Are your investments linked to serious human rights violations?

0:12Mike Head: Welcome to the latest episode of Margin Notes with me, Simony Kiriakou, editor of FT Advisor. All year I've been looking at the theme of risk and today's podcast is no different. In fact, we're following a theme about the risks posed to investors from ESG-labelled funds, which are not doing quite what they say on the tin. Are ESG frameworks in Europe and the UK truly equipped to identify companies that are linked to the most serious human rights violations? Now, of course, many investors, your own clients, will assume that ESG-labeled funds automatically exclude companies connected to genocide, apartheid, war crimes or crimes against humanity.

0:51Mike Head: However, a 2025 OECD review of more than 2 ,000 ESG metrics across eight major ratings products found that human rights indicators were absent from some products, while 68 % of metrics relied on companies' self-reporting. Well, joining us today to unpick some of this tangled sustainable mess is Mike Head. He was one of the very first ethical financial planners and is now Senior Advisor at the Justice Company. Welcome, Mike. Good morning. Thank you. No, thank you for coming in. So let's talk about assumptions. What are the assumptions that investors may naturally make about ESG-labelled funds in terms of what they automatically exclude?

1:34I think it's the thing that as an investor, as a client, you imagine that environmental, social and governance will mean that those areas are ones that are viewed in a negative fashion in terms of their potential involvement and impact on your underlying investment. And so I think that it's a natural step that those investors would think that's going to mean that certain activities would be excluded. What's peculiar is that there are certain things that are excluded. Tobacco, for example, doesn't appear, as far as I'm aware, in many, if any. Defense companies don't tend to. But human rights and corruption, for example, and we'll come on to that in a minute with the OECD report, they don't seem to be issues that are of such great importance.

2:23And I think that there's an expectation for investors that there are certain red lines that would not be crossed. and because you mentioned I've been doing this a long time when I started in the 80s there was that thing that it was people planet animals and oppression and which was what human rights was called in those days so oppressive regimes was an absolute sort of red line avoid yeah now it doesn't appear to be I think the other thing that has complicated things particularly of late is the issue around tech. And also the fact that, like many things, there's an overlap with investment into areas where there previously wasn't and it was exclusively sort of government.

3:08And that applies with human rights. It applies with genocide. It applies with space. One of those odd, sorry, through that one is a bit tangential. No, no, no. But it's that odd thing where actually it always used to be it was nation states that did these things and now people are making money out of things that you wouldn't necessarily like. And therefore people are investing and or profiting, or better yet, losing money in areas that they would not wish to be exposed to.

3:35Mike Head: Of course. And we see, you know, over the years that the lines have become blurred. You talk about the red lines, it almost seems to be different shades of green lines to the point where some ESG funds could say that we're just purely about engagement and which almost feels like a catch-all to be able to invest in all sorts of companies that normally would not have appeared in a screened portfolio. So it must be really hard for the average investor to really know what they're getting. I think engagement is in and of itself a fascinating topic. I like stewardship. The idea of, as an investor, you are the steward of the capital and therefore you are talking to investee companies about issues.

4:18but sometimes the engagement industry trips itself up by suggesting that it can change activity and there are any number of instances where companies have said one did about five or six years ago, claimed that BP had changed their policies because of their engagement and subsequently BP clearly went in the other direction. And I think it's quite misleading to suggest there are certain things, modern slavery has been a fantastic success around engagement where there genuinely has been. But that relies in many instances upon reputational risk because nobody particularly wants to be associated with that sort of activity when you get Rana Plaza and the situation there with garment workers.

5:03But to suggest that you're engaging, somebody told me once they were engaging with an arms company.

5:08Mike Head: How do you engage with arms companies? Maybe kill people nicely, be more gentle. It's quite odd, isn't it? And that's the whole thing. And I think as well, there's a lack of understanding around the whole ESG piece that ESG is about risk. It's about assessing the risk to the underlying company. And if you only look at it in that, which is what it was designed for. Yeah. It's unfair to criticize the data providers because if what you're doing is what's known as single military reality, which is the external impact upon the company, it ignores what the company does. So arms companies, tobacco companies, oil companies, some of them have very, very good ESG scores.

5:47Mike Head: Yes, of course. But it ignores what they do. The other thing that's sort of mentioned as well in that OEC report, which is the larger companies have better scores in many cases because they have enough people to be able to complete the forms and they know how to answer the questions in the way that will make them look as good as possible. And you can commit some money towards setting up a school or launching a foundation or doing something that looks very good on paper, a PR exercise. That element of when you look at the things that will get you a better score, so diversity, charitable donations, something environmental, etc.

6:24There was an arms company that started using solar power a few years ago and they therefore got a better score, which seems like the ultimate irony that you're making sure that you're renewable with your weapons manufacture. Indeed. And there's also that worry, isn't there, that defense companies can then argue. And I think the European Union recently said something about there's no greater aspect of sustainability than protecting your own people.

6:54Mike Head: So there's a sense that national security, aka defense, aka war, sort of becomes almost Article 8. it's as part of the justice company one of the things that so effectively we were given the remit to screen for a very strict single focus almost like a thematic human rights approach and one of the companies we looked at was a was a British company and it was a relatively small company into which the Polish government had put a significant investment to make landmines now landmines is a total no-no exactly but they were making landmines for Poland to protect them themselves against the possibility of invasion so suddenly you get that really awkward thing which is actually if it stops you being invaded by a aggressive hostile nation maybe that's not a bad thing the problem you have is that once they've done that they're not going to close the factory down so who do they then sell because look we've got this so it becomes at one stage it's okay And the whole conversation about defense and its involvement and should it be in ethical portfolios and the churches and the like talking about it.

8:06And it just feels a little bit misplaced because, as you say, if it were defense, it would be quite nice. But it's offense.

8:13Mike Head: Yes, of course. It becomes the problem. It's the outward side of things. You know, Ukraine and Russia changed a lot of people's perspectives because we should be helping the Ukrainian people protect themselves. but those arms companies aren't particularly selective about who else can buy their products. Of course and they have done exponentially well over the past few years in terms of stock market returns. Oil companies have done well. The sort of things that you would say well I don't want those in my portfolio as a deep green investor suddenly it starts to look a little bit lucrative. I don't think you should be deep green to not want to profit from arms.

8:56Do you know what I mean?

8:57Mike Head: You should just be human. Yes, exactly. And that's the bit that's really interesting with this, which is when you start talking about human rights, your human rights matter to you a great deal. And so do those of your friends, family and children, etc. If you have them. Other people's human rights, not always. And certain wide sways, not really that much at all. And that bit's quite difficult to deal with, that sort of how have we got the ability to look away, which seems to be quite prevalent at the moment. And it's very... People have said, why now for the fund that we've been involved in launching?

9:34And it's because, look back 5, 10 years, the world has become an awful lot more dangerous.

9:39Mike Head: Yeah. In many arenas. And it's very stark to realize that 30, 40 years ago, there were minor conflicts. And now it's just a fact of everyday life. Do you think we've almost lost that focus by talking about sustainable or badging things as sustainable or ESG? We've lost that original focus. I mean, you mentioned sort of being a financial advisor in the 90s. We talked about ethical investment. Do you think that we've lost that idea of what is ethical in favour of what is seen to be sustainable? And perhaps that nuance, that semantic nuance has actually led us to accepting more investments in things that actually would not be considered ethical.

10:24I think what's happened, sadly, is ethical, because I can remember when ethical started, it was basically if you did nothing wrong, then you were acceptable. And then suddenly we got the body shop. How exciting. We got something positive to invest into. And so there was this sort of nascent start of environmental investment. And people thought this is great so that we've got both social and environmental opportunities to be investing for those purposes. But underlying all of those, and if you look at some of the funds that were around then that are still around that were environmental funds, they still had red lines.

11:03then you got this thing where esg and sdg and net zero and all of these endless acronyms came along and the moral side got lost in the wash yes because you want to invest in evs you think

11:15Mike Head: electric vehicles are the best thing ever i want to invest in the biggest ev producers in the world because they're doing a really good thing to lower sort of lower the environmental impact of petrol cars unfortunately they are in china which as we know may not have the best human rights record um you know statistically speaking so then where do you draw the line well it's that whole thing that i'll have conversations with clients who will say i don't want cement or steel but i love wind turbines i've got an electric vehicle but i don't want anything coming out of the DRC, which is one of those human rights disaster zones.

11:59I don't think it's too extreme. And so it's that odd sort of tension there. I think the other thing that's happened is that sustainability has become exclusively an environmental, not, but almost exclusively an environmental subject. So that going back again to the OECD report, they mention about the vast number of measures that there are for greenhouse gas emissions, for carbon, for any of those but there are hardly any if at all on human rights and on corruption and if human rights isn't in the s box for social and government and corruption isn't in the g box for governance there's something wrong there something completely misaligned and with 68 percent of companies i

12:43Mike Head: think was self-reporting how can investors really interrogate that data well it's an interesting concept isn't it that if you're a data uh an analyst data provider and and that's one of the other things that we do writing to a company saying could you tell us about any of your corruption problems this year or have you been involved in significant human rights abuses it seems unlikely they're going to self-report yeah they will tell you endlessly about their you know accessible toilets or diversity or what they did to sponsor someone to run the london marathon but they're not going to you're going to have to find out there are very few companies some of the health and safety stuff comes out but outside of that self-reporting is is not exactly the way to go about it and on that on that note of data it's going to become much harder isn't it for data providers particularly smaller companies thanks to some new rules being brought in by ESMO could you talk a little bit about that it's it's coming here in 2028 where the FCA has decided that data providers are going to be regulated it's arriving on the 2nd of november for europe through the european securities and marketers agency i think it's a great thing that they're they're going to regulate because as we've already discussed the impact of data providers upon stock selection upon the ability for clients to have confidence in where their money is invested is incredibly important the problem is the way they're going about it is going to end up because it's an expensive thing to do.

14:19Regulation is never cheap. And we lucky Brits are not in Brexit, or because of Brexit, are not part of the EU. So the cost to us is higher. But what the regulation is going to do is they are insisting that you have high standards, etc. But again, sort of going back to that point I made earlier about reporting of ESG data, the big providers are going to have more ability and facility to be able to explain how they do what they do. But there's a very common perception, belief, which is justified within the ESG data provider world that a lot of data is pulled out of a black box. Fundamentally, there is a score and that score is based upon a hidden proprietary metric that the data provider creates.

15:05One of the things that's been talked about for a very long time is two of the major providers when they were assessing tesla as a company one said it's the best company in the world because it's incredibly efficient green etc and the other one said it's the worst company in the world this is obviously a bit extreme yes because the governance is really poor because basically it's controlled by one person so you don't actually have any oversight you don't have the ability to shareholder checks and balances as you say, are completely missing. So the idea of regulating data providers, I think, is really important.

15:38But at the same time, it's even more important. And one of the key things for the FCA historically has always been to maintain as wide a market as possible. And if you do away with the small providers who can specialize in biodiversity and issues like that, which is a very niche thing, but where clients are really interested in it. Yeah, of course.

15:59Mike Head: So for a small data provider who's got a niche or a specialism in either the natural economy or human rights, is it potentially just going to exclude them from the market? Are they going to have to shut up shop? Yes. I think what will happen, what's already happening, conversations I'm having, is there's going to be a consolidation. Wow. That the ones who are struggling, because we have the other glorious situation, which is asset managers want more and more for less and less. Yes, of course. They're all being squeezed because it's a difficult market, particularly sustainability for the last five years has not been the easiest place to be.

16:38So that they have an increasing demand for more and more information, more and more credible information. But they've got less money with which to pay for it. So they want us to do more work, but to reward us with less money, which is always a treat, as you can imagine.

16:55Mike Head: Well, I mean, we have similar issues as journalists, you know. But, you know, there's always that case then, what about AI? Is AI going to be a helpful tool in sort of winkling out any potential human rights abuses and plugging that into the data? Or is AI just not going to be able to pull that information, doing the human behind that? We use a, I always think AI is very interesting as an overall catch-all for data scraping. Sure. But fundamentally, we have built an AI tool for the justice company that looks at human rights abuses. But we have a human in the loop. Because what you do is you get some output that you find.

17:35I mean, the AI will find things that you would never have possibly found. And it will also find things that are barely credible. So as a consequence, you need both. And it's exactly the same with journalism. Once the journalist starts to look at a story and tries to find out a particular issue, they will look and they'll think well hang on a minute that looks more like facebook than the financial times yes of course not naming any names in particular but you know that sort of like some of it's tittle tattle some of it is there are some ngos out there that are a bit more political than they should be and human rights is a particularly fraught area for that and obviously one where you have to be very careful because there are sensitivities around conflict there are two sides to all of those yeah so i think ai will help but only because of the massive amount that it can do i don't think it's going to it can't make those judgments it can't say actually that's not material it can't look at a thing and say yes but actually i'll give you a really good example we we spent ages i mean literally half and half a day six people talking about a lift manufacturer that had got their lifts installed in an area under occupation and whether they whether that's an include or an exclude they were not part of it so if somebody buys your product and installs it into an area under occupation does that actually mean that they've done anything wrong yeah and an ai does not have the ability although they keep telling us they're super intelligent doesn't seem like that to me but they don't have the ability to consider nuance which is one of the most important things.

19:10Mike Head: And how you justify that to a potential investor who asks about it. Well, exactly that, because that's when the human reaction, which is, and we have the other side of the coin, which is there isn't enough evidence, but it still doesn't smell right. It doesn't smell right for certain companies to be in a human rights aligned fund that is concerned about those things. There are certain things that are clearly beyond the pale, but then there's the element of how do you make sure that you're not discriminating against all of the people in one territory because they are not all responsible for the actions of their government yes of course and that then leads to really interesting dichotomies you say there's a an issue with sort of data providers or potential issues coming down the line in terms of the cost of regulation asset managers are going to have to rely on data providers or the ones that exist post-consolidation for their information, which means that advisors, financial advisors, are going to have to rely on what either the ratings agencies or the asset managers are telling them, which means that the end investor is left with, you know, second, third, fourth-hand information about what they're really getting into.

20:22Mike Head: I mean, can we talk a little bit about the advisor and the client relationship there? How hard has it become for a financial advisor to really have that green convo with their clients? I think it's become increasingly difficult. I think that the fundamental issue, the way that my view on labels when the FCA brought those in under SDR was there were two things that we needed. We needed a strictly applied greenwashing rule and we need a complete transparency. Obviously, that's difficult when you've got an index so that you've got an index that's got 1 ,500 companies in it. But the reality is if you were required to give a list of every company and what they do, if you are a concerned advisor and a concerned investor, then you can spend the time doing that.

21:09It's very interesting. I do quite a lot of work with foundations and charities and their underlying investments where you have a conversation with them and you say, well, okay, this is what your mission statement says. But you know that some of your investments are actually not aligned. You've done that relatively simple, no alcohol, no tobacco, no gambling, etc. But you're concerned about migrants or equality and you're investing into companies that are amplifying the very social media that leads to problems for those very people. And you have the other thing, which is that tech and defense, AI and defense is a major issue now.

21:49And it's very front and center for a lot of, it's more front and center for asset owners than it is at the moment for asset managers. So there's a very odd scramble going on, which is the asset managers trying to think, how do we satisfy this demand? Because big asset managers, big pension funds, big churches, etc. saying, we don't like the fact that there are credible stories about people being killed by AI targeted weapons.

22:17Mike Head: Yes, of course. But then that almost leads back to a kind of a rules-based alternative investment strategy, which people have said in the past, that sort of thing is too strict. You want to move away from that. But do you think we almost have to go back to that really strict rules-based methodologies for sustainable or green or human rights friendly funds? I think what we need is we need something that basically says, OK, so you have a stocks and shares ISA, I'm your advisor. And we have an annual meeting where we talk about the money. And then afterwards, we talk about the issues. And I say to you, you've got 60 holdings in your ISA.

22:52Those 40 are fine. These 10, I think, are OK. And these 10 are ones where I need to explain to you why they're in there.

22:59Mike Head: Right. Because the whole issue around – and tech isn't the only one. No, of course not. there could be an oil company in there because heaven forbid we do still get into our cars and sometimes we even fly so the transition isn't going to happen without them so if you are someone who is relaxed about a certain exposure to fossil fuels but would like to see a company that has a credible transition plan yeah then that's something that you have as a conversation i think the difficulty is getting the information for the advisor to then be able to make it comprehensible to them to then make it comprehensible to the client is incredibly difficult and there are people within the investment industry that are very very smart on these things but transmission of that information is not a strength just to to finish then um because i could be talking about this all day but i can see other people waiting to start using the podcast studio here at the ft but But would you say that there doesn't seem to be enough of an appetite among the asset manager providers of ESG or sustainable badged funds to interrogate human rights abuses properly?

24:15Mike Head: Which means then that advisors don't have that information to give to their clients? Yes. I had a conversation recently with one of our big asset managers in the UK about conflict because the big data providers, particularly the American ones, have changed their approach to conflict. And I asked about what they were doing around conflict and they said it's something we look at less and less. which is troubling when you look at what's happening in Yemen, Darfur, Sudan etc. Obviously in what's happening in Israel but in Russia all around the world there are people suffering horribly in areas of conflict and the research and the drive to unpick is not as strong as it should be in my opinion.

25:02Mike Head: That's a very stark warning and a very sad note to leave this on but thank you very much for raising these matters to our attention, Mike. Well, it's been lovely talking to you. Thank you very much. For more news and views, stay tuned to ftadvisor.com. Until next time, take care.

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