Late one evening last November Nickolai Prakofyeu answered the phone to some troubling news: he had 24 hours to leave Belarus or face at least 12 years in prison. Prakofyeu’s father had been tipped off by a sympathetic source within the Belarusian KGB that the security forces of Alexander Lukashenko’s regime were no longer willing to tolerate the family’s pro-democracy activities since last August’s disputed election.

Officials were about to shut down his family’s hotels and restaurant in the south-eastern city of Gomel, which had been giving free food to anti-government protesters. After the warning, Prakofyeu and his wife had time to gather just a few belongings — along with Jason, their Yorkshire Terrier — before fleeing in the early hours.

“We packed what we could into our car and drove to Ukraine,” says the 28-year-old, who has since linked up with the Belarus opposition in exile in Poland. From that bolt-hole he now spends his time pressuring western companies into ditching their investments in his home country. They include an array of asset managers who have funded Lukashenko’s authoritarian regime by buying Belarusian government debt.

Such divestment campaigns are not new in the world of emerging markets investing, where European and North American fund groups frequently use their clients’ money to bankroll unsavoury regimes. But they have been given fresh impetus by the phenomenon of ESG investing sweeping the asset management industry — which evaluates investments on environmental, social and governance criteria. And by the public attention Belarus has attracted.

Prakofyeu has tried to hold the industry to its promises, writing to asset managers such as BlackRock and UBS to ask if owning Belarus’ bonds is consistent with their policies, “given that the proceeds support the terroristic regime which is involved in gross human rights violations”. UBS says it only holds small positions of these bonds.

“All of these companies say ‘we’re all about ESG and sustainable practices’,” Prakofyeu says. “But when it comes to their investments, it seems like no one really cares.”

Such campaigns have enjoyed isolated success. Even before Belarus’ forced grounding of a Ryanair flight in May placed the regime back in the spotlight and sparked a tightening of US and EU sanctions, a group of Danish asset managers sold all their Belarus government debt. Germany’s Union Investment has also sold out, while investors such as BlueBay Asset Management avoided last year’s bond sale over human rights concerns. EU sanctions, imposed in June, prevent European investors from buying or trading any new Belarusian bonds that the regime tries to sell, but do not affect holdings of existing bonds.

Many emerging market investors point to a dilemma for the industry: if they steer clear of Belarusian bonds, what about other countries with dubious human rights records? Many worry privately it would be hard to make money if the likes of Russia, Saudi Arabia or China were off-limits.

“All of the countries in the emerging markets index will have some issue of some kind — there’s no perfect way to do it,” says Richard House, chief investment officer for emerging market debt at Allianz Global Investors. “It’s a bit of a pandora’s box.”

Profit vs rights

The dilemma over human rights exposes an uncomfortable tension at the heart of the ESG boom. Is all the effort spent measuring and evaluating “ESG factors” simply a way to improve returns by avoiding some hitherto under-appreciated risks? Or is investing more “sustainably” an end in itself?

Asset managers love to pretend both these goals are in perfect harmony. Logically, that won’t always be the case. And up to now a poor human rights record has been little barrier to borrowing money from western investors.

Saudi Arabia has successfully sold $ 32bn of international bonds since the start of 2019, according to data from Bond Radar, despite the worldwide condemnation of the 2018 murder of journalist Jamal Khashoggi linked to Crown Prince Mohammed bin Salman and Riyadh’s military campaign against Houthi rebels in neighbouring Yemen. Over the same period Russia, under international pressure over events such as its 2014 annexation of Crimea and its role in Syria’s civil war, has raised more than $ 10bn on international bond markets over the same period.

Egypt is a very popular holding among emerging market bond managers, even though president Abdel Fattah al-Sisi’s government holds tens of thousands of government critics in prison on politically-motivated charges, according to Human Rights Watch.

Prominent holders of its bonds include BlackRock, AllianceBernstein and Crédit Agricole. ESG and human rights are important issues for all three, according to their websites. BlackRock and Crédit Agricole declined to comment. AllianceBernstein said no country it does business in “demonstrates policies, strategies and actions that are 100 per cent ideal or responsible”.

Foreign investors have also grown active in China’s massive bond market, despite the imposition of a security law in Hong Kong and its treatment of the Muslim Uyghur population in Xinjiang province, which the US state department has described as “genocide and crimes against humanity”.

Criticised by human rights activists, many fund managers insist that deciding what to do about bonds issued by unsavoury regimes is not straightforward. Their mandate is to make money. In a performance-based industry, excluding countries over human rights concerns could deny them access to profitable trades.

“We have a core responsibility to generate a return for investors, and a lot of the challenging ESG stories [countries ranking poorly on environmental or social measures] have the [highest] yields, which obviously creates a bias to invest,” says Timothy Ash, senior emerging market sovereign strategist at BlueBay.

And while a country may score badly in one area, it could fare better elsewhere. Ash highlights Saudi Arabia: while Prince Mohammed approved a “capture or kill” operation on Khashoggi, according to US intelligence, he has also led an ambitious reform programme giving women greater freedom.

Some feel it is unfair that the growing focus on human rights has increased the pressure on them to make ethical decisions about acceptable and unacceptable regimes.

“We’re not here to measure the extent of human rights violations,” says the head of emerging market debt at a big global asset manager that holds Belarusian government bonds. “We’re not going to go to Saudi Arabia and ask them to become a democracy.”

Nor would their investors wish them to, he argues: the firm manages money for western pensioners, Middle Eastern sovereign wealth funds and wealthy Chinese individuals — to automatically assume a preference for democracies would be perverse. “Some investors don’t want to invest in countries that have a problem with racism. Does that mean we shouldn’t invest in the US?” he asks.

‘Turning a blind eye to abuses’

Many fund managers say they are simply deferring to widely-used bond benchmarks against which their performance is judged when explaining why they invest in countries with poor human rights records.

Belarus remains part of the benchmark JPMorgan emerging market bond index, a broad index of countries accessible to investors. Such indices aim to provide a snapshot of investable assets, rather than make moral judgments about inclusion. JPMorgan said in April it was considering ejecting Russian bonds because US sanctions might render it impractical or illegal to purchase them. Most fund managers take a similar view, preferring to wait until sanctions are threatened or in place before selling.

ESG bond indices, which are often based on ratings from specialist firms and which are designed to provide clarity on ethical investing, can add to the confusion.

The widely used JPMorgan ESG EMBI Global Diversified index uses ESG scoring and screening “to tilt toward issuers ranked higher on ESG criteria and green bond issues, and to underweight and remove issuers that rank lower”. Its biggest exposure is to the United Arab Emirates at 5.2 per cent. Yet, hundreds of activists, academics and lawyers are in prison in the UAE, “in many cases following unfair trials on vague and broad charges”, according to HRW.

Saudi Arabia is the index’s third-biggest weighting, while China is also included. As well as being followed by many active managers, the index is also tracked — replicated in an investable fund — for instance by a $ 1.3bn exchange-traded fund run by BlackRock.

More than 37 per cent of the bonds in the JPMorgan EMBI index are issued by countries labelled “not free” by human rights campaign group Freedom House. Even in the ESG version of the index, that figure is 34 per cent — a larger proportion than bonds issued by “free” countries.

Some managers have begun to take action themselves. AkademikerPension, a Danish pension fund for academics, sold out of Belarus bonds in April on human rights grounds, and now excludes 45 countries, including China, Saudi Arabia and Venezuela.

The fund has taken a harder line because its members have made it clear human rights are a priority when choosing investments, chief executive Jens Munch Holst says. Even so, working out where to draw the line is difficult.

“It’s a dilemma. Whenever we exclude a country, we always get asked ‘why not these other countries too?’” he says. “At some point too many exclusions might start to hurt our returns — it hasn’t yet.”

Holst says the fund has excluded Belarus while continuing to buy Russian assets “because we think the repression in Belarus is worse”.

Such a swingeing approach is rare, but there are increasing signs that other investors are taking notice of human rights. Germany’s Union Investment decided not to buy Tajikistan’s bonds because of human rights abuses. The firm also raised the Khashoggi killing with Saudi representatives in 2019 and the dominant role of the military with the Egyptian government, says Christian Kopf, head of fixed income and currencies.

But often appeals made to fund managers either by activists or those directly affected by human rights violations have little impact.

“Certain investors are [turning] a blind eye to human rights abuses in some countries,” says Vytis Jurkonis of Freedom House. “They are contributing to the survival of the regime.”

A detained diplomat’s case

A poor human rights record also appears to be little barrier to countries building a new presence in bond markets.

Since the death of authoritarian dictator Islam Karimov in 2016, Uzbekistan, which used to rank alongside North Korea for its political rights and civil liberties, has been vocal in trying to open up to the outside world. President Shavkat Mirziyoyev has released political prisoners, lifted exchange controls and encouraged political debate. This year the central Asian country published its first report on its ESG progress, which said it had introduced laws to enhance civil and economic rights and was working to eradicate forced labour in its cotton industry.

Yield-hungry investors have flooded in. A debut eurobond in 2019 and a subsequent issue late last year were heavily oversubscribed, raising more than $ 1.5bn. Blue-chip investors such as T Rowe Price, M&G, Candriam and Neuberger Berman bought in.

But concerns are growing over the pace of reform and the state of human rights in the country. HRW notes on its website that “grave rights violations, including impunity for torture and abuse of lesbian, gay, bisexual, and trans (LGBT) people, persist” while “journalists and bloggers are harassed and arbitrarily prosecuted”.

Kadyr Yusupov, 69, a former high-ranking Uzbek diplomat convicted of treason by a closed court last year, is one of those said to have been mistreated.

In April last year Yusupov, who is being held at a prison colony, raised concerns about prisoner welfare. According to a December 2020 submission to a UN working party by Yusupov’s son Babur — who says his father was wrongly convicted — the former diplomat was threatened and put in a punishment cell.

After two days of hunger strike, Yusupov was transferred to a cell measuring 1.5 metres by 2 metres, containing a metal chair and a bed, as well as a torn mattress that was taken away during the day. The toilet was a hole in the ground, and the cell was, according to the submission, infested with small scorpions and snakes. The filing also details alleged psychological torture by Uzbek security services, including threats of sexual violence against him, his wife and daughter, and threats to arrest his sons.

In May this year the UN working group on arbitrary detention found that Yusupov’s imprisonment contravened five articles of its Universal Declaration of Human Rights, and called for his immediate release. Uzbekistan’s ministries of justice and foreign affairs did not respond to requests for comment.

“It’s been remarkable how people have just said ‘we don’t really care too much about what’s going on politically and locally, because the credit is so healthy’,” says Max Hess, central Asian fellow at the Foreign Policy Research Institute. He points to Uzbekistan’s large gold reserves and good record on investor relations as being attractive to fund managers.

Investors including Neuberger Berman, Candriam and M&G point to signs of ESG progress in Uzbekistan. Neuberger says it is monitoring the situation, ‘including the case of Mr Yusupov, and should we get more evidence that Uzbekistan is regressing on the reform momentum, we would look to reduce our exposure”. 

Since March 2021, EU rules have required fund managers to disclose how they account for the ESG impacts of their investments. And from 2023 they will be asked to provide further information on the human rights records of the countries they lend to, giving investors greater transparency.

And, says Sebastiaan Greeven, manager in ESG and sustainability at consultancy MJ Hudson, investors will use the information to decide where to put their money. “This is going to become really big.”

For some, such pressure cannot come soon enough.

Prakofyeu and his colleagues have written to more than 25 bondholders and banks about Belarus, and only a handful have replied.

Yusupov’s son, Babur, has also had little success. He contacted JPMorgan, which underwrote Uzbekistan’s bonds, in 2019 shortly after his father’s arrest and again on June 23 this year. JPMorgan acknowledged him at the start of July — around 90 minutes after the Financial Times contacted the company to ask about its involvement in Uzbekistan. JPMorgan declined to comment.

Following the UN ruling, Babur emailed Aberdeen Standard Investments, an investor in the bonds, to request help in highlighting the case. In a statement on its website in May the firm said that “as active investors, fulfilling our human rights responsibilities requires ongoing engagement and effort to drive positive change”.

Babur Yusupov is still waiting to receive a reply from the fund manager.