Passive investing or active destruction: How robo-investing mows down forests for fun and profit

It’s a dynamic moment in the world of palm oil.

Where, just a few years ago, not more than a handful of consumer companies showed concern over the overwhelming environmental and social costs of palm oil plantations, in the last two years alone over twenty companies, including Unilever, Cargill, Wilmar, and Pepsico, have adopted sustainable palm oil policies of varying strengths.

If implemented in good faith, these commitments will bring positive change to the palm oil market which should result in sparing millions of acres of rain forest from the ax.

But another set of actors has yet to budge significantly. As we’ve been demonstrating through our campaign on Landgrabs, forests and finance, the expansion of palm oil is driven not solely by consumer demand — I mean, does anyone really demand donuts fried in palm oil? — it’s driven in at least equal measure by private finance and the needs of investors to deliver high rates of return.

What this has come to look like is banks and investors pouring money into companies based in emerging economies — companies that are often the products of dictatorship, political fiefdoms, and entrenched corruption, and that lack any of the regulatory restraints that have been established to rein in the worst excesses of western corporations.

Worse still, with the increase in passive investing — buying and holding a representative slice of equities instead of trying to choose particular winning stocks, and letting the market do the work — and automated investing — letting computer-generated algorithms make investment decisions — what we have is a “passive” global marketplace in which robo-investors largely bypass both ethics and regulations.

A new article by Global Witness explains:

In the absence of a person to make investment decisions there is no [environmental and social] risk assessment of companies. Because stock exchanges don’t require companies to have social or environmental standards in order to publicly list, the chances of investing in a tainted company are far higher. And of course, with no active fund manager comes no accountability – banks can simply point at the computers and shrug their shoulders.

The passive investing approach was pioneered by a firm called Dimensional Fund Advisers, or DFA, whose clients are selected through ‘algorithmic trading’, that is, through a pre-programmed computer. In fact, DFA adviser Eugene Fama won a Nobel Prize in economics for the approach (famously characterized as taking a random walk down Wall Street).

By “tilting” its passive investments toward certain winning combinations, DFA has become one of United States’ biggest investment firms, managing hundreds of billions of dollars for clients worldwide, including Pepsi, Kellogg’s and Boeing, the California Public Employees’ Retirement System (CalPERS), the cities of Seattle, San Diego, San Francisco, and Kalamazoo, and the endowments numerous universities and labor unions.

DFA is also partly owned by Arnold Schwarzenegger, the subject of this must-see video.

So why, you ask, does Friends of the Earth care about DFA?

It so happens that DFA’s computers have purchased roughly US$774 million worth of shares in palm oil and logging companies implicated in widespread destruction of tropical forests, land-grabbing, and human trafficking. As Global Witness notes, this includes one company previously linked to arms trafficking during a brutal civil war in Liberia 

Let’s look at just one of DFA’s holdings: a Malaysian palm oil company called Kuala Lumpur Kepong Berhad, also known as KLK, in which DFA has about a $12 million stake.

KLK is Malaysia’s third largest palm oil plantation company, with a land bank of roughly 750,000 acres. A recent report by Rainforest Action Network documents four cases of serious abuse by the company, spanning several countries, including these two:

• In Liberia, KLK partner Equatorial Palm Oil destroyed community crops, forest reserves and sacred sites on land held by eleven villages under customary law. After company security guards physically assaulted community members, the communities filed formal complaints before every authority in Liberia, and have been trying to kick the company out of Liberia.
• In Indonesia, a KLK plantation called PT Adei is on trial for deliberately setting forest fires that led to record-setting air pollution levels last summer; two KLK employees face jail time for their role in the fires. Two other KLK plantations are charged with threatening endangered Bornean Orangutans, in violation of national law, and still others have revealed gross violations of basic labor rights, use of child labor, and conditions amounting to modern day slavery — allegations that earned KLK a feature in a BusinessWeek article, “Indonesia’s Palm Oil Industry Rife with Human-Rights Abuses.”

KLK is just one of dozens of companies held — passively — by DFA. And while legal cases proceed against KLK in several countries, KLK’s top investors, including DFA, Van Eck Global, Vanguard Group, Fidelity Investments, and JP Morgan Chase, bear no responsibility.

To further complicate matters, investors like DFA balance risk and return by diversifying their investments into very large portfolios, often with small equity participations. As a result, each investor holds such a small share in any given company — compared to KLK’s $2.8 billion annual revenues, DFA’s $12 million stake is a drop in the bucket — that the influence and culpability of any particular investor is minimal.

The case of DFA and KLK shows in vivid color how the sheer drive of financial markets to bring high returns on investment — legally mandated as the asset managers’ fiduciary responsibility to the client — thoroughly trump social and environmental concerns.

At a time when there is increased pressure for companies to operate sustainably, and growing recognition of the need for transparency and accountability within the banking sector, the impacts of passive investing demand attention.

That’s why we’re asking Arnold Schwarzenegger, the green action hero who owns a significant piece of DFA and has a million dollars of his own money managed by the firm, to help us terminate forest destruction by making DFA take action.

To echo the words of Global Witness once more, “let’s not be passive about passive investing – let’s rage against the machine.”

Click here to see Indonesian palm oil activists tell Arnold to get out of palm oil, and click here to tell him so yourself.  

Image credit: Jason Taylor, www.thesourceimage.com