and people are becoming more connected and interdependent through increased economic integration (via goods and capital flows), communication exchange, cultural diffusion (especially of Western culture), and travel. By emphasizing processes we draw attention to the means by which this interdependence and connectivity is occurring.¹

This definition of globalization warrants further explanation as it sounds fairly benign and does not recognize the rampant problems generated as a result of globalization. Globalization has concentrated power in the hands of economic elites and political conservatives to create a 'new world order' based more on private corporate control than public democracy. Rich countries have overwhelmed poor ones in defining the macroeconomic policies that must be followed, which usually benefit the former at the expense of the latter.² For example, the structural adjustment programs and regional trade agreements set in motion by the Bretton Woods Institutions (i.e., the International Monetary Fund, the World Bank, the International American Development Bank), have repeatedly borne out significant detrimental effects on developing nations.³

Human Rights: The United Nations Universal Declaration of Human Rights states: "All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood."⁴

Social Justice: The concept where individuals and groups receive fair treatment and a just share of the benefits of society. This includes the distribution of wealth and income, and more important, equal basic rights, security, obligations, and opportunities. Social justice addresses oppression and the intergenerational transmission of poverty.

The World We Live In

Today's world is also one where information technology, specifically the internet, enables improved communication on a global scale, in a way that avoids the censoring that dominates mainstream media due to the concentrated control of these media. As a result, while many injustices and atrocities are still perceived as distant and intangible problems, there is growing awareness and attention to the issues, including some mainstream media coverage. On the other hand, not everyone has access to information and tools that could prove helpful in addressing these problems. This digital divide also serves to widen the inequities that exist globally.

Another aspect of our current plight is the growing environmental challenges the world is facing, including increased environmental destruction and degradation and reduced resource availability. These factors have significant impacts on human rights and social justice issues. They affect the amount and quality of resources available, and create a growing number of environmental refugees who are displaced from their land because of environmental destruction.

The social challenges facing the world today are immense and there is a clear need for increased global action to address them. Corporate media brings attention to the 'issue of the day' (i.e., the crisis in Sudan), and the issue of today is all too often forgotten by tomorrow. Although it is important to increase awareness of a particular issue, this approach causes a myopic distraction and fails to acknowledge the broader and systematic relationship between various problems that need to be addressed. For example, media attention might highlight the challenges of sweatshop labor in the apparel industry, but it neglects to paint the larger picture of labor rights challenges across all industries. Each isolated social crisis or challenge is part of a larger problem that needs collective attention. By focusing on specific incidents we fail to put time and energy into creative solutions for the ubiquitous problems of the world.

How do the issues of Globalization, Human Rights, and Social Justice affect investment in capital markets?

The framework of current capital markets, particularly the stock market and publicly traded companies, is premised on the assumption that economic growth (as currently measured) is the primary goal of business and governments alike. In fact, capital markets carry an unsustainable mandate for growth that compromises the environment, labor, and community. As the global activities of the human population have already overshot the world's ecological carrying capacity (we currently operate by depleting natural capital stocks), and have exacerbated social inequities, the stock market itself is inherently unsustainable—environmentally, socially and economically. We would go so far as to say that our current system of economic growth, which is based on globalization (providing access to new markets and lower costs, resulting in growth and profits), benefits, directly or indirectly, from human rights violations and social injustices.

Recognizing these challenges, we are working to develop new financial services that do not carry a mandate for unsustainable growth. Instead they require companies to consider additional factors, including: the social, legal, and economic effects of their operations and products on their employees, customers and suppliers, and on the communities and geographic areas in which the companies operate; the long-term as well as short-term interests of the companies and their shareholders; and the companies' effects on the environment. In other words, we seek to redefine the purpose of the corporation. This is no small task and it will take time and patience.

In the interim, however, we recognize that it is necessary for many of us to invest in capital markets as they currently exist. There are things we can do to incrementally improve a flawed system in the process. We have the ability, primarily through screening and shareholder activism, to invest within the existing framework to gain the most financial benefit with the least harm. This is the approach of Portfolio 21. In the case of environmental sustainabilty issues, we are investing in corporations that, despite subscribing to the prevailing growth paradigm, recognize the impending ecological crisis, and are making changes to their products, services, operations and, business models to reduce their environmental footprint, and to increase their ability to successfully navigate through the increasingly restricted resource funnel.⁵ Action to address these ecological risks provides the basis of our primary screening criteria, and we believe there is financial benefit that can be captured from pursuing such a strategy.

In the case of social issues, the questions are more complex, and the argument for financial benefit is difficult when the action goes beyond the company's employees and immediate community. We have to address the question of what is reasonable to expect of corporations given the framework and market conditions in which they operate? How do we, as investors, capture the greatest financial benefits with the least harm, specifically in relation to social issues?

But there is a larger question here: Is it even possible to address social equity and human rights issues when investing in capital markets that are driven by globalization, which depends on profits generated via substandard work conditions in developed nation factories, or increasing outsourcing to less developed nations, resulting in ever falling cost structures based on lower wages and poorer working conditions? The answer is no. Investing in publicly traded companies is de facto participation in the system that perpetuates social injustices. It is possible to avoid particular companies or industries that cause the most harm, but the reality is the problems are endemic, they infiltrate every company—whether an apparel, electronics, or capital goods company—operating in, or outsourcing to, developing nations. Essentially every publicly traded company is engaged in this activity, regardless of how high their standards are in developed nations (or not, as the case may be). It extends to the consumer market too-every inexpensive good we purchase that is partially or fully made in a less developed nation, or in a substandard facility in the developed world, is inexpensive at the expense of humans and the environment.

So where does that leave us?

To begin with, we believe it is important to look at the broad range of social issues-from labor rights, to human rights, to access to clean water, and a myriad of issues in between and beyond. We would argue that much of the social problems in the world today are driven by, or at the very least exacerbated by, the inequitable distribution of natural resources caused primarily by publicly traded companies, governmental institutional discrimination, and global organizations such as the International Monetary Fund. Since the beginning of colonization (and long before), social inequities have been established to enable the ruling class, or the powerful, access to natural resources-from spices and silk in past centuries to oil today.

If we recognize that social problems and human rights abuses are, more often than not, tied to inequitable distribution of natural resources, the importance of environmental sustainability, as a prerequisite for social sustainability, becomes clear.

Understanding this inequity forces us to look in the mirror and acknowledge our role as U.S. residents in the inequitable distribution of natural resources. We believe that in many ways the United States is the biggest global human rights abuser through its appropriation of the largest amount of natural resources relative to its population base. Additionally, through U.S. global influence, and demand for low cost goods produced in developing nations, the U.S. is responsible for perpetuating the economic structures that result in social inequities and labor rights abuses. It is imperative that we recognize that the United States' appropriation of resources and demand for cheap goods drives actions that result in injustices worldwide.

Looking outside the U.S., let's consider two serious problems faced in the world today:

1) Every 5 seconds a child dies of starvation.⁶ Every 15 seconds a child dies due to lack of access to clean drinking water.⁷ 2) Human rights atrocities executed by government regimes.

In the first case, one of the root issues is the limited availability of clean water. This may be related to limited water supplies (perhaps due to unsustainable consumption by other parties), due to industrial contamination of water, or due to civilian contamination of water resulting from insufficient sanitation infrastructure. In reality, the root causes are due to a combination of these reasons as well as others, but it is clear that the resource scarcity and the resource quality is at issue—again highlighting the need for ecological sustainability in order to achieve social sustainability.

In the second case, we can consider Sudan and the Darfur conflict. It is widely understood that the inaction of the global community is based in great part on the power Sudan has as an oil producing country. For example, China is unlikely to compel Sudan to admit the United Nations peace-keeping forces as 7% of China's oil comes from Sudan. Again, the apparent inability of the global community to address genocide is based on the distribution of resources, which in this case, give Sudan considerable power (not to mention money to fund the genocide).

Clearly both of these issues are serious and need to be addressed by the global community. While Portfolio 21 obviously cannot affect the geographic distribution of natural resources, through an environmental investment strategy, we can work to reduce the pressures on natural resources. In regards to the question of how to address the inequitable distribution of resources, and the social woes this creates and exacerbates, we believe that the role of individuals and governments must be greatly increased. Governments need to recognize ecological constraints and equity issues, and create and enforce policies and standards to address these challenges. In the U.S. in particular, our government needs to reform campaign financing and dismantle the oligarchic control of multinational corporations. Citizens have a responsibility to push governments to take these actions, as well as a responsibility to examine their own footprint. That is, individuals must consider the social and environmental impact of their consumption and consider reducing that demand and decreasing that footprint.

Further, there needs to be greater acknowledgement of the limitations of the capital markets due to the extremely large footprint of corporations worldwide, the dominance of the concept (and legality) of shareholder primacy, and the short-term decision-making that is driven by the system. Thus capital markets, as they are currently structured, are inadequately positioned to truly create change. This means we must also acknowledge the limited impact shareholders can have in instigating change on these broader issues.

What should we do as individuals?

Despite the limitations outlined above, we also recognize the need for specific actionable suggestions, and believe there needs to be a several pronged strategy to address broader social issues:

Personal Footprint Evaluation: We each need to examine our own consumption patterns. Do we need all that we consume? Does working harder, making more money, and buying more 'stuff' enrich our lives? Could we easily forego some consumption and increase quality time with our families, friends and communities? Can we shift our consumption to lower footprint products such as local food, locally manufactured goods, or products and services designed with environmental or social consideration?
Personal Activism: We need to individually, and collectively, call on our representatives to address campaign finance reform, to eliminate the political power of corporations, and to address global social inequities. We can also use our power as consumers to demand that social and environmental issues play a greater role in business decision-making. Finally, we each have a responsibility to engage others in conversation about these broad challenges, expanding views beyond the myopic discussions around individual incidents, and motivating further personal activism in these areas.
Charitable Giving: We encourage investors and concerned individuals to make a direct contribution (in time or money) to problem-solving on the ground in regions in need. For example, our Chairman, Carsten Henningsen, moved by the tragic 2004 tsunami, founded a non-profit called Community Friends. This is a Portland, Oregon-based, grassroots, non-profit relief organization dedicated to developing microfinance programs to provide access to capital to relieve suffering in regions of the world where there are human rights abuses and inequitable distribution of resources. You too can find (or found) an organization that delivers results and make a contribution to improving social equity.

What Portfolio 21 can do:

As explained above, Portfolio 21's driver for stock selection (our positive screens) is focused on an evaluation of how well companies have addressed environmental sustainability and how well they are prepared to deal with the increasing impacts of ecological constraints. However, we also apply negative screens. That is, we exclude companies if they have a poor performance record in one or more of our areas of concern. Our human and labor rights investment policy is stated below.

Investment strategy: Portfolio 21 acknowledges that as a mutual fund, we are greatly limited in our ability to influence publicly traded companies on issues of global social and human rights, despite their significance, due to the structure of existing equity markets. However, we do believe it is necessary to set certain boundaries regarding egregious social and human rights activities. As a result, Portfolio 21 commits to the following principles as best we can evaluate given available information. We utilize the work of well established and respected non-governmental organizations (such as Amnesty International) to keep us informed about issues and developments in these areas, and are grateful for the excellent work being done in this area.

Portfolio 21 commits to the following:

No investments in companies that have significant business in countries that are state sponsors of terrorism. That is, countries that have repeatedly provided support for acts of international terrorism. We also reject investments in countries where significant and systematic human rights violations are occurring. Sudan is one example of a country that would fall in this category.
No investments in companies where significant human rights violations or significant labor rights violations occur in company-owned facilities. Where a company contracts with manufacturers in regions of the world that may have current or past human and/or labor rights violations, Portfolio 21 will look for companies that are demonstrating leadership and have made progress in these areas. We recognize that it is likely that significant work will remain, and look for companies that appear committed to further progress.
When looking at investments in regions of the world that may have current or past human and/or labor rights violations, Portfolio 21 will consider how widespread and systematic these violations are. We also take into account the nature of the investment under consideration. That is, what types of products and services does the company provide and what social and environmental benefits result from the company's activities. For example, a provider of mass transportation, or a manufacturer of solar cells, both provide inherent environmental advantages, and offer solutions to social challenges of transportation and remote energy provision respectively. In these cases, where the actions of the government may or may not be notorious, we believe the benefits of developing effective infrastructure and product supply to address social issues in an environmentally sustainable manner, are invaluable. As previously stated, we believe it is only with environmental sustainability that social sustainability can be achieved.

As a result of implementing the above outlined investment strategy in Portfolio 21, we may, at times, invest in companies that have a low level of involvement in activities or countries with which we don't agree. In these cases we believe the greatest way to effect change is not through divestment, but rather through engagement with the companies in question. To see a list of activism activities Portfolio 21 has been involved in, please visit the Company Engagement section of our website, or specifically, our Recent Company Dialogue.

1. Labonte, Ronald, Ted Schrecker, David Sanders, and Wilma Meeus. Fatal Indifference: The G8, Africa, and Global Health. Lansdowne, South Africa: UCT Press/International Development Research Centre, 2004.

2. Ibid

3. Diaz-Laplante, Jeannette and Sabrina Zirkel. Unpublished data.

4. United Nations General Assembly. "Universal Declaration of Human Rights." Adopted on December 10, 1948.

5. The concept of the resource funnel was developed by The Natural Step and recognizes that due to increasing economic prosperity, humans are systematically destroying the life-sustaining natural resources on which we depend. As a result, we are faced with a constriction (or funnel) of the availability of ecosystem services and natural resources, which represents an increasing business risk.

6. Ziegler, Jean, Special Rapporteur on the Right to Food. Oral statement to the United Nations General Assembly. October 25, 2006.

7. Jong-wook, Lee. Former Director-General, World Health Organization. Ministerial Meeting on Health and the Environment, June 18 2005.