Pension funds and others can no longer ignore the risks and opportunities associated with forced displacement
The former UN High Commissioner for Refugees issued a strong warning last year, claiming that we are ‘witnessing a paradigm change, an unchecked slide into an era in which the scale of global forced displacement… is now clearly dwarfing anything seen before.” While the Syrian refugee crisis is grabbing headlines around the world, in 2015 there were at least 15 other conflicts in Africa, the Middle East and Europe, and by 2016, 1 in every 113 humans across the globe has been forcibly displaced from their homes.
In a different world – the world of finance – another paradigm change is underway that could offer some serious relief to the enormous pressures of forced displacement. Institutional investors, including pension funds, sovereign wealth funds and others, are increasingly recognizing that they cannot ignore financial, environmental and social risks that are unfolding at the systems-level.
This marks a strong break from the past, where humanitarian issues like forced displacement were reserved for philanthropic investors and government aid agencies, as they were believed to clearly fall outside of the fiduciary duty of most institutional investors. But initiatives such as the Investment Integration Project are making it possible for long-term investors to begin seriously contemplating how financial, social and environmental systems impact their investment portfolios, and equally, how their portfolios impact and contribute to shaping systems-level risks and opportunities.
There are several possible linkages between systems-level risks presented by forced displacement and the investment portfolios of long-term investors.
To begin, forced displacement is placing extreme pressures on countries that host refugees, in the form of increasing youth unemployment, urban population densification, resource scarcity and fiscal instability, among several others. For example, a recent report by the Earth Security Group finds that the Syrian refugee crisis has led to a 20 per cent increase in average water use in Jordan, a country in which water was already in short supply.
And in developed countries such as Germany and the United Kingdom (UK), forced migration is placing increasing pressures on social resources that were also already in short supply prior to the influx of Syrian refugees, such as affordable housing units and public education institutions.
As a result of these increasing pressures on both the social and natural resources of refugee host countries, forced displacement has led to significant political instability that is resounding in markets around the world. For example, the UK referendum decision to exit the European Union earlier this year is largely attributed to increasing contempt among the British working class for migrants and refugees. Brexit has created significant uncertainty in global financial markets. Similarly, the election of Donald Trump raises significant uncertainty over the fate of current and future migrants and refugees.
Around the world this anti-immigration sentiment is fuelling uncertainty for entire sectors and industries that depend on foreign workers and migrants to fill labour shortages, act as conduits with new export markets and bring new perspectives and talent needed to respond to rapidly evolving market conditions.
With an increase in the frequency of extreme weather events and political conflicts, forced migration will have a significant impact on social systems over the next couple of decades. Mitigating risks and tapping into new opportunities associated with global migration will require host countries to invest in better settlement and integration systems.
Universal owners – investors that, by virtue of their size and ownership of diversified portfolios that are representative of global capital markets depend on stable and well-functioning financial, environmental and social systems – have good reason to be concerned about forced migration and its impacts on global financial markets. These investors can use their rights as shareholders to engage with government and corporations to encourage policies and legislative changes that promote the financial, economic and social inclusion and protect the rights of migrants and refugees.
While some of these engagements on migration issues can be linked directly to portfolio level risks and opportunities, other actions by investors will not have direct and measurable portfolio-level impacts, at least when held up against the short-term frameworks that the finance industry uses to measure success. However, these actions can contribute to greater social cohesion and inclusion, with long-term benefits accruing to host countries, migrants and investors.
Addressing systems-level risks related to forced migration is an ambitious task. It requires institutional investors to extend beyond the now ‘conventional’ toolbox of ESG ratings and standards to assess risks and opportunities at the portfolio level, and to begin to think and act at a systems-level. It is at times like these, when our politics fails us, that the true value of private sector commitment to social responsibility will reveal itself.