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Brunei’s drastic punishment becomes ESG issue

Stoning for homosexuality, adultery prompts calls to boycott country's businesses

Helga Birgden said some managers are weighing withdrawing from Brunei.

Brunei's decision to punish homosexuality and adultery by stoning starting on April 3 is prompting high-profile calls to boycott the business interests of the tiny, oil-rich country on the island of Borneo. Whether money management firms will follow suit is an open question.

Some observers report early signs of an exodus.

Helga Birgden, a Melbourne-based partner with Mercer Investment Consulting Inc. and the firm's global business leader, responsible investment, said she's been advised informally that a number of asset managers with business in Brunei are considering withdrawing or declining to pursue new business there.

The reputational risks of taking money now from institutional heavyweights in Brunei — including the Ministry of Finance and Economy and Brunei Investment Agency, the country's more than $50 billion sovereign wealth fund — outweigh the potential rewards, said the Asia-Pacific head of one global money management firm, who declined to be named.

Others believe the likelier outcome is business as usual following a brief spate of negative publicity — with Saudi Arabia providing the starkest recent example of that pattern. Six months after the murder of journalist Jamal Khashoggi in a Saudi consulate in Turkey, which saw many in the financial industry condemn the country, investors flocked to embrace a huge Saudi Aramco bond offering. The state-run oil company's $12 billion bond issue was one of the most oversubscribed debt offerings in history, according to Bloomberg.

It's hard to believe that money managers who gladly invest on behalf of other countries with draconian legal systems, such as Saudi Arabia, will turn up their noses at Bruneian money, said one Southeast Asian institutional sales executive with a global manager, who declined to be named.

If money managers begin narrowing their client universe on the basis of broad moral judgments, where will it end, asked an institutional sales executive in Singapore with a U.S.-based money manager, who declined to be named.

Still, the surging ranks of asset owners and money managers pledging to integrate environmental, social and governance factors into their operations could be slowly building a framework capable of giving reputational considerations greater staying power.

A growing number of asset owners expect their money managers to live up to ESG guidelines, making a situation like the one in Brunei "much more complex today," said Cynthia Steer, an investment consulting and money management veteran serving on the investment committees of Washington-based ICMA-RC, which oversees $55 billion in public sector retirement assets; Northampton, Mass.-based Smith College, with its $2 billion endowment fund; and Hartford, Conn.-based Hartford Healthcare, with $3.2 billion in pension and endowment assets, among others.

With ESG principles increasingly being enshrined in investment management agreements, yesterday's moral questions could increasingly become contractual ones going forward, said Ms. Steer.

ESG factors cover a wide range of issues, including human rights and discrimination, said Joy Frascinella, a spokeswoman for the United Nations-backed Principles for Responsible Investment, a London-based organization with more than 2,300 asset owner, investment manager and service provider signatories representing $82 trillion in assets.

PRI doesn't dictate how its members should invest but "we would hope that investors are alert to breaches of these issues" across all of their financial activities, she said.

In an industry where such standards are being elevated, some observers see room for money managers doing business with controversial clients to lose out on other opportunities.

For the most part, ESG issues relate to a manager's "investment portfolio" rather than its "client portfolio," noted Tomas Franzen, who founded Lisbon-based Franzen Advisory in 2017 after a decade serving as chief investment strategist at the 334 billion kronor ($35.9 billion) Second Swedish National Pension Fund, or AP2, Gothenburg.

Still, in an environment where ESG-focused factors are being emphasized, managers with high-profile roles serving clients surrounded by controversy, as Brunei has become, "could be excluded in the due diligence process just because of that," predicted Mr. Franzen.

But as a practical matter, money management veterans note the risks of garnering much attention as a manager of Brunei's assets are negligible as the country's sovereign wealth fund operates under the radar screen, making allocations with no publicity and issuing no detailed reports, industry veterans say.

On another front, the controversial changes to Brunei's justice system could make it tougher for other institutional heavyweights to partner with Brunei on private markets club deals and other co-investment opportunities.

Johan Floren, head of communications and corporate governance with 426 billion kronor AP7, Stockholm, said in an email that "with our current strategy and agreements, there can be no investments in or with Brunei on our behalf."

A Brunei Investment Agency spokesman couldn't immediately be reached for comment.