Wide Index Use Means ESG-Minded Investors Own Private Prison Stocks

Via Chief Investment Officer

CoreCivic and GEO Group are two of the largest private prisons. Both are publicly traded, and some of their largest shareholders are those that tout environmental, social, and governance (ESG) principles. Namely, public pension plans.

That’s courtesy of the finance industry’s role in sponsoring index funds, which hold the jail stocks. Result: Vanguard and iShares owner BlackRock, the two largest asset managers, own around 15% and 12% stakes in both prison companies, according to Nasdaq. The companies, which both have ESG-centered investing offices, offer index funds in the S&P 500, which list the prison businesses.

Broad indexes, which house large portions of the stock market, have always gotten flak for this quandary: Their automatic ownership mandate means they have positions in controversial companies, whether in tobacco, firearms, military hardware, or alcohol. And with index investing increasingly popular, their owning such “sin stocks” will only expand. 

Lately, private prisons, especially CoreCivic and GEO, have gotten a lot of flak because immigrant families have been separated by border patrol officers as part of the Trump administration’s crackdown. CoreCivic and GEO own many of the immigrant detainment centers near the US-Mexico border.

Indexers’ Hands Tied

There is little Vanguard and BlackRock can do. The same can be said about such other index sponsors as State Street, Northern Trust, and Bank of New York Mellon, index providers that also are in the top 10 slots of both prison holders, Nasdaq shows.

Big pension plans, such as California Public Employees Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the Oregon Public Employees Retirement System, are also stuck in the index predicament vis-a-vis questionable but unavoidable stocks. They too are big proponents of ESG, especially the Californians—and own index funds that contain prison issues.

Other organizations, such as New York City pension funds, invest in the prisons the old-fashioned way: by owning prison company stock directly—although in 2017, they chose to divest their prison holdings gradually. Legislation is pending before New York State’s lower house that would ban banks that are regulated by the state from owning prison stocks. The measure has passed the state Senate.

The only way an index investor can truly divest from sectors they disagree with is to scrap the whole index, which makes almost no sense as they will also lose the other companies. Organizations can also flex their proxy muscles to try to seek exclusion or force change within the companies they have issues with.

Carolyn Wegemann, a public relations specialist at Vanguard, told CIO it would be “exceedingly difficult” for Vanguard, a mutual/index fund provider, to manage its funds “effectively and efficiently” by divesting from CoreCivic and GEO as they make up a “very modest” portion of its portfolios.

She added that Vanguard offers several ESG options for investors. These exclude companies that do not meet certain social, human rights, and environmental criteria.

Immigrant Woes

“The immigration crisis at the border is deeply saddening, and this troubling issue needs to be solved by our elected officials,” Wegemann said. “We hope that policymakers come to a swift resolution to ensure the safety, security, and dignity of these children and individuals.”

Other forms of heat institutions and major pension funds such as the CalPERS are facing include investments in oil and firearms. Those two sectors have seen more investor engagement. Gun stocks have felt many divestments from some of their biggest stakeholders in the wake of mass shootings, and big oil is constantly being pressured into putting a higher ESG focus on its operations.

Since immigration policies are coming from the White House, private prisons and their institutional shareowners are caught in a dilemma as there isn’t much they can really do about the situation.

Vanguard did not respond to comment about engaging index funds to exclude private prisons as part of its policy on specific companies or engagements.

“To be clear, The GEO Group has never managed any facilities that house unaccompanied minors, including minors who may have been separated from their parents or legal guardians, nor have we ever managed border patrol holding facilities,” a GEO spokesperson told CIO. “Additionally, our company was never involved in providing any services related to policies regarding the separation of families.”

Amanda S. Gilchrist, CoreCivic’s director of public affairs, said the organization’s “sole job is to help the government solve problems in ways it could not do alone – to help manage unprecedented humanitarian crises, dramatically improve the standard of care for vulnerable people, and meet other critical needs efficiently and innovatively.”

BlackRock declined comment.

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