The Republic of the Sudan (South Sudan)

After years of conflict with its northern neighbor Sudan, South Sudan’s declaration of independence in 2011 was heralded as a new beginning for the war-torn region. Unfortunately, violence quickly returned.

Since December 2013, a civil war between the South Sudanese government and opposition groups has destabilized the fledgling nation and created a humanitarian crisis.ⁱ Both the government and opposition militias target civilians, often along ethnic lines, causing widespread food insecurity and famine and the largest refugee crisis in Africa, displacing over 4 million people.ⁱⁱ Tens of thousands of people have been killed. As of 2018 South Sudan was ranked as the most fragile state in the world by the Fund for Peace.ⁱⁱⁱ

At Domini Impact Investments, we work to be consistent in the application of our Impact Investment Standards globally, but certain markets present distinct challenges. In these cases, we conduct enhanced due diligence processes to determine whether companies operating in line with our long-term goals of universal human dignity and environmental sustainability.

In this paper, we outline the human rights situation in the Republic of Sudan (South Sudan) and explain why and how we perform additional analysis for companies that operate or have ties to business in the country, including the factors that help us determine whether these companies are eligible for investment. Additionally, we illustrate the supplementary actions investors can take to mitigate risk and promote responsible business conduct. We hope it serves as a guide for other investors, and for companies with ties to operations in conflict zones.

Read the Full Issue Paper

Two key factors make South Sudan a particularly high-risk environment for business^iv

The struggle for control of oil reserves and other natural resources is fueling the conflict.

Both the government and opposition are kleptocratic in nature and complicit in the ongoing atrocities

Continuing Human Rights Violations

The ongoing civil war has been marked by crimes against humanity committed with virtual impunity. The African Union, United Nations and civil society organizations including Amnesty International and Human Rights Watch have documented mass rapes and rampant sexual violence, targeting of civilians along ethnic lines, and the use of child soldiers. Arbitrary detention, torture and enforced disappearances, extrajudicial killings, and other war crimes have been widespread. These conditions have caused an internal and external refugee crisis of massive scale.

UN officials have warned that this conflict is an ethnic war with the potential for genocide. In December of 2016, the chair of the UN Commission on Human Rights in South Sudan warned of “a steady process of ethnic cleansing underway in several areas of South Sudan using starvation, gang rape and the burning of villages.” In many cases, intercommunal tensions have been purposely seeded.

Economic and Governance Challenges in South Sudan

South Sudan has one of the weakest economies in the world, and is almost fully dependent on oil revenues, which are expected to be negligible by 2035. The country has limited infrastructure, including fewer than 313 miles of paved roads. None of its three power plants are working at full capacity and the country is almost fully dependent on diesel-run generators for electricity.

Corruption is endemic and a threat to self-governance. There are no strong institutions in the country, and those that exist serve to control and extract wealth. Close family members of President Kiir and his brother-in law General Gregory Vasili hold stakes in many commercial ventures operating in South Sudan, though this is prohibited under South Sudanese law. Their family members, as well as those of other top generals, have interests in companies operating in oil, mining, construction, engineering, gambling, banking, telecommunications, aviation, and government and military procurement. The elites and military have enriched themselves under cover of the chaos of the civil war, extracting extensive oil and resource wealth and creating illicit business networks. President Kiir, former-Vice President Machaar and other top officials own millions of dollars in real estate. There are thousands of non-existent ‘shadow-soldiers’ on the payrolls of the military, and the military budget is bloated and opaque but generally funds kleptocratic patronage networks, rather than paying individual soldiers. Auditing is legally mandated but virtually impossible and oversight mechanisms are undermined by those in power. The U.S. Treasury department has imposed sanctions on several individuals close to the President and other military officers, but civil society groups recommend more and broader sanctions against the networks of men responsible for the violence.

The Role of Investors and Corporations

Investment can play a positive role in providing desperately needed services and opportunities for development, but the capacity for harm is also high. For Domini, this dynamic means we devote extra scrutiny to high risk sectors and regions and look for positive actions rather than using blanket exclusions. We updated our policy on Sudan and South Sudan in January 2017 and continue to closely monitor any new developments and company activities.

Domini’s Enhanced Due Diligence Process for South Sudan

Domini’s policy is to assess each company’s involvement in South Sudan on a case-by-case basis, rather than issue a blanket exclusion. We consider whether there is evidence that a company’s involvement in South Sudan may have a net positive impact. In virtually all our evaluations of corporate performance, we are looking to understand whether the company is working to address the key sustainability challenges it faces.

Step One: Country-level Risk Assessment

Evaluate risks to companies and investors, with consideration for the overall environment of widespread bribery and corruption, weak institutions and legal system, and reoccurring violent conflict and human rights abuses. Risks fall into three categories: legal and regulatory risk, reputational risk, and physical risk.

Step Two: Sector/Industry-level Risk Assessment: High Risk Sectors

All business operations in South Sudan are hampered by a corrupt judicial and police system and significant bribery risk in public services, land administration, tax administration, and public procurement, but there are also sector-specific issues:

Extractives, particularly oil and gas

Since oil and gas extraction is the primary economic activity of South Sudan, control of the industry and its profits is the main source of conflict within the country. Revenues and related contracts for oil and gas extraction go directly to government and military figures responsible for the ongoing instability. Oil or mining infrastructure and other physical assets can often be targeted for the attacks, looting, seizure as well as the destruction, all of which have implications for employee safety as well including killings and kidnappings.

Domini categorically excludes fossil fuel owners and producers from our portfolios due to our concerns regarding climate change, human health, and environmental degradation.

Weapons and other military procurement

Investors and financial institutions should enhance their due diligence in this fraught sector and consider that any influx of weapons to the region is likely to destabilize it further.

Domini categorically excludes military weapons and firearms manufacturers from our portfolios.

Information and Communication Technology, including telecom, internet and technology hardware

While telecommunication networks are vital infrastructure, they are often used by governments as tools for censorship and surveillance. Fake news and hate speech in the social media have reportedly been used to instigate violence in South Sudan, particularly along ethnic lines. Telecommunication and other ICT sector firms operating in the region are recommended to comply with guidelines developed by the Global Network Initiative to address these risks.

Transportation, including railways, airlines and marine shipping

Illicit inflow and outflow of both capital and goods, including arms or other prohibited goods, as well as human trafficking, is a substantial risk. As in the case of the extractives sector, large-scale infrastructure and related assets such as trains and airplanes have been targeted for attacks and seizure, placing employees and customers at risk.

Consumer Discretionary, such as automobiles and components

Vehicles can be used for military purposes, and components can be used for military vehicles or by other armed groups. In Darfur, the Janjaweed government-backed militia used light trucks manufactured by European and Asian manufacturers in their coordinated attacks.

Materials and wholesale trading

These operations present corruption risks as well as potential human rights violations including forced displacement of civilians and forced labor, including child labor, particularly in upstream operations. Trade of specific goods and materials can be restricted by multilateral as well as unilateral sanctions.

Construction

Construction presents a range of risks, including bribery, land grabs, forced displacement, and forced labor, particularly in large-scale projects commissioned by the government or major industries.

Utilities

While playing a critical role by providing necessities such as water, electricity and heat, utilities often involve large-scale construction and operations, and the construction and operations of these facilities can negatively affect people in the surrounding communities even during the post-conflict phase. To avoid negative effects, proper processes must be in place such as free, prior and informed consent by communities. During the construction phase, there are ample risks of forced labor and displacement, along with the destruction of arable land and other ecosystems that could destroy the livelihood of the local population, as occurred in the case of the Merowe Dam in northern Sudan.

Hospitality, mainly hotels and resorts

In addition to providing accommodations for aid workers and diplomats, these facilities may be entangled in human rights violations by third parties including the military and other armed groups. These facilities are often used as sites for prostitution, which could include exploitation of children and youth.

Agriculture

There have been numerous reports of large-scale land grabs, allegedly often involving private investment including capital from the U.S. and Europe, often promoted by the government. There is thus ample risk of complicity with land grabs and associated violence in the agricultural commodities sector if thorough due diligence is not conducted, even after the current conflict has ended.

Financials, both banks and insurance

Financial institutions play a pivotal role as ‘enablers’ of business operations by providing capital and insurance for the companies operating on the ground, and therefore take on the responsibility to conduct enhanced due diligence to ensure that they are not contributing to abuses. Banks can also enable corruption and money-laundering by facilitating transactions on behalf of corrupt officials and other politically exposed persons. In such an environment of rampant corruption, financial institutions must institute enhanced anti-money laundering procedures. Under the UN Guiding Principles on Business and Human Rights, financial institutions should seek to enhance their leverage, where possible, to avoid and mitigate human rights abuses to which they may be linked. In the face of potential genocide, banks and other large financial institutions should make a greater effort to meet their responsibility to respect human rights than what they need to do in a “normal” operating environment.

Step Three: Company-level Assessment

After considering the government and industry context, Domini turns to an analysis of each company’s involvement in South Sudan.

We evaluate:

Whether the company has enhanced due diligence and disclosure.

Whether the company has been involved in specific problematic incidents or there is a history or pattern of problems.

The structure of the business and its relationships.

Who benefits from the company’s products and services?

We also consider positive efforts to promote stability. These may include:

Participating in or supporting institutional capacity building. Examples include active involvement in multi-stakeholder initiatives, particularly those that support peace, justice, transparency, and protection of civilians.
Providing educational or vocational training to employees and local communities.
Providing access to products and services to disadvantaged communities.
Promoting international human rights standards, including in its supply chain and business partners.
Taking action towards mitigation and remediation of adverse impacts. As outlined in the UN Guiding Principles on Business and Human Rights, companies have an obligation to monitor their salient (or leading) human rights risks, mitigate potential impacts and remediate any actual impacts that they cause or contribute to.

Domini recommends that companies use the UN Guiding Principles Reporting Framework to convey this information to investors.

Strategies for Positive Impact: Recommendations for Investors

Investment Due Diligence

Investors should take steps, such as those contained in Domini’s enhanced due diligence process described above, to assess their exposure to the unique human rights presented in all regions, but with focus on regions such as South Sudan that are torn by conflict.

Corporate Engagement

When companies have operations in a high-risk and conflict-affected environment, investors are in a unique position to work with them to understand and mitigate these risks. For many investors, this may be preferable to selling their shares, and can result in significant positive impacts.

Public Policy and Standard Setting

While investors have an important role to play in influencing company operations, governments bear the primary responsibility to protect human rights. It is often a failure of government or public policy that creates serious risks to long-term sustainable investment. Investors can therefore play an important role by bringing a private sector perspective to these public policy issues.

Awareness Raising

Because investors have an obligation to monitor their holdings and constantly be on the look-out for emerging risks, we can be among the first to be aware of issues. This provides us with an opportunity to inform peers and clients, place additional pressure on companies and governments to act and can help to facilitate coordinated action.

Learn more about how Domini investors can make an impact

South Sudan presents a difficult environment for responsible business operations and development. The risks for businesses and investors are serious and pervasive. Substantial due diligence and engagement must be undertaken to ensure that foreign direct investment in South Sudan contributes to peace and stability in the region and, at a minimum, does not contribute to the crisis.

While investors continue to implement targeted divestment regarding Sudan (North Sudan) in compliance with U.S. law, the public and governmental level of awareness and action around South Sudan has been significantly lower.

The environment for business and investment cannot improve while the conflict, and its root causes, persist. If the failed peace process is revived, incorporating more diverse stakeholders, there may be hope for progress. While recent steps toward a peace deal and power sharing agreement may have promise, the human rights environment in South Sudan is still poor, and even after a new government is formed many of the risks to investors will remain. At that point, investors will have another important role to play: providing the capital and opportunities for sustainable development of the young nation.

Download the Full South Sudan Issue Paper

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South Sudan: Investors & Human Rights