Published February 26, 2015
1) Why does Wespath have a guideline relating to human rights?
Wespath is committed to investing in a sustainable manner, which includes encouraging companies to address and manage environmental, social and governance (ESG) issues in their operations. Recognizing a shared concern with United Methodist retirement plan participants and other stakeholders about the importance of protecting human rights, the agency formalized and later strengthened a human rights guideline. The guideline helps inform the execution of our sustainable investment strategy of active ownership.
The guideline provides direction for identifying and managing excessive sustainability risk linked to human rights, which could potentially affect the value of assets held on behalf of Wespath-administered benefit plans and our institutional investment clients. We believe a company poses excessive sustainability risk when it derives significant revenues from countries demonstrating a prolonged and systematic pattern of human rights violations, from conflict-affected areas where significant human rights violations are widely documented and/or where breaches of international law occur. Companies with significant exposure to these high-risk areas could see their operations negatively impacted. This could adversely affect the value of the securities of those companies that we hold on behalf of our participants and institutional investors.
2) The Human Rights guideline references the financial risks to companies doing business in high-risk operating areas. Shouldn't Wespath be more concerned about the welfare of vulnerable people in these areas?
Wespath cares deeply about the welfare of vulnerable people in high-risk areas. The guideline's reference to the financial risks to companies doing business in high-risk operating areas recognizes the directive of The United Methodist Church (UMC) General Conference regarding the administration of benefit plans. It has delegated to Wespath responsibility for administering these plans "…solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries."
However, through our years of sustainable investing, we have come to strongly believe that effective strategies to reduce corporate risk include the protection of human rights. This is a key reason why we engage companies on human rights issues. Accordingly, our Human Rights guideline focuses on creating positive change for affected communities and manages financial risk.
3) How does Wespath identify "high-risk operating areas," as described in the Human Rights guideline?
Wespath's Human Rights guideline provides two definitions of "high-risk operating areas":
— "Countries demonstrating a prolonged and systematic pattern of human rights violations," which we have defined as "countries with a ‘worst ranking' in Freedom House's annual Freedom in the World report."
— "Conflict-affected areas where significant human rights violations have been widely documented," which may include sectors of a country's economy recognized as prolonging conflict and violence (for example, the oil, gas and mining sectors' role in conflicts over natural resources) and areas where a United Nations Security Council resolution or an advisory opinion by the International Court of Justice has identified that significant breaches of international law occur. This definition of "breaches of international law" aligns with the United Methodist Church's Social Principles (¶ 165.D).
Wespath has engaged Sustainalytics, an external research provider with expertise in assessing sustainability risk in high-risk operating areas, to help identify the affected companies.
4) The role of business in promoting and protecting human rights is a challenging and emotional issue. How does Wespath try to ensure that its investment activities in this area are as objective and constructive as possible?
Wespath seeks input from a wide variety of internal and external resources and stakeholders. We examine the Social Principles; review the investment activities of our global peers; discuss issues with our investment managers, research providers and other secular experts; and seek the guidance of our board of directors and opinions of other United Methodists.
5) Why does the Human Rights guideline focus on "countries demonstrating a prolonged and systematic pattern of human rights violations," as defined by Freedom House?
Wespath is concerned about human rights abuses wherever they occur. However, we must prioritize our work in identifying companies that present the most excessive sustainability risks in part by operating in the high-risk areas determined by Freedom House. The organization is widely recognized as a reputable source that annually identifies and ranks countries based on a wide range of human rights-related criteria.
6) The Human Rights guideline focuses on "conflict-affected areas where significant human rights violations have been widely documented." It further states that this "may include sectors of a country's economy recognized as prolonging conflict and violence; or areas in which significant breaches of international law occur." Why have these clauses been chosen and what are their implications?
"Conflict-affected areas" are widely documented as exacerbating human rights violations. Companies operating in these areas are vulnerable to accusations of complicity in these violations. Wespath's guideline seeks to avoid investments specifically in sectors fueling conflict (most notably the oil, gas and mining sectors' role in conflicts over natural resources) and in companies breaching international law because we believe these present the greatest sustainability risk.
7) Does Wespath believe that companies operating in the Palestinian territories (including Caterpillar, HP and Motorola Solutions) present excessive degrees of sustainability risk under the new Human Rights guideline?
Wespath implements the Human Rights guideline across countries and areas defined as "high-risk" regarding human rights. Many companies operate in settlements located within the Palestinian territories, and we have evaluated and applied our Human Rights guideline to companies that meet the financing, revenue and sourcing thresholds defined in our guideline. Caterpillar, HP and Motorola Solutions do not meet these thresholds.
8) How does the new guideline affect the number of companies in which Wespath can invest? Is it possible this could adversely affect fund performance since its application results in limiting the number of stocks Wespath can hold?
We strongly believe this guideline will lead to improved investment performance by excluding investments in companies with unsustainable business policies and practices. Developing and adopting this and other guidelines that address ESG issues is a requirement for prudent fiduciary management of investment funds.
With external research provided by Sustainalytics, we have identified companies for exclusion from our portfolios under the Human Rights guideline.
9) Is Wespath concerned that the Human Rights guideline could potentially be viewed as punishing Israel?
Wespath is not divesting from Israel. We remain invested in publicly-traded Israeli companies that meet our investment criteria.
The UMC General Conference has delegated to Wespath responsibility for administering benefit plans "...solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries." Excluding from investment the securities of companies with unsustainable business practices involved in the Israeli settlements located in the Palestinian territories is consistent with our fiduciary obligation to our participants and other stakeholders, as directed by the UMC General Conference.
10) The Human Rights guideline says that Wespath will "exclude the sovereign debt of any country demonstrating a prolonged and systematic pattern of human rights abuses." What does this mean, and how will Wespath implement this guideline? Will this include the sovereign debt of Israel?
Wespath excludes from investment the sovereign debt of any country that appears with a "worst ranking" in the Freedom House annual Freedom in the World report. Israel is not ranked among the worst countries; therefore, Israel's sovereign debt is not excluded from investment based on the Human Rights guideline.
11) How does Wespath monitor and update the Human Rights guideline?
Wespath continues to monitor the countries listed on Freedom House's annually updated "worst of the worst" list, as well as geopolitical situations where conflict exists and significant breaches of international law occur. We seek advice from a wide variety of internal and external stakeholders; examine the Social Principles; review the investment activities of our global peers; discuss issues with our investment managers, research providers and other secular experts; and seek the guidance of our board of directors and other United Methodists. We work with our external research provider, Sustainalytics, to assess sustainability risk and to monitor and update the list of companies affected by our Human Rights guideline.