SDG16: Peace, justice and strong institutions, is arguably more abstract and subjective than many of the Goals, and it isn’t at the top of investors’ list of priorities – or demands for investment strategies. Most responsible investors exclude controversial weapons as standard, but, so far, that’s been about it.
“It’s quite ambitious to talk about peace in a fund,” admits Dominique Habegger, who started his career in responsible investment with SAM (now RobecoSAM) back in 1996.
But that is exactly what he is doing in his current role at Pury Pictet Turrettini, where he runs the Cadmos Peace Investment Fund.
Habegger says SDG16 is “clearly investible, as companies invest billions in fragile and emerging countries”. His fund’s approach is to hold profitable companies that operate in “fragile” countries, with the aim of fostering peace in the regions through their business activity.
On the surface, there is little to differentiate the Cadmos Peace Investment Fund from any conventional mainstream large-cap equity product: its top three holdings are chemicals multinational Sika, Danish wind company Vestas and tech giant Apple. Companies like Facebook, Amazon, Mastercard and Microsoft are also in the portfolio. Although armament producers are excluded from the investment universe, the oil industry – frequently cited as a leading contributor to conflict and political instability around the world – is included (Total was a holding until it was removed last year, for financial reasons).
‘Peacebuilding is complex, and there are very few companies that really report thoroughly on SDG16 – it’s very undefined and impractical as a SDG’ – fund manager Dominique Habegger
But, the €18m fund, founded in 2018, was shortlisted last year for the Principles for Responsible Investment’s Active Ownership Project of the Year for “breaking new ground within mission-related investments”.
The Peace Investment Fund is based on an index that was co-developed by its seed investor, the PeaceNexus Foundation, which put its endowment’s entire equity allocation into the fund. PeaceNexus is supported by a single endowment from Swiss philanthropist Hansjörg Wyss, and seeks to make decent returns. The fund also has an unnamed pension fund as an investor.
The Index ranks the 300 most economically-impactful listed companies in 76 “fragile” states, and the fund – which has outperformed the MSCI World Index since inception – holds 30-40 stocks.
Antoine Mach, Managing Partner & Co-founder of Covalence, which worked with PeaceNexus to develop the index, says it is based on conventional ESG criteria alongside “peacebuilding business criteria”.
“This is probably the most original part,” he says. “We look at how companies can contribute to stability, good governance and construction of peace, for example, through their hiring practises; how they create jobs. Do they create jobs only for the majority ethnic group in one country or do they have more conflict sensitivity and try also to integrate into their workforce? And do they have a similar approach with the supply chain management? We look at how companies work with suppliers. Anti-corruption and tax transparency are also very important in terms of contributing to democracy and to good governance in those countries.”
Google, for example, meets the peacebuilding criteria because of its regional search advertisements depicting friendships between neighbouring countries India and Pakistan, which have been engaged in hostility since the 1947 Kashmir conflict.
Nestle sources agricultural crops from a social enterprise that provides jobs to young people in the north of Nigeria “that could otherwise be tempted to join terrorist groups like Boko Haram,” says Mach, adding that this information wasn’t found through Nestle’s communications, but in the Stanford Social Innovation Review. “Sometimes companies are not aware that they are contributing to peace in different areas and we’ve helped them realise that role,” he suggests.
Some may argue that stocks like Facebook, Google and Nestle – whose business-models aren’t intentionally focused on peace – have no place in an impact fund purporting to address SDG16.
“The discussion around what is green is already difficult, but what is ‘peace’ is even more difficult, in particular for a listed equity context,” admits Habegger. “Peacebuilding is complex, and there are very few companies that really report thoroughly on SDG16 – it’s very undefined and impractical as a SDG.”
With PeaceNexus Foundation, the fund is working to better define the Goal from an investment perspective. Investee firms L’Oreal and Nestle have agreed to work with the UN Global Compact Action Platform on Peace, Justice and Strong Institutions to define appropriate business objectives and metrics.
In the meantime, the fund is trying to provide a high level of transparency to “allow our investors to decide if the achievements match the impact intentionality in the same way as they can assess if the financial performance matches their expectations”.
The Cadmos Peace Investment Fund lists all its holdings online, with the financial performance history of each stock alongside its ‘peacebuilding score’ and the case for its inclusion in the fund.
But engagement is the key way the fund seeks additionality. “Investors want to have a tangible additional impact through direct engagement with global listed portfolios,” says Habegger. “They want to have a real impact – not just invest in Danone instead of Nestle because one has slightly lower Co2 emissions than the other. The fund is about creating intentional and additional impact.”
As well as voting all its shares (last year, it opposed a modest 10.5% of proposals, which Habegger describes as “one opposition in at least half of the companies in the fund”), Cadmos meets with the 90% of the fund’s investee firms annually to encourage them to progress and report on SDG16, and has developed a methodology to measure the impact of this engagement. It also engages companies outside the fund, but in its investment universe.
“For most people, unfortunately, engagement is the same as doing a Q&A,” observes Habegger. He says for Cadmos, it’s based on an ESG assessment covering material topics for each company across compliance, social impact, supply chains and more. Every firm gets given recommendations for improvement, which are made public and monitored each year, and is scored on progress.
Of the 31 companies currently being engaged, 24 have expressed an interest in a “peacebuilding” meeting with the PeaceNexus Foundation and 19 have had meetings. Six firms have agreed to put senior management up for meetings, and three companies – Nestle, L’Oreal and Standard Chartered – have agreed to develop a common approach on peacebuilding with the Foundation.
Nestle was already under pressure from its brand ambassador George Clooney – actor and husband of human rights lawyer, Amal Clooney – to do more on human rights. It is now working with the PeaceNexus Foundation on a project in the Democractic Republic of Congo.
Holding controversial companies
Not all companies are showing enough progress, though. Facebook has been flagged as “red” by the fund, meaning it’s risk of being dropped. Last week, the social media titan banned Holocaust denial on its platform, but critics still say it isn’t doing enough to tackle hate speech.
“There were some signs that Facebook would hire a head of peacebuilding and human rights, and that was an important signal for us to invest,” explains Habegger, adding that Cadmos has a meeting with the firm later this month as part of its engagement efforts.
Covalence’s Mach says that Facebook is an example of a company with both positive and negative impacts: “Bad guys are using Facebook to spread hate speech – for example, in Myanmar with the Rohingya Muslims – but a lot of good people, like human rights organisations and democractic groups, are also using Facebook to promote freedom and human rights, and to work together to improve the state of society. So we are very excited,” he tells RI.
Asked how a “peace fund” could justify financing oil majors, whose role in political instability, conflict and the climate crisis is well documented, Mach says: “We’re okay to invest in certain companies that are not ideal, that may face controversies, but we also think they have a peacebuilding potential.”
“The engagement component has a lot of importance here,” he continued. “You don't want to engage only with the leaders, it’s important to engage with companies that have some room for improvement too.”
“Companies are happy that we engage with them. We don't come with the stick and say: ‘You are bad guys’. We say: ‘Look, you're one of the 30 companies in the Peace Fund – you’d better do something, or you're going to be out’.”
He also highlights the macro-level business case for companies that often, he says, “need these fragile countries more than these fragile countries need them” because of their natural resources.
The jury is still out on the effectiveness of the engagement. The Cadmos Peace Investment Fund is yet to ditch a single company for not improving on its contribution to SDG16. Its longer-standing sister fund, the Cadmos European Engagement Fund, allows three years for engagement before considering divestment, and the Peace Fund will likely mirror this – making next year a revealing one when it comes to judging whether the strategy truly has teeth.