When high returns conflict with human rights issues

Many emerging markets offer great rewards, but investors may want to consider how some countries treat their own people

Investing in countries with records of human rights violations can be a double-edged sword: you can be damned if you do and damned if you don’t. Many foreign markets offer high returns, but your clients must also be aware that some countries treat their people unfairly when compared with Western standards.

Most investors are usually unaware that the investments they make either directly or indirectly in countries that violate human rights may affect the lives of people they will never know.

China, one of the world’s hottest emerging markets, is notorious for its sweatshops, political oppression and other forms of human rights violations. Yet investors keep pumping money into the country, and so-called “ethical” Western companies continue to move their operations in droves to China to take advantage of its cheap labour — with full knowledge of human rights abuses. Even the U.S. government recently enhanced its trade relations with China with only cursory reference to human rights abuses.

China is not alone. Human rights violations exist in various forms in MSCI-listed markets such as India, Pakistan, Mexico, Colombia, Malaysia, Thailand and Russia. India and Pakistan, for example, have been accused of violating the rights of women and children and encouraging forced servitude. Thailand has been linked to political killings, Malaysia to massive ethnic and religious improprieties and Mexico to politically motivated murders and abductions. Colombia has been criticized for perpetuating fear of safety, harassment and intimidation, and Russia for confining mentally disabled children to cruel and degrading conditions. Many more violations exist in all the countries.

Even so, the countries have all attracted substantial foreign funds. Collectively, their markets are up by an average of more than 70% in U.S.-dollar terms on the MSCI Emerging Markets Standard Price Index in the 12 months ended Jan. 6 — a clear indication why they are popular among investors.

“We do consider human rights when investing,” says Mark Grammer, vice president of investment at Mackenzie Financial Corp. in Toronto. “However, one cannot take a simplistic view of this complex subject. Our mandate is to look for companies that provide the best returns, not judge nations.”

Indeed, human rights issues stimulate the sensitivities of politicians, interest groups, local and international organizations and individuals in a variety of different ways, depending on the specific country and nature of the abuses.

The United Nations’ Universal Declaration of Human Rights identifies a broad spectrum of individual rights and entitlements, including adequacy of living, health, housing, education, labour, political and environmental conditions, freedom from want, and protection from abuse. Organizations such as Amnesty International and Human Rights Watch monitor conditions around globe, focusing mainly on civil and political liberties and bringing to light abuses in the hope that corrective action would be taken. The World Bank and the International Monetary Fund pay lip-service to human rights violations, focusing on the concept that foreign investments promote creation of an independent class of economically self-reliant workers, while facilitating economic development.

In reality, human rights abuses are subject to voluntary remedial action, with no enforceable laws to curtail them or international standards to follow. In the foreword to the recently published book, Business and Human Rights (2003), Mary Robinson, former U.N. High Commissioner for Human Rights, writes, “It is difficult to draw meaningful comparisons between different companies, different countries or communities and the impacts that companies can have on the many different thematic issues that comprise the ‘social dimension’ of human existence.”

Accordingly, she continues, “Companies’ approaches to corporate social responsibility are not universal or objective, largely philanthropic and subjective by nature.”

Given the range and complexity of human rights issues, Grammer argues, “Violations are very often more perception than reality.” For example, he says, what might be considered child labour in certain Asian countries is in reality a means of survival, often for an entire family. And regarding concerns about long hours of work, he says, “People are anxious to have jobs as the alternative is not nearly as attractive … By whose standards should we judge whether working 12-hour days is appropriate?”

“Human rights are often treated as an externality when it comes to investing,” says Craig Millar, associate portfolio manager of international equities, Natcan Investment Management in Toronto.
While he recognizes the importance of paying attention to human rights violations, Millar says, investors are more concerned with returns. “Investors don’t generally view the performance of, say a mutual fund, by discounting the fact that its performance might have been poor because its portfolio manager avoided certain hot markets due to human rights violations,” he says.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

More articles by Dwarka Lakhan