Police Misconduct Bonds: ESG Risk That Should Not Be Ignored
Warning: Not all bond investments are socially responsible
In a widely viewed body-camera video, 17-year-old Erik Cantu was shot while eating a burger in the parking lot of a fast-food restaurant in San Antonio, Texas[i]. The officer apparently mistook the teenager’s car as stolen and fired into the vehicle. Three weeks later, Cantu remains in the hospital.
The police officer involved was almost immediately fired and Cantu’s family will probably take the legal action that is needed for medical care and future medical needs. Given the officer’s termination, a settlement will likely occur.
Reaching this kind of legal resolution after unfortunate police misconduct cases are common practice according to The Thurgood Marshall Institute, which tracks these situations [ii].
Between 2017 and 2021 in the City of New York, for example, $1 billion was spent to settle police misconduct cases
You might be surprised to know that you may be subsidizing payments like these in your retirement portfolios or in the general accounts of a business. This is not an isolated incident or one of high-profile settlements, it’s a form of investment architecture that should be eliminated.
As a financial advisor who specializes in retirement investment and planning, understanding the nuisances and quirks of capital markets is part of my professional practice. But even I was shocked when while watching television one evening, a graphic comparing police shootings to the S&P 500 appeared on my T.V. screen. I and many others were outraged by its insensitivity in light of recent events of police violence against unarmed citizens.[iii]
However, it is not surprising if you understand how general obligation bonds play a role in police brutality settlements.
So, let me explain how investment architecture makes money by turning the worst experiences of individuals into profit.
The federal government is the only one allowed to run a deficit; your local and state governments must balance their budgets each year.
The entities collect taxes and disperse the funds throughout the year as part of their budgeting process.
So, if a city or state enters civil court proceedings and receives a settlement or judgment, the funds to pay for it will not come from currently budgeted assets.
Therefore, entities use general obligation bonds to raise capital: the lender agrees in advance that taxes will be raised if necessary so that bondholders get paid.
These types of bonds are used to raise funds for construction projects that benefit the public, such as bridges and roads. For example, if I’m a city mayor who believes that building a new roadway will bring jobs, revenues, and residual income to pay off the bond.
Unfortunately, municipalities across the country have to use them to pay for settlements related to misconduct.
Municipal general obligation bonds offering above-average returns have funded most of the $1.5 billion spent nationally to settle claims over police misconduct.
So much so that they have their name: “Police Brutality Bonds.”
This term was coined in a report examining bond-borrowing practices in 12 cities and counties by researchers Alyxandra Goodwin, Whitney Shepard, and Carrie Sloan. The phrase refers to financial instrument’s municipalities can issue to pay for police-related judgments or settlements.
But should municipal bond funding for police misconduct be included as a regular part of the mutual funds in your 401(k)?
It’s a fair question.
Others are noticing and beginning to act.
A campaign for police transparency resulted in the introduction of H.R. 7261 Disclose Police Brutality Bonds Act 2020 during the 116th Congress, which is currently pending before both houses of Congress. [iv]
As organizations increasingly adopt ESG standards in their corporate policies, we, as financial services professionals, must pay attention to the social elements of companies and investments as much as any other element.
Younger generations, as well as people of color who are often overlooked by corporate America in decision-making processes, view social responsibility and sustainability from a human capital perspective.
I have advocated for better human capital management since 2020 — an under-invested factor of ESG standards. Since then, I have taken part in several panels and discussions about this important topic.
As Americans I think we can all agree investments that capture the monetary value of police misconduct and its impact on municipalities are not ideal or suitable for any portfolio.
Yet, you may have this investment product in your 401(K) or an organization’s general account and would never know.
Using general obligation bonds to finance civil settlements and shifting the burden onto taxpayers while raising taxes in those communities is also not an ideal investment.
Yet, you may have the conduit for collateralizing this burden, and you would also never know.
And engaging in using such products, which are harmful to society even as they generate investment returns for investors, should not align with social standards within ESG.
Yet, this general obligation bond may be your best performer in the asset class.
Investment management firms have a fiduciary duty to act in their client’s best interests. However, we have yet to see any evidence that deems police misconduct settlements appropriate or beneficial for investors.
As a result, socially responsible investors who don’t want their money supporting these investments can choose not to do so. The U.N.’s initiative allows them to make this statement with their dollars — and euros and pounds sterling too!
The U.N. has provided guiding principles on Business and Human rights that can help organizations better understand their social impact; one such principle states that it is the responsibility of business enterprises to respect human rights and “seek to prevent or mitigate adverse human rights impacts directly linked to their operations, products, or services by their business relationships, even if they have not contributed to those impacts.”
In conclusion, investments that capture the monetary value of police misconduct and its impact on municipalities are not ideal or suitable. For socially responsible investing purposes, ensure that your ESG standards justify your stance on this investment class and ensure you prioritize consumer well-being over revenue generation.
Reference
[ii] https://policefundingdatabase.org/explore-the-database/settlements/?page=1&all=true
[iv] https://www.congress.gov/bill/116th-congress/house-bill/7261?s=1&r=8
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