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The FDI angle:
- Companies are excluded from access to finance and/or investment from institutions because of business practices deemed to be unethical or harmful to society.
- Climate change is the most cited motivation for exclusion, followed by weapons manufacturing and tobacco.
- Why does this matter? Governments and investors should conduct higher due diligence on companies blacklisted by financial institutions before doing business with them.
The US is home to the highest number of companies blacklisted by 87 major financial institutions over concerns about their business operations, in a sign of how climate change impacts have become more prominent in shaping finance and investment decisions.
Almost half of the roughly 9000 exclusions of US-headquartered companies by financial groups cited climate change as the main reason, according to research by a group of environmental and non-governmental organisations (NGOs) that includes Fair Finance International, Rainforest Action Network and Profundo, a Dutch research advisory. An exclusion is a public commitment by institutions to not invest in a blacklisted company’s securities such as equities or bonds.
Chinese companies had the second highest (5049) number of exclusions, followed by businesses based in Canada (2072), India (2064) and Russia (1778).
These findings come from a publicly available list of 4532 companies excluded by the 87 financial institutions, most of which are public pension funds and insurance groups. There are more exclusions than companies since companies can be excluded for multiple reasons, including concerns over climate, human rights abuses and unethical business practices.
The majority of these financial groups are based in European countries such as the Netherlands, Denmark and Sweden, where institutions tend to be more transparent about exclusions. A lower representation of banks in the research is due to many not publishing exclusion lists for reasons such as “confidentiality” and “competition”, according to Ward Warmerdam, a senior financial researcher at Profundo.
A total of 971 US companies have been blacklisted by financial groups included in the research, with around 40% excluded for concerns about their impact on the climate. China was home to a total of 549 excluded companies, followed by Canada (313), Russia (256) and Japan (208). The UK was the only European country to feature in the top 10 countries with a total of 167 companies blacklisted.
“Climate has grown to be such an important motivation for exclusion, where it used to be [mostly about] tobacco and weapons,” says Mr Warmerdam.
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Aside from reflecting the size of these 10 major economies, the findings show the prevalence of companies involved in industries deemed to be unethical or harmful to society, including fossil fuels, tobacco and weapon manufacturing.
“The US remains the safe haven for tar sands oil and shale gas companies,” says Kees Kodde, a project lead at Fair Finance International. Several large fossil fuel and mining companies are also headquartered in countries like China, Canada and Russia.
Only two of the top 10 — China and Russia — had significant numbers of exclusions motivated by institutional investors’ country policies. For example, Danish public pension fund AkademikerPension excludes both countries from its investments.
“We have judged that China, Russia and Saudi Arabia were even worse in terms of human rights, and have prioritised opting out of them within our possible room for manoeuvre,” says a statement alongside AkademikerPension’s exclusion list.
The most excluded company in the research was Poongsan Corporation from South Korea, which was blacklisted by 75 financial institutions due to its involvement in producing cluster munitions. It was followed by US defence company Northrop Grumman and Indian industrial conglomerate Larsen & Toubro. Companies like Poongsan and SNT Holdings contributed to South Korea having the highest share (46% of total) driven by companies engaged in weapons manufacturing.
While companies on exclusion lists may not have less access to capital, due to other institutions still investing and financing them, the NGOs behind the research hope it will push them to improve their business practices.
Mr Warmerdam says being included in the financial exclusion list is like a company having a “dangerous” label. He advises that investment promotion agencies do “considerably higher due diligence” and receive commitments when assessing investment from these companies.
“If a company is involved in land grabbing or human rights violations anywhere in the world, I wouldn’t want that company to invest in my country,” he says.
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