Polisario case reveals high stakes behind investors’ ESG enthusiasm

Legal action over disputed African territory affects EU links with Morocco

Financial Times / JOHN DIZARD. .- What the military calls asymmetric warfare — guerrillas fighting regular armies — has come to the compliance world.

Political movements with few financial assets, let alone military superiority, can win in court against corporate or government players.

Thanks to their ability to make use of their wins by influencing trillions of investors’ money, or sensitive sovereign wealth funds, they can generate a huge effect.

Take a case filed in the European Court of Justice on April 29 by the Polisario Front, a political group that demands full sovereignty for Moroccan-occupied Western Sahara. Its lawyers claim Brussels is violating EU human rights law by allowing, even encouraging, the import of natural resources from the territory.

If Polisario wins the first round of its case against the European Council, it and its allies around the world could file lawsuits against companies and institutions doing business with Morocco, which says it has sovereignty over Western Sahara.

On its own, Polisario may not be an impressive opponent. But what if it has the support of Norway’s sovereign fund, Swedish insurance companies and the $12tn of assets locked into financial products screened using environmental, social and governance criteria?

Morocco, for its part, is backed by the French and Spanish for both economic reasons, such as fishing rights and investments, and political reasons, including avoiding a Libya-like meltdown at the gates of Europe.

Discreet corporate or investor withdrawal will not work, since human rights groups such as the Western Sahara Resource Watch note every shipment of the territory’s phosphate and every European company that has fishing or overflight permission.

Corporate compliance people may have thought that ESG investors would just post proxy votes for annual meetings or accept anodyne slideshows about support for local football clubs and the odd contribution to health clinics. But no.

Stricter corporate governance rules in Europe and other developed markets are not only working to the benefit of activist investors, such as vulture hedge funds. They are also bringing pressure for explicit compliance with human rights laws and treaties. German companies such as HeidelbergCement and Continental are increasingly besieged by harsh questions from Polisario-aligned activist groups.

What would have been routine extensions of bank lines or bond underwriting groups are now complicated by questions about carbon content and the use of conflict minerals. ESG screening consultancies such as Sustainalytics in the Netherlands now consider phosphate rock, a key export from Western Sahara, as one of those conflict minerals.

Consider what happened to the financing of coal-fired generation. Once, that was strictly the business of whatever an energy company wanted to build. Now it is difficult, if not impossible, to get any bank support.

Polisario had already managed to persuade the court to declare in February last year that an EU fishing agreement with Morocco “was not applicable to Western Sahara and to its adjacent waters”.

The enraged Moroccans persuaded the European Council and European Parliament to cobble together a legal workaround, which was passed into law in January.

That was not the end of the story.

Polisario’s filing at the end of April calls for a tribunal to vacate the new economic agreement with Morocco, more or less for the same reasons the ECJ has affirmed in previous cases. People close to the court say it will take between six months and a year for the case to be accepted for a trial.

One cannot say how the tribunal will rule but a review of the record shows a deal of sympathy at the court for Polisario’s arguments. The EU, France and Spain, and Moroccan sympathisers probably think they are at serious risk of another defeat.

If Polisario has that initial victory in hand, it is likely to proceed against Morocco’s commercial and financial partners in other courts in Europe and elsewhere, My understanding is that it could ask for civil damages from companies that have imported phosphate, fish and farming products over the years.

Of course, the French and Spanish will show up in the same boardrooms as the compliance consultants and lawyers, and demand that the corporations, banks and investors continue to do business with a key geopolitical partner. Otherwise, they will hint, Morocco could allow more migrants to cross the Mediterranean.

So once a bank, corporation or asset manager has accepted the notion of ESG compliance, it could find itself in the middle of conflicts such as the one between Polisario and Morocco, not to mention the French and Spanish.

Yes, it is nice to have some little green-leaf-decorated certification from the sustainability consultants but that also means you have been dealt into games with high stakes