While the term “institutional investor” spoken in the same breath as the term, “right to food,” seems almost oxymoronic, in fact it is not.
What links these two terms is an investment in use by institutional investors in the U.S. and elsewhere. Known as a Commodity Index Swap, it is a complex derivative sold to investors by financial institutions seeking ways to create new investment products at any cost. Unfortunately, the societal costs caused by these swaps have been profound.
As investors poured into this new asset class in 2007 and 2008, the investment capital far outweighed the available underlying commodity contracts in the global markets, driving up prices for various commodities – corn, soy, copper, oil and other commodities – to record levels.
Remember when the price of oil topped $150 a barrel?
More than a hundred economic studies have established that commodity index swaps were the primary driver behind the dramatic spike on food, energy and other commodity prices during that period. This happened largely due to the deregulated commodity markets in the U.S. and Europe that occurred in the late 1990s. Freed from the requirements of transparency and market controls that would prevent out-of-control speculation, Wall Street financial institutions were free to sell these derivatives to unwitting investors that put the lives of millions of people at risk. As noted by the UN Conference on Trade and Development, it is not commonly recognized that demand from financial investors in the commodity markets has become overwhelming during the last decade . . . But with the volumes of exchange-traded derivatives on commodity markets now being 20 to 30 times larger than physical production, the influence of financial markets has systematically transformed these real markets into financial markets.
The human rights implications of this unregulated investment are widespread. The United Nations estimates that more than 20 million people were driven into hunger as the cost of basic foodstuffs became out of reach as a result of soaring commodity prices. To understand how human rights are front and center on this issue, one need only look at the Universal Declaration of Human Rights, the foundational document upon which the international human rights framework is constructed states:
Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services . . .
This was formalized in the interpretative language of the International Covenant on Economic, Social and Cultural Rights, a binding international treaty, which states:
The right to adequate food is realized when every man, woman and child, alone or in community with others, has the physical and economic access at all times to adequate food or means for its procurement.
With this in mind, the link between commodity speculation and the human right to food is made clear. In his final report to the Secretary-General of the UN, the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie stated, “Business enterprises should respect human rights. This means that they should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved. The responsibility to respect human rights requires that business enterprises: (a) Avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur; (b) Seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts.”
Herein lies the problem: Financial institutions trading commodity index swaps bear responsibility for the human rights violations committed as a result of their massive trading and unwittingly, institutional investors are now complicit in violating the human right to food and the hunger that it has caused.