Leaving the Big House
Ever more investment firms are touting their skills in applying environmental, social and governance criteria to their portfolios. Just how much weight to give to ESG factors can be a tough call in practice. Yet at least one industry in the United States shouldn’t pose that hard a test: private prisons.
Reports of children being separated from their parents in migrant detention facilities – and in some cases being denied blankets, soap and toothpaste – has created an outcry from critics of President Donald Trump’s immigration policies. That has dealt a blow to CoreCivic and GEO Group, the two publicly traded companies in a sector that runs more than two-thirds of migrant facilities for the U.S. Immigration and Customs Enforcement agency, as well as around 10% of the nation’s jails. Their shares have fallen roughly 10% in the past week.
Granted, the two companies don’t set the rules – that’s up to federal and state governments. And both companies have been at pains to make clear that they don’t operate any facilities on the country’s border with Mexico and have never housed unaccompanied children.
They have, though, come under fire for conditions elsewhere. And they did house some of the parents who had been separated from their children. Such facts, as well as many people’s discomfort at correctional and other detention facilities being run by for-profit enterprises rather than the state, are reputational risks to the industry. One of the leading Democratic candidates running for the White House, Elizabeth Warren, has already called for them to be banned.
Some investors aren’t waiting. CalSTRS, the $226 billion manager of California teachers’ pensions, factored much of this into its decision to dump the two companies’ shares late last year. Several other state and city retirement funds have done the same. Even some banks have stopped lending to them – Bank of America became the latest to do so on Wednesday, following JPMorgan and Wells Fargo earlier in the year.
Yet some of the industry’s biggest investors are still in. Vanguard, BlackRock and State Street collectively own roughly 30% of both CoreCivic and GEO. As big index fund providers, they may not be able to sell readily. But they should at least be pressing these companies to respect human rights, and consider exiting some of the uglier areas of the business. Fund managers who claim to adhere to ESG principles can’t escape that commitment.