Q&A with Emily Claire Goldman: divesting from for-profit prisons in America

Positive Mavericks, Corporate political capture, Reports

The responsible investment world’s most entrenched habit might be debating the merits of divestment versus engagement. While not here to settle the debate (Preventable Surprises has generally supported forceful stewardship or quick and public divestment), we found Emily Claire Goldman’s work on divesting for for-profit prisons – which may very well epitomize systemic social ills  in America – to be compelling and asked her to share her experience, because it is relevant for all institutional investors. Emily led an effort for CalSTRS and CalPERS to divest from private prisons.  Her report, “High Risk, Low Reward: The Business Case for Divesting from For-Profit Prisons”, a recently updated version of the original report prepared for CalPERS, is a useful resource.

Hi Emily, can you introduce yourself and tell us about your campaign on for-profit prisons divestment?

I’m an international human rights lawyer focusing on the intersection of business and human rights, including corporate accountability and responsible investing. Guided by the belief that transparency is the key to accountability, I founded ESG Transparency Initiative in 2018 to build a grassroots movement of investors and consumers who can drive corporate social responsibility from the bottom up. The organization’s flagship campaign, Educators for Migrant Justice, emerged in June 2018 in response to the Trump administration’s “zero tolerance” policy that resulted in thousands of children being forcibly separated from their families as they crossed the U.S.-Mexico border. The Educators for Migrant Justice campaign sought to end these human rights abuses by cutting off the flow of money to the for-profit prison companies playing a critical role in the U.S. government’s crackdown on migrants and asylum seekers.

What does the for-profit prison business look like? And why is it a concern for (responsible) investors?

 For-profit prisons are privately operated by corporations under government contracts and while private prisons account for a small fraction of the U.S.’ total prison population, roughly 80% of migrants, or more than 50,000 people, are detained in for-profit prisons [although current data may differ wildly given the Covid-19 crisis. Two companies alone, CoreCivic and GEO Group, control the majority of the for-profit prison market; and as private entities, these for-profit prison companies are not subject to public records laws or disclosure requirements, and the applicable health and safety standards for detention facilities are not codified in law, making them more difficult to enforce. This is compounded by the inclusion of “guaranteed minimums” in private prison contracts, which creates a financial incentive to maximize the number of detainees held in each facility to increase profits and then cut costs by neglecting medical care, and understaffing facilities, relying instead on a captive labor force to keep the facilities up and running. As a result of their attempts to cut costs in these essential areas, private prisons present significant safety and security concerns and frequently face lawsuits with costly payouts, reduced profitability, and a damaged public reputation. This has left investment analysts increasingly raising doubts about CoreCivic and GEO Group’s financial viability and long-term outlook.

What made you chose the divestment route?

While alternatives to divestment were afforded brief consideration, divestment was deemed the only appropriate course of action. This strategy was guided by international best practice standards on business and human rights and closely follows the U.N. Guiding Principles on Business and Human Rights framework. For-profit prison companies have a financial incentive to incarcerate as many people as possible, relying on deliberate understaffing, medical neglect, and forced labor to cut corners for profitability. From its earliest conception, the campaign recognized that investors could not reasonably expect or even hope to end these egregious human rights abuses and reform the companies’ business practices through corporate engagement or shareholder advocacy.

Human rights abuses are inherent to the for-profit prison business model itself and no amount of pressure from investors can force a company to change its business model. Institutional investors had, in fact, tried to use their leverage as shareholders to improve CoreCivic and GEO Group’s corporate conduct for more than a decade with little evidence of success. Both companies failed to take steps to remedy issues at their facilities despite dozens of lawsuits, fines from government agencies, and scathing reports from the Office of the Inspector General, the oversight body for US Immigration and Customs Enforcement. Under such conditions, the only way for investors to cease contributing to CoreCivic and GEO Group’s egregious human rights abuses was by terminating the business relationship, or divesting.

Why focus on CalSTRS and CalPERS?

CalSTRS, the California State Teachers’ Retirement System were particularly relevant because of the immense pushback from their members over the pensions’ investments in for-profit prisons. Focusing on CalSTRS was also a strategic decision given the pension’s positions as one of the world’s largest and most influential institutional investors, and its reputation as a leader in responsible investing. Following closed-door meetings with CalSTRS’ executive officers and public protests at CalSTRS’ July 2018 board meeting, CalSTRS’ Chief Investment Officer announced the pension would review its investments in CoreCivic and GEO Group. This review ultimately opened the door for divestment, and after sustained pressure from CalSTRS members and the Educators for Migrant Justice campaign, CalSTRS’ Board voted to divest on November 7, 2018. With the momentum from CalSTRS’ divestment, the Educators for Migrant Justice campaign turned its attention to the other California giant, the California Public Employees’ Retirement System (CalPERS).

This proved a bigger challenge; despite several board members voicing explicit support for divestment from the start, nearly all members of CalPERS’ board privately expressed concerns about the financial impact of divesting, based on the belief that divesting would jeopardize investment returns and would therefore be inconsistent with the Board’s fiduciary duty to its members. This response was largely expected, as institutional investors have typically been reluctant to divest, viewing divestment as a political statement that prioritizes social or moral issues over investment returns or otherwise requires a tradeoff between socially responsible investing and maximizing investment returns. This is, however, a false dilemma; failing to consider ESG (environmental, social, and [corporate] governance) issues in investment decisions is a failure of fiduciary duty precisely because human rights abuses can pose material risks to investors. For-profit prisons are perhaps the perfect case study into the importance of socially responsible investing – and divesting – as a risk mitigation strategy to protect market-rate returns. Having underperformed the S&P 500 over the past five years by 108.2% and 81.6%, respectively, CoreCivic and GEO Group have proven to be costly investments. And now, with investment analysts increasingly calling their financial viability into question, the long-term outlook is rapidly declining.

What were the outcomes of the campaign?

In October 2019, CalPERS quietly divested from CoreCivic and GEO Group over concerns about the material risks both companies’ human rights abuses pose to their bottom lines. By addressing the matter internally as a financial decision rather than putting it to a Board vote, as its sister fund, CalSTRS did in November 2018, CalPERS implicitly recognized the financial materiality of human rights issues in what was truly a landmark move in the evolving standard of fiduciary duty.  The “High Risk, Low Reward: The Business Case for Divesting from For-Profit Prisons” report is an updated version of the original report prepared for CalPERS, and has been published as a resource for investors, stakeholders, and fiduciaries who wish to better understand how the for-profit prison business model affects financial performance, as well as the larger risks systemic human rights abuses pose for investors.

What are your lessons learned and what might you do differently if you ran this effort today?

The Educators for Migrant Justice campaign’s success pushing two of the largest and most influential institutional investors in the world to divest from for-profit prisons ultimately speaks to the power of grassroots organizing and co-powering communities to hold financial institutions accountable. One of the most important takeaways from this campaign has been the reminder that lack of transparency is often the biggest obstacle to accountability. Virtually all the pension fund members I encountered simply weren’t aware of how their retirement savings were being invested, and this is a common thread amongst investors and consumers across the U.S. and abroad; most of us just never think to ask this question, and this is all the more true for people whose pension systems have a reputation for being leaders in responsible investing. The other critical lesson learned was on the importance of countering misconceptions about responsible investing as a whole. Despite significant evidence that human rights abuses are bad for business, ie that investing in companies that commit egregious human rights abuses is not a prudent decision from even a purely financial standpoint, there appears to be a lot of confusion even amongst financial professionals about the extent to which legal, moral, and financial risks are connected.

What’s next for these for-profit prison companies?

Neither company’s outlook was particularly good prior to COVID-19, and, like the conditions within the facilities themselves, the financial health of CoreCivic and GEO Group is rapidly deteriorating. The wave of private prison divestment that followed CalSTRS and CalPERS’ decisions, coupled with the long list of banks that have backed away from private detention has, in turn, prompted credit agency downgrades. With the courts recently upholding California’s ban on private prisons, the tidal wave of class action litigation against both companies, and increasing scrutiny from Capitol Hill, it is difficult to see how these for-profit prison giants will be able to survive much longer, at least in their current corporate structure.

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