Investors, are you feeling the human rights heat yet?
Anna Triponel
October 26, 2020
Human rights are material to business (both in practice and, increasingly, by law) but investors haven’t universally accounted for human rights risks in their portfolios or adverse human rights impacts in their investment practices. The 3,000 member, US$100 trillion-supported Principles for Responsible Investment (PRI) has created human rights guidance for investors to bridge this gap.
Why this matters
Mainstream investors have historically overlooked risks to people as material risks to the business; at the same time, ESG investors—while more attuned to nontraditional measures of risk—have often struggled to meaningfully account for human rights in their approach.
However, there is a noticeable lag in investors embracing human rights in the same way.
With the growing recognition that investment portfolios are not only affected by human rights risks, but that investors can cause adverse human rights impacts themselves, there is an impetus for more structure and standardisation around how to account for human rights in investment.
Trends driving this change
In an article for Responsible Investor, John Ruggie (Harvard Kennedy School professor and author of the UN Guiding Principles on Business and Human Rights) and Fiona Reynolds (CEO of the Principles for Responsible Investment) point out that mainstream investors have been slow to embed consideration for human rights risks into their investment activities, but identify three new drivers that could overcome it:
The rise in ESG investment since the 2008 financial crisis is intersecting with “an increased recognition that most of the S factors in ESG are human rights related”—from diversity and inclusion, to responsible marketing, to working conditions, to safety and security.
Many human rights concerns are material. For one, investors are increasingly seeing the ways that human rights are in fact material to business—and the financial costs that ensue if a company fails to address its adverse impacts on people. What’s more, policymakers are increasingly introducing new regulations on the topic, some of which provide for civil penalties and potential criminal penalties for directors.
The COVID-19 pandemic is exposing underlying weaknesses that can undermine financial stability: the fallout from the pandemic “has shone a bright light on the S in ESG, including the unsustainable economic and social inequalities built into our current economic system.”
A three-part responsibility for investors
As a step towards bridging the human rights gap in investment, the Principles for Responsible Investment (PRI) —a UN initiative comprising more than 3,000 investors with around US$100 trillion of assets under management—created a guide for investors with the basics on business and human rights: Why and How Investors Should Act on Human Rights. The report outlines a three-part responsibility for investors to respect human rights, plus guidance on how to operationalise that responsibility.
A few key points here (emphasis added):
“Institutional investors’ responsibility to respect human rights encompasses both their own operational activities – for example in relation to employees, clients, communities, and contractors – and the outcomes they are connected to through their investments”
“Institutional investors should embed their human rights policy commitment into their investment governance framework and management systems. They can then use their investment decisions, stewardship of investees and dialogue with policy makers and other stakeholders to effectively implement the due diligence and access to remedy requirements, in line with the UNGPs and OECD Guidelines.”
“Institutional investors need to be able to influence investees and other stakeholders to change the wrongful practices of another party that is contributing to or causing harm.”
The PRI recognises that “[o]ptions to influence an investee while invested vary across investment instruments. For some financial instruments, leverage can (and therefore should) be applied both pre- and post-investment.”
In particular, “[e]quity investors will have more direct mechanisms for influence through stewardship activities and proxy voting rights.” “Private equity investors with board positions and negative control rights will have greater direct influence, including the option to replace management.” When it comes to sovereign bondholders and investors in illiquid assets, these investors will have limited influence, which increases the importance of “identifying human rights risks and … articulating expectations pre-investment.”
“To understand their exposure and the actions required, asset owners need to request information from their investment managers, other service providers and/or investees, as relevant. … As human rights due diligence is often lacking, investors should actively work to fill information gaps, through service providers, NGOs, governments, media, trade unions and affected rightsholders or their representatives.”
“Just as for all businesses, institutional investors have a responsibility to respect human rights. This responsibility was formalised by the UN and the OECD in 2011, and since then expectations – from employees, beneficiaries, clients, governments and wider society – have only increased. Expectations have been driven not only by growing visibility and urgency around many human rights issues, but also by a better understanding of investors’ role in shaping real-world outcomes, and of their responsibility to do so – across all their investment activities.”
