UBS passive strategies flagged on human rights

A human rights complaint against UBS follows legal precedent that financiers are responsible for acting on human rights in passive index funds.

The Swiss human rights watchdog accepted a complaint against UBS for holdings in private prison contractors CoreCivic and GEO Group, responsible for 90% of individuals in U.S. Immigration and Customs Enforcement (ICE) facilities.

Non-profits BankTrack, Coalition for Immigrant Freedom, and Worth Rises allege UBS violated OECD Guidelines by failing to exert influence over these companies to address human rights abuses.

Alleged violations include forced unpaid labour under threat of solitary confinement, and water and food deprivation.

UBS claims there is "no direct link" between its operations and human rights violations, as its shares are not actively managed but rather held in index funds.

However, the Swiss National Contact Point for Responsible Business Conduct (NCP) said a link "cannot be excluded."

A confidential dialogue between the parties is now set to begin.

This complaint follows a 2021 OECD NCP case, 'Society for Threatened Peoples v. UBS', which alleged UBS violated OECD Guidelines through ties to Hikvision, a surveillance company linked to alleged human rights abuses against Uyghur minorities in China.

For the first time, the watchdog ruled banks have responsibility for passive investments through index funds.

In 2019, CalSTRS, CalPERS, JPMorgan Chase, BNP Paribas, Wells Fargo, Barclays, Bank of America, Fifth Third Bank, SunTrust, and PNC committed to divesting or halting new corporate lending to CoreCivic and GEO Group in response to activist pressure, cutting off 87% of their credit lines and loans, according to S&P Global.

Passive investing carries a heightened risk of exposure to companies involved in human rights abuses, which can lower financial performance - according to Andrew Montes, who leads the Prison Free Funds project by As You Sow, a shareholder advocacy non-profit.

"Investing in private prison operators carries the risk of contributing to human rights abuses, including forced labor," said Montes.

"Unfortunately, prison companies like CoreCivic and GEO Group are found in virtually every American 401(k) plan, including from employers like Microsoft, Disney, and Target. They're found in the pensions and retirement plans of colleges and universities and health care systems, often in the default investment option that new employees are directed into.

"Passive investing is not an excuse for ignoring human rights impacts. Furthermore, these human rights risks are investment risks and could lead to lower financial performance. People should investigate their own investments and engage their employers/retirement plans to reduce the human rights risks of their savings."

Estelle Parker, Responsible Investment Association Australasia (RIAA) said: "It is not acceptable for a financial product that claims to exclude a particular activity, including human rights abuses, to have indirect ownership through an index fund - unless the financial product issuer has clearly disclosed this limitation in its screening process".

"It is absolutely possible to invest responsibly and maintain a commitment to human rights using an index-tracking fund. You can consider indices that incorporate ESG criteria; you can engage with the fund manager to ensure their approach to human rights aligns with the outcomes you want; and you might even advocate for better index construction itself. You can also monitor the holdings.

The OECD Guidelines create clear obligations that investments do not contribute to human rights abuses, said Bianca Tylek, executive director of Worth Rises, one of the complaint filers.

"We are pleased to see the Swiss NCP accept our complaint, reiterating the important role banks play in the financial ecosystem, including their passive investments. We hope other financial institutions take note."

BankTrack urged all investors to address exposure to ongoing human rights abuses.

Parker added: "All financial institutions should be managing human rights risks preventatively."