The UN Working Group on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises (UNWG) released Investors, environmental, social and governance approaches and human rights, an assessment of how institutional investors can align their ESG and sustainability approaches with the UN Guiding Principles on Business and Human Rights.
Human Level’s Take: The UN Working Group has a clear message for institutional investors and financial regulators: it's time to put human rights front and centre in ESG and investment practices! After digging into ESG standards and industry practices, the Working Group found a high likelihood of "green-washing" and "human rights-washing” and misalignment with human rights expectations. To turn this trend around, the Working Group recommends that investors (1) adopt transparent and consistent ESG methodologies that are aligned with human rights standards; (2) recognise the interconnectedness of the environmental, social, and governance criteria in ESG - and embed human rights considerations into each of these factors; (3) engage meaningfully with stakeholders and rightsholders; and (4) further embed human rights due diligence by integrating human rights requirements into policies and investment decisions - in alignment with existing global standards (i.e., UNGPs, OECD guidelines, and the Principles for Responsible Investment). To drive real change, the adoption of double materiality reporting—covering both financial and human rights & environmental impacts - is also key. Also, it must be a team effort! As advisors, data providers, real-sector companies and civil society, we all need to push for the alignment of regulatory and voluntary ESG standards and investment practices with the UNGPs.
Key points from the report:
- Limits to current approaches to ESG, stewardship and impact investment: The report highlights several limitations in the current ESG investment practices, emphasising the need for investors to strengthen human rights considerations within ESG. It points out, for instance, that ESG methodologies vary widely, lack uniform definitions and are not linked to global standards on human rights, leading to risks of "green and human rights-washing." It also found that most financial actors lack understanding of the interconnections between the ‘E’, ’S’ and ‘G;’ but that “alignment with the Guiding Principles entails the integration of human rights considerations across each of those criteria.” In addition, concerning stewardship and impact investment, the report found that risk screening for human rights issues is usually done based on “regulatory risks or controversies” rather than by applying the UNGPs’ methodology. It also found that impact investments can be marketed as impact-related without consideration for their negative human rights impacts or “substantial evidence or significant positive outcomes.”
- Baseline responsibilities for investors on human rights: Investors’ responsibilities under the UNGPs involve placing risks to people and the planet at the centre of their decision-making processes. Existing guidance, like the OECD guidance for the financial sector and the Principles for Responsible Investment, offers good frameworks for investors to embed human rights considerations into their investment decisions and capital allocation, stewardship of investees and use of voting rights, and engagement with rights holders, policymakers and other stakeholders. In addition, the report emphasises that “investors [need] to have policies embedded at the organizational level that enable them to deliver on their responsibility to respect human rights.” The Working Group also underscores the importance of better collaboration between investors, investee companies, states, and rightsholders to achieve meaningful remedy and ensure respect for human rights, recognising that a one-size-fits-all approach is not feasible.
- How those baseline responsibilities can be met: To meet these responsibilities, the Working Group highlights the need for a double materiality approach to reporting and stewardship - with stakeholder engagement with affected groups, such as Indigenous Peoples, local communities, trade unions and workers, and other relevant stakeholders, at its centre. In addition, the Working Group provides recommendations for specific stakeholders. For states, it suggests strengthening ESG regulations in a way that ensures policy coherence and the integration of human rights considerations, as well as enforcement. Investors are encouraged to embed human rights in their policies, prioritise stakeholder engagement, and conduct human rights due diligence, particularly in high-risk regions. The report also calls for other actors, such as businesses and data providers, to improve transparency and the quality of data being used. Additionally, professional advisors, civil society and the UN system are urged to support the alignment of ESG approaches with the UNGPs, providing education and practical guidance to foster a human rights-based approach in ESG investments.
