Migrant Detention at US Borders: What investors need to know

Over a five-week period in May and June 2018, 2,342 immigrant children were forcibly separated from their families at detention centers along US borders[1]. This was the result of the Trump administration’s “zero tolerance” policy of referring for criminal prosecution people who cross the border illegally, including asylum seekers. This policy and the resulting family separation have been criticized as unconscionable and damaging by the United Nations high commissioner for human rights, as well as by the American Association of Pediatrics.

These events fit within the context of today’s global migration crisis, where governments are relying more and more on private companies to deal with the influx of migrants.

After backlash from civil society, President Trump signed an executive order on June 21 instructing the Department of Homeland Security to detain families together wherever possible. This may end family separation but does not address the children already separated and will not put an end to the “zero tolerance” policy of referring all people who cross the border illegally for criminal prosecution. It is difficult to predict exactly how Trump’s immigration policy will unfold. But as long as the criminal prosecution of illegal border crossers continues, we will see an increased demand for detention centers to house the masses of people awaiting trial.

Based on the quick response of civil society to the current situation on US borders, I expect investors to follow suit by examining their exposure to these operations in their investment portfolios.

ESG Risks

The ESG risks associated with private prisons and detention centers are not new. Sustainalytics has assessed human rights controversies for big players in this industry for several years, including GEO Group, CoreCivic, and Ferrovial.

Private prison operators have been subject to allegations of physical and sexual abuse of inmates, wrongful deaths, and increased violence due to insufficient staffing or training. These controversies have resulted in lawsuits, regulatory intervention, and loss of contracts over several years.

An observed track record of breaches of international norms and principles related to human rights has also resulted in Non-compliant or Watch list assessments under Sustainalytics’ Global Compact Compliance Service, which monitors severe, structural breaches of the United Nations Global Compact Principles.

Recent Trends

The Trump administration’s current immigration policy has sparked new opportunity for private prison operators to further expand into migrant detention centers. The administration’s 2017 reversal of an Obama-era guidance to phase out private prisons resulted in a revival in the stock price of GEO Group and CoreCivic, the two main private prison operators in the US.

In late 2017, US Immigration and Customs Enforcement (ICE) released a request for information to identify contractors for five new migrant detention centers. ICE spends over USD 2 billion per year on migrant detention through private prison operators, which now house the majority (65%) of all migrant detainees.

Although private prison operators are certainly not involved in setting immigration policy and cannot be held accountable for the recent policies that resulted in family separation or criminal prosecution of migrants, they do benefit from them.

CoreCivic President and CEO Damon Hininger cited ICE’s order to expand its network of detention centers as a business opportunity in its 2018 Q1 earnings call. Similarly, GEO Group CEO George Zoley referenced an uptake in ICE detention and multiple pending procurement contracts with ICE as potential revenue drivers for 2018.

Private prison operators are not the only companies associated with human rights risks in US prisons and migrant detention centers. Social media-based consumer activism groups Sleeping Giants and Grab Your Wallet have called for consumers to contact companies like General Dynamics and MVM. These defense contractors typically provide security or IT-related services but are currently involved in establishing appropriate care of unaccompanied migrant children due to their relationships with ICE. Sustainalytics is monitoring the involvement of all companies exposed to potential human rights violations at US borders.

Global Perspective

Although the situation materializing at US borders is unique to the US, it is not the first nor the most severe instance of human rights violations occurring at privately run migrant detention centers. The business model of privately run detention centers has received attention from civil society and responsible investors for over a decade. The UN Guiding Principles on Business and Human Rights lays out a framework under which companies operating in high risk contexts have an increased responsibility to implement robust human rights policies, especially for vulnerable groups under their custody.

Sustainalytics has historically assessed severe human rights controversies and breaches of the UN Global Compact’s principles of human rights for Australian firm Broadspectrum (since acquired by Ferrovial). Broadspectrum provided security and welfare services for the Nauru and Manus Island Regional Processing Centers through its contract with Australia’s Department of Immigration. The Manus RPC was eventually closed after it was ruled to be illegal and cases of child rights violations were uncovered, including the sexual assault of minors.

What are investors doing?

Although recent trends in immigration policy may represent a business opportunity for certain sectors, investors should be wary of corresponding ESG risks. Private prison and detention center operators are particularly exposed to human rights risks due to the nature of their business model.

In June 2017, New York City Pension Funds became the first major public pension system in the US to fully divest from private prison operators, selling USD 48 million in assets of GEO Group, CoreCivic, and G4S. This was done after an analysis by the Comptroller’s office found inherent legal, regulatory, and reputational risks in for-profit prison companies.

Shortly after, the Philadelphia Board of Pensions followed suit, divesting USD 1.16 million from the same companies.

Pension funds, universities and foundations are naturally at the forefront in assessing their portfolio exposure to private prisons, as they also examine implications for their various constituents. Given the reaction of civil society and the private sector to current developments on US borders, I expect investor concern to increase. In addition to divestments by institutional investors, we may see other groups favoring more nuanced responses, including increased industry dialogue.

Investors should pay attention to trends in US immigration policy as they drive both opportunity and risk for government contractors.

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[1] New statistics confirmed by Trump administration- https://www.vox.com/2018/6/19/17479138/how-many-families-separated-border-immigration