Inequality is hitting bottom-lines: Why finance is turning against the US ‘prison industrial complex’

Companies with ties to US prison industry face growing scrutiny

As wildfires rage across the US West Coast, states like California rely on prisoners to help fight them. It’s dangerous, low-paid work, which some activists compare with slave labour. 

Some prisoners – known as “inmate firefighters” – say the work is meaningful and life-changing, though. But finding work in the profession once they’ve been released is difficult – due to the litany of institutional barriers faced by people with criminal records (there are moves by Californian legislators to tackle this). 

It’s just one example of the inequality that activists, abolitionists and now pockets of the financial sector are trying to dismantle within the US “prison industrial complex” – a term encompassing the different pervasive effects the system has on American society. 

One of its most egregious is the disproportionate incarceration of the low-income and people of colour – a situation that some interviewed for this feature describe as a modern-day iteration of slavery. The issue is on the agenda for the current US presidential  campaign, with candidate Joe Biden openly hostile to for-profit prisons and incumbent Donald Trump relying on the industry to support his expanding immigrant detention policies. The multi-billion dollar for-profit prison industry has already amassed $1.9m in political spending – up by 14% on the last election, according to the Center for Responsive Politics. In another record, 92% of this went to the Republicans. 

The two largest listed prison firms in the US, Geo Group and Corecivic, both deny taking ‘political sides’. Full statements from both companies can be viewed here and here.

“A humanitarian and civil rights issue”

It’s well-known that the US locks up more people per capita than any other nation – with a rate of 698 per 100,000 residents. Worryingly, some 74% of people held in US jails are not convicted of any crime, according to Prison Policy.

And mass incarceration has profound links with racial inequality. The US imprisonment rate is at its lowest level in more than two decades and the greatest decline has come among black Americans, whose imprisonment rate has decreased 34% since 2006, according to the Pew Research Centre.

But black Americans remain far more likely than their Hispanic and white counterparts to be in prison. The black imprisonment rate at the end of 2018 was nearly twice the rate among Hispanics (797 per 100,000) and more than five times the rate among whites (268 per 100,000).

The rate is even higher among black men in certain age groups: Among those ages 35 to 39, for example, about one-in-twenty black men were in state or federal prison in 2018. To put this into context blacks make up 13% of the US total population but 33% of the US prison population. 

Prison divestment campaigns

This inequity has pushed the American Federation of Teachers to campaign for pension funds to divest CoreCivic and Geo Group, with members “tired of investing in the potential incarceration of their students”. 

“This is, first and foremost, a humanitarian and civil rights issue,” said AFT president Randi Weingarte. “But it’s also a financial issue that brings the misaligned incentives of our justice system in stark relief. Private prisons and private equity firms that invest in correction companies are profiting from jailing people – disproportionately people of color – and are a major contributor to the US’ world-leading incarceration rate.”

Teacher activism pushed the New York City pension system to divest in 2018, followed by the giant California State Teachers’ Retirement System (CalSTERS). AFT estimates that these big divestment pledges, alongside a drop in share prices, has seen the level of public pension money in CoreCivic and Geo Group fall from $75m to just shy of $18m.   

European investors are under pressure too, with Danish funds PKA and Laerenes exiting US for-profit prisons earlier this year after an investigative expose.

Universities are also facing campaigns from students who, having been successful at pushing for fossil under divestment, are demanding their endowments stop profiting from private prisons and the wider ‘prison industrial complex’. A group of Harvard students are suing the university’s endowment for its ties to the prison industry, in response to what it describes as long-standing disregard on the issue and scant levels of transparency. 

“The way that Harvard has historically dealt with student activism is to wait a few years for them to graduate and then move on with their lives. If they ignore you for long enough, the problem is solved for them. They never actually have to address what you are demanding,” says Amanda Chan, a plaintiff in the lawsuit and recent graduate of Harvard Law School. 

“That’s why we brought a lawsuit. We’ve had countless protests, countless interactions, countless meetings, and they just tell us the same thing over and over again. That the endowment is not political and that it is not to be used for social change. Which is ironic because their educational mission is to make the world a better place. And they have divested from tobacco,” she says, referring to a decision by Harvard in 1990 to sell out of direct tobacco holdings.  

The lawsuit alleges the university has violated Massachusetts state law by “profiting off the caging of people”, in breach of its charter, and it has conducted “misleading advertising” by promising to address its ties to slavery and recent support for the Black Lives Matter campaign. 

Harvard declined to comment, but has filed a motion to dismiss.

Campaigns hitting bottom lines

Three stalwarts of responsible investment, Zevin Asset Management, Boston Common Asset Management and Trillium Asset Management, have been working together on this topic – specifically trying to get Boston City Council to divest the prison industrial complex. 

Geeta Aiyer, CEO and Founder of Boston Common, and Matthew Patsky, CEO of Trillium, say the topic’s focus on racial justice echoes the South Africa divestment campaign in the 1980s. But, they add: “For those who remain unmoved by ethical arguments, these companies also pose a substantial financial risk.” 

Pat Tomaino, Director of Socially Responsible Investing at Zevin (who, as Harvard alumni, has been supporting the Harvard Prison Divestment Campaign with its arguments around financial risk) explains: “If we get back on track with the momentum the Obama administration was trying to establish in terms of questioning private prison contracts, the big business of incarceration stands to become more volatile and risky.” 

And already, cracks are starting to show. In August, CoreCivic and Geo Group both announced structural changes to cut their debt, citing concerns over access to capital markets. Damon Hininger, Chief Executive of CoreCivic, said its cost of capital has been increased by its “incorrect” characterisation as a “non-ESG investment”. Geo Group’s George Zoley made similar comments at the time. 

CoreCivic is the first corporate to have its credit rating downgraded due to ESG issues, and in August it was demoted from the S&P Midcap 400 index to the S&P SmallCap 600. 

Major banks including JP Morgan, BNP Paribas and Barclays, no longer do business with either company. 

A recently updated report prepared for the California Public Employees’ Retirement System (CalPERS), which divested in 2019, points to these elements – alongside lawsuits and contract cancellations – to make the “business case for divesting from for-profit prisons”. 

David Webber, a Boston University law professor and expert on pension divestment, told the FT in the Summer: “Divestment campaigns throughout history, in terms of actual economic impact, have been underwhelming”, but within the prison industry, “there seems to be some of the strongest evidence I’ve seen to date that divestment campaigns….can actually work in that bottom-line sense of hurting the target economically”.

CoreCivic said divestment campaigns and banking announcements made last year had no operational impacts (again, you can read the full statement here.)

A spokesperson for Geo Group said: “The divestment efforts against our company are based on a false narrative and deliberate lies about our role as a long-standing government services provider. We strongly reject these baseless allegations, which are being advanced by radical activists with a fanatical political agenda fueled by dark money and aimed at impacting decade-long banking relationships.”

Lack of transparency around links to the prison industry 

“If at this point you’re not divested from private prisons, you are way behind the ball,” says Bianca Tylek, Executive Director at Worth Rises, an organisation advocating to dismantle the prison industrial complex. “We should be challenging people to look at where prisons are in their portfolios way past private prisons.” 

Private prisons represent just 8.2% of the total state and federal prison population, according to figures from 2017,  but the wider prison system has many complex links to private companies.

Worth Rises has identified more than 4,000 companies it says have substantial ties to the prison and detention industry, from construction and healthcare to food. It gives each company a ‘harm score’, with a score over 10 being a marker for divestment. 

The list includes household names such as Amazon and 3M, and a host of financial player listed in the table below. 

Apollo Global Management Bain Capital Bank of America Barclays
Berkshire Hathaway BlackRock Blackstone Group BNP Paribas
Citigroup Elliott Management Fidelity Goldman Sachs
JP Morgan Chase Macquarie Group Morgan Stanley Neuberger Berman
Nuveen Investments Ontario Teacher's Pension Plan Royal Bank of Scotland TD Bank
UBS Vanguard Group Wellington Management Group Wells Fargo

Shareholder advocacy group As You Sow uses data from Quaker organisation the American Friends Service Committee to power a new open source Prison Free Funds tool that financial advisors, asset managers and others can use to see the level of exposure a mutual fund has to private prisons and the prison industry.

However, As You Sow’s CEO Andrew Behar says companies’ links to prison labour are “still very, very opaque”. 

“Ultimately it is slavery in a company’s supply chain, which is an area that investors need to know about as there is material risk,” he says, adding: “Bonds are where the big money is, but they are hard to figure out. We have heard that some municipal bonds are being used to pay settlements to families of young men of colour killed by police. I have not seen official documentation of this and bonds ‘use of funds’ are hard to track, but we intend to keep gathering data on this issue and make it public so that everyone can align their investing with their values.”

NorthStar Asset Management has also found transparency a barrier in its work on engaging companies on prison labour in supply chains. 

In a 2018 white paper, NorthStar describes how prison labour is enabled by the 13th amendment of the US constitution, which outlawed slavery with the exception of forced labour as punishment of crime. As a result, nearly every able-bodied inmate in the US works in some form of labour while incarcerated. While many of those inmates perform the duties of prison upkeep, the paper argues that prison labour for the creation of supplier products that enter the open market, or services provided to companies, are more pervasive than publicly acknowledged.

Since the paper was published, CEO Julie Goodridge says NorthStar has struggled to uncover more on the issue. She says a lot of companies make pledges and statements “to get themselves off the hook” without any auditing or follow up. 

But it’s hard to get companies to take this step, she says. “If you can’t prove prison labour is in the supply chain, they question why they should do it.” 

Investing in criminal justice reform 

The sharp effects of the ‘prison industrial complex’ continue even after incarceration, with ex-inmates in the US subject to 27% unemployment – a rate higher than the overall national rate during any historical period, including the Great Depression. 

The financial sector is developing to tackle this inequality. There have been social impact bonds in the US, focused on preventing recidivism – persistently high as ex-offenders struggle to find regular work – and retail investment platform OpenInvest allows users to screen for companies that have positive hiring practices for those with a criminal sentence. 

Tanay Tatum-Edwards is currently raising capital for FreeCap, an ESG data service focused on criminal justice reform, including organisations’ hiring policies.

“I grew up in Florida where we had really high incarceration rates in my community and I had loved ones who had moved in and out of the prison system,” she says. Her younger brother had served a four-year sentence in prison, during which time – despite the high cost of basics such as food and telephone calls to his family – he was expected to work for free. 

Tatum-Edwards left her job in the financial sector to explore the best way to leverage capital markets to spark positive change. 

“We are interested in figuring out ways that any company can be an ally and leader on criminal justice reform in the US,” she says. “Companies will use incarcerated people in their supply chains but then these people have a hard time finding jobs when they come back home”

Major US bank JP Morgan is a leader in this respect, hiring more than 3,000 people with arrest and conviction records in 2019 – accounting for roughly 10% of new hires at the time. And its Policy Centre advocates for federal and state policy changes to remove obstacles to employment for people with criminal backgrounds. 

Tatum-Edwards is developing ratings for companies on criminal justice and other topics, in the hope of being able to provide an equivalent to Bloomberg terminals for investors, focused on social justice.