Pension funds must look at soft law for their holdings, or face ‘scandal’ guilt by association

International best practices are changing, and investors need to change with them.

Not too long ago, a company was responsible for its own actions. That has changed. In 2017, accusations surfaced from Amnesty International and the International Trade Union Confederation (ITUC) of mass deaths of construction workers building soccer facilities in Qatar. The figures proved to be controversial, but other abuses quickly surfaced. The Kafala system, where visas were linked to a single employer, made it impossible to change jobs or leave the country without the employer’s permission. Employers extracted fees of up to $4,300 from workers, a forbidden practice. They punished workers for complaining about abuses by withholding salaries and stopping them from leaving the country, which amounts to modern slavery, according to ITUC. Construction firms committed the abuses, but the International Federation of Association Football (FIFA) was held responsible. FIFA said it had already done all it could. No matter. A number of complaints were maintained, i.e. that FIFA was not using its leverage with the Qatari government enough. Eventually, ITUC and FIFA agreed to mediation by a strange animal, known as the Swiss National Contact Point or NCP. OECD countries have undertaken to have such a contact point as part of an agreement on what is known as the Guidelines for Multinational Enterprises.
Companies’ responsibilities for their suppliers
The mediation convinced FIFA to do much more. It had learned an important lesson. Today, enterprises are not just responsible for their own actions, but also for the actions of those whose goods and services they buy. The principle isn’t new. Whether it was clothes made in Asian sweatshops, anything made in South Africa under apartheid or diamonds sold by African warlords, companies had been held responsible for the way their products or services were produced before. However, these issues were mainly created by popular outrage. Now they are part of international best practices. That part of international law has now become more transparent.In May, the OECD published a booklet: Due Diligence Guidance for Responsible Business Conduct. It explains in plain language what the Guidelines for Multinational Enterprises expect from them. That comes in handy, as those guidelines are of growing importance. One example is that the London Metal Exchange now requires all its traders to adhere to the OECD guidelines, following a child labour scandal.
Few accusations sting as badly as that of modern slavery. As the FIFA case shows, there is a fine line between labour abuses and modern slavery – a line that is easy to cross unnoticed. Some of the sectors where modern slavery occurs are unsuitable for institutional investors, such as agriculture and the footwear and clothing industry. Others, such as construction, are not. In 2015, the UK government promulgated the Modern Slavery Act. Switzerland and Australia have followed suit. It is not difficult to see that this may become a new concern of derived responsibility.
What can pension funds do?
As the OECD covers more economic sectors with specialised guidelines, and as scandals keep occurring, it is likely that the trend will continue. That should concern pension funds. Going against the OECD guidelines is prima facie proof of risky behaviour. Pension funds are big shareholders and important providers of capital, so they have the leverage to engage with companies. Now, they have a few more questions to ask. They have a vested interest in asking them about the framework of their risk management efforts. The risk of losses a company runs if it does not adhere to the OECD guidelines runs is underwritten by the shareholders. At the same time, pension funds would do well to pay some attention to their own suppliers, whether they are asset managers or a company that cleans their offices. A significant portion of the complaints the National Contact Points have received concerns banks. That makes sense. Banks know about money flows and they can spot irregularities that betray abusing economic operators. The OECD has published a paper on Responsible business conduct for institutional investors. It is available free from the OECD web site. Pension funds cannot afford to ignore it.

Peter Kraneveld, former Chief Economist at PGGM and advisor to APG Asset Management and State Street Global Advisors among others, is a pension expert at PRIME bv.