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Institutional investors, climate change

and human rights
a b
Kristian Alm & Riikka Sievänen
a
Institute of Strategy and Logistics, Norwegian Business School ,
Oslo , Norway
b
Faculty of Forestry and Agriculture, University of Helsinki ,
Helsinki , Finland E-mail:
Published online: 11 Sep 2013.

To cite this article: Kristian Alm & Riikka Sievänen (2013) Institutional investors, climate
change and human rights, Journal of Sustainable Finance & Investment, 3:3, 177-183, DOI:
10.1080/20430795.2013.791139

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 Journal of Sustainable Finance & Investment, 2013
Vol. 3, No. 3, 177 –183, http://dx.doi.org/10.1080/20430795.2013.791139

EDITORIAL
Institutional investors, climate change and human rights

Background
This special issue stems from the workshop that we held at the research conference of European
Business Ethics Network in Newcastle, UK from 7 to 9 July 2012. We invited scholars to partici-
pate with relevant research articles and also welcomed submissions from outside of the work-
shop. We received numerous submissions and were ultimately able to include five articles,
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three of which were presented in the workshop.

Briefly, climate change refers to the increases (and decreases) in the average global tempera-
ture. Climate change is a complex problem that has implications for all spheres of existence on the
Earth. It impacts and is impacted by global issues, including poverty, economic development,
water resources, population growth, sustainable development and resource management. Sol-
utions to climate change are likely to come from all disciplines and fields of research
(UNFCCC 2012). As climate change will affect future generations, as well as people far away
from the venues of international conferences, neither national self-interest nor approaches that
exclude equity and justice are applicable (Adger et al. 2006). This is why we believe it is
topical to move climate change issues from paper to practice; specifically, investment decision-
making.
The Universal Declaration of Human Rights was adopted by the United Nations (UN) General
Assembly in 1948. Although the roots of the declaration derived from the Second World War (UN
1948), they are still greatly needed in contemporary societies. Human rights are those rights that
are essential for protecting our lives as human beings. They are basic standards of law
implemented by nation states to protect the dignity of all human beings on the basis of the
idea that all humans have the same unique value. The fulfilment of these obligations is often a
necessary prerequisite for people’s lives, without which they cannot survive and develop in
dignity (UNICEF 2012). Human rights and their vision of the equal value of all humans are appli-
cable to everyone, in a broad variety of situations, especially when there are differences in power
between weak and strong humans and corporations. Furthermore, companies investing in emer-
ging markets do not necessarily account for human rights. This is why it is worthwhile for insti-
tutional investors to account for human rights and sector-relevant employee rights during
investment decision-making.
Pension funds and pension insurers are institutions set up by a public or private entity with the
aim of securing the pensions of the funds’ participants (OECD 2009). In some countries, insur-
ance companies serve this function. The fact that the assets of pension funds account for approxi-
mately one-third of the GDP in Organisaton for Economic Cooperation and Development
(OECD) countries (OECD 2011) means that pension funds are significant asset owners and
perhaps the most influential institutional investors in the global markets, along with sovereign
wealth funds. Other institutional investors include banks, asset managers, mutual funds, foun-
dations, churches, universities and associations. The integration of environmental, social and cor-
porate governance factors (ESG) into the investment decision-making and ownership practices of
such institutional and private investors (Eurosif 2010, 2012; UN PRI 2011) appears to be the most

# 2013 Taylor & Francis

 178 K. Alm and R. Sievänen

common definition for (socially) responsible investment, sustainable investment and similar terms
that describe responsible investment. In this Editorial, we use the umbrella term ‘responsible
investment’ to cover all such terms.
In recent decades, responsible investments by institutional investors such as pension funds
have become a dynamic part of the development of the international financial markets. The finan-
cial competence and strength of such institutional investors have also contributed significantly to
the growth of the interest of other institutional investors in evaluating non-financial values as
potential vehicles for long-term investment decisions. Human rights and climate change protec-
tion have been important non-financial values for pension funds’ asset management, not least
because of an intensive public debate on the financial relevance of those values (Vandekerckhove
et al. 2011). When accounting for social and environmental factors, values such as human rights
and climate change can be integrated into the responsible investment strategy of the fund through
internal and external assets management. In internally managed assets, the fund can favour invest-
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ment targets that fulfil its responsible investment criteria. In externally managed assets, the fund
can request that its asset managers commit to such values. The different forms of responsible
investment, such as negative and positive screening and engagements, as well as the asset
class and the sector in question, specify how these values are taken into account in practice.
Both climate change and human rights have received considerable attention in the media, as
well as in public policies, both at the international and national levels. For example, according to
United Nations Framework Convention on Climate Change (UNFCCC 2011), the Durban climate
change conference in the end of 2011 ‘delivered a breakthrough on the international community’s
response to climate change’. Human rights are linked to climate change, as the latter can nega-
tively affect many people’s homelands. For example, water as a scarce resource may, as a
result of global warming, negatively influence the living conditions of poor people and that
way their human rights.
Policies and public debate provide a forum in which to develop and change responsible
investment practices, and have largely influenced the ethical profiles of funds such as the Norwe-
gian Government Pension Fund (NGPF) (NBIM 2011) and the Swedish national AP funds (The
Swedish Government 2008). After the ethical guidelines of the NGPF were revised, the climate
change profile of its investment portfolio was strengthened, partly because of the public criticism
of a lack of such ESG factors (Myhrvold 2012).
We also note that, on a global scale, institutional investors such as pension funds have paid
relatively little attention to climate change and human rights in their responsible investment prac-
tices, although these topics have been tied to the national and international policies of nation states
via such instruments as the Kyoto Protocol. The following section addresses the relevant topics
that affect the response of pension funds and other institutional investors to public policies and the
debate on climate change and/or human rights.

Relevant topics
One of the main reasons why it is important to address responsible investment practices of
pension funds and other institutional investors is because they account for more than 90% of
the assets that are invested according to responsible investment criteria (Eurosif 2012). One
could expect the strong growth of responsible investment to be related to the success of organiz-
ations that provide support for responsible investment and corporate social responsibility (CSR).
Such organizations base their investment philosophy on United Nations Principles for Respon-
sible Investment and United Nations Global Compact. According to Eurosif (2010, 2012),
responsible investment grew by 87% between 2008 and 2010. The latest report (2012) indicates
similar strong growth in responsible investment strategies, such as engagement, norms-based and
 Editorial 179

thematic funds. As several strategies are applicable by one investor, Eurosif (2012) estimates cau-
tiously that responsible investment could have grown from E5 billion in 2007 to E6.8 billion in
2011.
Another main reason for addressing responsible investment by institutional investors is that
such a huge amount of responsible investment can make a difference for the quality of life of
people and the environment. According to Kutz (2000), institutional investors are accountable
in the domain of repair. As Nagell (2011) points out in her interpretation of Kutz’ theory, ‘a volun-
tary decision by an investor to participate in an intrinsically risk-bearing collective venture makes
shareholders liable’. The liability might be related to the fact that investors are collectively con-
fronted with the risk that their portfolio-companies might violate human rights. Nagell’s perspec-
tive opens the door for the notion of double-complicity by arguing that an investor who is
complicit in an immoral action carried out by a portfolio-company is also responsible for
repair or compensation. The fulfilment of this responsibility of repair might make a difference
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in certain people’s quality of life.

Several responsible strategies can be applied to addressing climate change and human rights
in practice. The first hypothesis that we present here is that thematic funds and norms-based
screening are in play. Thematic funds address one or more themes related to sustainability
(Eurosif 2012), and the theme of climate change could fit especially into this strategy. Norms-
based strategies avoid companies that are in breach of one or more internationally recognized
norms covering ESG practices (Eurosif 2012); therefore, human rights would fit well into this
strategy. It seems that both strategies are becoming increasingly popular in Europe: thematic
funds grew by almost 38% between 2009 and 2011, and norms-based screens by 54% in the
same period (Eurosif 2012). This growth indicates an interest by pension funds and other insti-
tutional investors in addressing issues such as climate change and human rights, and we tend
to think that investing by accounting for themes and norms is one of the ways in which
pension funds and institutional investors address the long-term financial risks that relate to
topics such as climate change and the violation of human rights. Another hypothesis is that by
investing in companies that are participants of UN Global Compact (GC), pension funds auto-
matically account for climate change and human rights, as these companies have agreed to
account for such issues. An investor perspective to the use of GC is that the largest institutional
investors around the world do not appear to make much use of the GC-reporting framework when
communicating about their ethical guidelines (Jensen and Seele 2013).
Despite our hypotheses of how investments that are ‘friendly’ to climate change and human
rights can spontaneously occur in practice, we find that there are considerably few references
available regarding why and how pension funds and other institutional investors account for
such topics. If we take the helicopter perspective, factors such as economics, finance, culture
and institutions can explain the emergence of responsible investment, and differences in respon-
sible investing (Scholtens and Dam 2007; Bengtsson 2008a, 2008b; Scholtens and Sievänen
2012). The development and maturation of regulatory frameworks relates to the institutions
and politics of the country in question. Sorsa (2013), for example, suggests a framework for
explaining why some activities are adopted because of the political choice to describe them as
socially responsible.
Another important factor that impacts pension funds’ responsible investing is fiduciary duty.
According to some studies, fiduciary duty can hinder responsible pension fund investment (Pivo
2008), although investing responsibly should fit well with it (Richardson 2011). The growing
amount of responsible investment by institutional investors such as pension funds (Eurosif
2010, 2012) indicates that responsible investment fits well with fiduciary duty. However, we
argue that fiduciary duty alone cannot alone explain detailed topics such as addressing climate
change and human rights. Therefore, we must seek more specific reasons.
 180 K. Alm and R. Sievänen

If we look at the values of societies, one of the main reasons for integrating ESG criteria into
the management of the pension funds’ assets are connected to what we could call the democratic
basis of the ethical norms in the management of pension funds assets. ESG criteria should reflect
the ideological position of the owners and the fund participants and arrive at a satisfactory return
to ensure reasonable pensions for (future) pensioners. In other words, the management of a
pension fund should manage the assets on behalf of the fund participants and the owners accord-
ing to the norms and values that reflect their ideological position and their basic values.
Human rights and the fight against climate change have been at the forefront of discussions
regarding these values (Syse and Gjessing 2007). Such ESG criteria have been interpreted as
an overlapping consensus among ordinary people who disagree profoundly about other norms,
as a common and stable situation of a democratic and pluralistic society. John Rawls’ theory
(Rawls 2001) of overlapping consensus has, as a symptom, been explicitly used to interpret
human rights as the overlapping basis among people with different ethical and social values,
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namely the owners of pension funds in democratic societies. An example of this can be seen
in the allegation of the ethical guidelines of NGPF (Cappelen 2004).
In the ethical guidelines of the NGPF, Rawls’ theory is used to argue that there is no consensus
among Norwegian owners regarding exclusions other than to exclude such companies that break
the human rights values in a systematic or severe way (Management for the Future 2003). Some
years ago, there was a discussion among the Democratic and Republican members of the board of
the California Public Employees’ Retirement System regarding whether the management of the
funds assets should be based on human rights. This could be interpreted as yet another sign of
this development among some large pension funds, especially as the Democrats won the
‘battle’ and human rights were introduced as the ethical basis of the funds asset management.
According to authors such as Soederberg (2007), it is common in responsible pension fund invest-
ment disclosures to mention climate change and human rights, but the link to real action is not often
well explained. Haigh suggests that this is due to insufficient guidance regarding how to transfer the
outputs of climate science to the investment world. These findings are supported by Alm (2013), who
finds that large institutional investors as universal owners have limited control over their global port-
folio when it comes to their portfolio companies’ human rights compliance, and by Sievänen (2013),
who suggests that pension funds can only address climate change and human rights to a limited extent
because they need more guidance in responsible investment practices.
Therefore, the management and owners of companies affect whether topics such as climate
change and human rights are addressed. For example Dam and Scholtens (2012) find that in Euro-
pean companies, ownership by employees, individuals and companies is associated with rela-
tively poor corporate social policies of the companies in which they invest, whereas the
holdings by banks, institutional investors and states seem to be neutral. The findings of Rees
and Rodionova (2013) support these findings.

Articles
The articles included in this special issue are very different in terms of their theoretical perspec-
tives, as well as the approach they take in addressing the response of pension funds and insti-
tutional investors to the public policies and debate on climate change and/or human rights.
Each article is relevant to the topic of the special issue, so we hope that this set of articles
helps broaden the understanding of the responses of pension funds and other institutional inves-
tors to climate change and human rights.

(1) Alm (2013). This article analyses the risks associated with the Norwegian Government
Pension Fund Global’s (NGPF) complicity in the violation of foreign citizens and their
 Editorial 181

human rights as carried out by the fund’s numerous portfolio companies. On the basis of
current research on shareholders’ complicity, the article develops a theoretical framework
on investor complicity and applies it to several empirical phenomena that characterize the
NGPF portfolio. The article concludes that there is a high risk of the fund’s complicity in
unethical violations on three levels: macro (the fund will reflect the bearing structures in
the world economy at any given time), meso (emerging markets and child labour) and
micro (contributing to PetroChina’s violation of human rights in Burma).
(2) Sievänen (2013) establishes relationships between impediments to responsible invest-
ment and the response of pension funds regarding climate change and human rights.
The starting point of the analysis is the seemingly conflicting goals of responsible invest-
ment and fiduciary duty and the article concludes that these conflicting goals, along with
the challenges to implement responsible investment, can impact how pension funds
address topics such as climate change and human rights. The article suggests that
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pension funds that do not yet have a particular responsible investment strategy must
first pass the phase of transforming the usual definition of responsible investment into
practice and must thoroughly consider implementing responsible investment before
meeting more detailed challenges such as climate change and human rights.
(3) Sorsa (2013) suggests a framework based on post-foundational political thought for ana-
lysing the discourse of how social responsibility shapes everyday practices in organiz-
ations and demonstrates an application of it from practice. The article concludes that
socially responsible discourse can politically shape investment practice and that there
is a need to examine politics of social responsibility more accurately.
(4) Rees and Rodionova (2013) investigate the impact of strategic shareholders on CSR
activities. They hypothesize that substantial shareholdings, especially when concentrated
among family members or when held by corporate cross-holdings, will tend to discourage
investment in CSR. The analysis is based on a large sample of international firms and
confirms that undiversified strategic shareholders are associated with lower CSR perform-
ance as measured by ASSET4. This negative influence is felt particularly strongly for
elements of CSR such as climate change, environmental management, business ethics
and human rights. Conversely, there is no clear relationship between CSR performance
and diversified institutional shareholdings. The results show that the impact of ownership
on CSR differs depending on the type of owner and the type of CSR.
(5) Jensen and Seele analyse the ethical investment guidelines of sovereign wealth funds and
pension funds and find that only a minority adhere to GC and ensure that violations of
their ethical guidelines are implemented by sanctions. They conclude that only funds
with published investment guidelines and applicable sanctions may influence corporate
behaviour and, in this way, assume their (and their investment’s) social and environ-
mental responsibilities. They also underline that ethical investment guidelines might be
a way of appearing clean and ethical.

Conclusion
The response of institutional investors to climate change and human rights is affected by several
factors that are embedded in the environment in which institutional investors function. For
example, socially responsible discourse can politically shape the investment practices of insti-
tutional investors. The ownership of companies seems to affect whether social responsibility is
accounted for. When institutional investors consider implementing responsible investment,
they seem to face challenges that may have a considerable role for the response of institutional
 182 K. Alm and R. Sievänen

investors. One example is the fact that controlling for responsible investment plays a role in the
response of institutional investors. Funds implementing guidelines for responsible investing such
as GC might be tempted to use them as a way of appearing ‘nice and clean.’ Furthermore, the
degree of the funds’ complicity in the violation of norms carried out by the portfolio-companies
might be a negative inspiration to take human rights more seriously in the management of the
portfolios.
We believe there is still some way to go before adopting responsible investment practices
become the rule rather than an exception. However, we observe that those institutional investors
that account for topics such as climate change and human rights seem to lead the way for others to
follow. We look forward to seeing more responses on climate change and human rights, as these
topics, which affect the world now and in the future, are likely to continue on the agendas of
decision makers and media.
We hope this Editorial has positioned the discussion of addressing climate change and human
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rights by pension funds and other institutional investors in a wider perspective, as well as pro-
vided an overview of the articles that go into the topic in greater detail. We also hope that this
special issue opens possibilities for future contributions on the same topic.

Acknowledgements
We thank all the authors for their interesting articles, as well as the anonymous referees who have provided
valuable evaluation and feedback on the articles. We also warmly thank the editor, Matthew Haigh, for his
valuable comments regarding this special issue.

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Kristian Alm
Institute of Strategy and Logistics, Norwegian Business School, Oslo, Norway
kristian.alm@bi.no

Riikka Sievänen
Faculty of Forestry and Agriculture, University of Helsinki, Helsinki, Finland
riikka.sievanen@helsinki.fi