‘The melting has begun’ – responsible investors hail CoreCivic’s relegation to small-cap index

Controversial US prison operator CoreCivic will be booted out of the S&P MidCap 400 next week, in what some responsible investors are describing as proof of the industry’s unsustainability.  

In a statement, S&P Dow Jones Indices said that on August 17, Builders FirstSource, which makes construction materials, "will replace CoreCivic Inc. in the S&P MidCap 400, and CoreCivic will replace Valaris plc in the S&P SmallCap 600". 

"CoreCivic is more representative of the small-cap market space," it said. 

CoreCivic’s shareprice has tumbled more than 40% since the beginning of March, but saw some uplift on the back of the announcement this week. Some analysts put the sudden growth down to investors predicting that trackers of the S&P SmallCap 600 will become ‘forced buyers’ when it enters the index next week.

However NorthStar Asset Management’s CEO, Julie Goodridge, said the relegation was a sign that responsible investment concerns were driving investor sentiment around private prisons in the US, and that the downward trajectory of CoreCivic's business was set to continue, despite the immediate uptick in shareprice. 

"Companies and investors are at the beginning of understanding their relationship to the prison industrial complex," she told RI. “This is a racial justice issue and a complex web of supply chain profit. If investors step up and demand divestment from private prisons and prison labour, we will see significant change.” 

“We are at the tip of the prison industrial complex iceberg, and the shrinking of CoreCivic indicates that the melting has begun.”  

Criticism of the private prisons industry in the US has been mounting over recent years, with allegations of human rights abuses, enabling racial inequality, and aggressive lobbying on controversial issues such as the detention of undocumented immigrants. 

In 2018, NorthStar published a white paper titled Prison Labor in the United States: An Investor Perspective, detailing the issue of domestic US prison labour in company supply chains. It has been filing shareholder proposals related to prison labour at companies in their client portfolios since 2017. 

The move by S&P is just the latest in a string of troubles for CoreCivic, which was downgraded from BB+ to BB by Fitch Ratings last year, after a number of big US banks, led by J.P. Morgan, exited the sector citing pressure from investors, civil society and politicians.

Earlier this year it was downgraded again – this time to BB-. Fitch attributed the decision to an “increased institutional lender and investor focus on ESG” reducing CoreCivic’s access to attractively-priced capital. The ratings agency stated that the prison giant lacked “access to secured mortgages, a key contingent liquidity source for equity real-estate investment trusts (REITs), making it more reliant on bank and debt capital markets access”.

Last week, CoreCivic announced it would cease being a REIT at the start of 2021, as part of a financial restructuring that will see it use profits to pay down debt faster, reducing its dependence on lenders. 

CoreCivic’s main rival, GEO Group, is also facing huge pressure from civil society and responsible investors. The company, whose shareprice has also plummeted this year, suffered a major blow in July when a US District Judge ruled in favour of the State of California in a challenge brought by GEO Group over plans to ban for-profit prisons in the state. Seven of the state’s 10 private prisons are owned by GEO Group, and have been ordered to close by 2028.  A further ruling by another US District Judge ordered the group to stop the conversion of two of its private prisons in California into ICE detention centres. 

GEO Group is also facing a shareholder lawsuit filed in July over allegations that the company “blundered” its COVID-19 response and caused damage to its shareholders’ value. The industry as a whole has suffered losses related to the pandemic as COVID spikes in prisons have killed prisoners and fewer detentions have led to many empty cells.