In the grand pursuit of profit, companies have not always prioritised the rights and wellbeing of people. Many have failed in their due diligence, closing their eyes to what might happen across their supply chains.
Investors cannot close their eyes to these issues either. The consequences of human rights failures are complex and finding solutions to them will require the full participation of all stakeholders.
Communities have been destroyed and lives lost from catastrophes brought on by bad governance and cutting corners. The International Labour Organisation also estimates that, at any given time, 25 million people around the world are trapped in forced labour; one in four victims of modern slavery are children.
Civil society organisation KnowTheChain aims to help companies and investors understand and address forced labour risks within their supply chains. To that end, it benchmarks 180 of the largest companies across three sectors at high risk of forced labour – information and communication technology, food and beverage, and apparel and footwear.
“So far, there has always been one company that scores zero,” says Felicitas Weber, project director at KnowTheChain. “If not even the largest global companies in high-risk sectors take action on some of the worst forms of exploitation, you can only imagine what that looks like at companies not in the spotlight.”
“There are a hundred ways to slice and dice social responsibility, but human rights are the overarching concept,” says Marte Borhaug, global head of sustainable outcomes at Aviva Investors. “Everyone will have a slightly different definition, but if you go back to the roots of human rights, they encompass all the social issues we talk about when we say the S in ESG.”
Why should investors care?
At the employee level, many HR professionals will be familiar with key risks around low wages, precarious contracts, discrimination and harassment, health and safety, and overly long hours, not to mention modern slavery (which includes forced labour, debt bondage and human trafficking).
Modern slavery is a key risk at the supply-chain level, rendered all the more difficult to find and eradicate by the layers of suppliers across multiple countries in some companies’ supply chains.
“From a human rights perspective, a lot of the issues are in the supply chain. There may be some issues with companies directly but that is rare compared to the huge amount of child and forced labour and labour exploitation in the apparel and food sectors,” says Dan Neale, social transformation lead at the World Benchmarking Alliance (WBA).
He explains the issue lies in connecting companies to those real-world impacts. While the UN Guiding Principles on Business and Human Rights state businesses have a responsibility to respect human rights, extending into their whole value chain, their level of responsibility to prevent and remedy a specific issue depends on their relationship to it.
Figure 1: How a company manages its social footprint brings risk and opportunity
Source: Aviva Investors, May 2021
This also highlights investors’ responsibility, however indirect, through the financing they provide to such companies, but also their demands for short-term returns. It is a systematic market failure that needs to be addressed.
Beyond the moral imperative, ensuring human rights are respected and protected and violations remedied also creates opportunities for companies.
What investors can do
Camille Le Pors, lead for the WBA’s Corporate Human Rights Benchmark (CHRB), the first open and public benchmark on the human rights performance of 230 major companies, says investors’ use of benchmark data when they engage with companies is crucial.
“Benchmarks only fully come to life when they are used by third-party stakeholders that have leverage over companies and can use that to push for change,” she says.
The first step for any company wanting to do the right thing is to understand and apply the UN Guiding Principles within their own organisation, drawing up a human rights policy, conducting due diligence, ensuring they treat their workers and customers fairly, and setting up avenues for claims, whistle-blowing and remediation.
For investors, incorporating human rights in investment decisions requires them to identify cross-industry themes, understand key risks at a sector level, and engage companies and governments, bilaterally and collaboratively with likeminded investors, including by using their voting rights as shareholders.
The WBA has identified seven global systems transformations needed to achieve the UN’s Sustainable Development Goals (SDGs). At the centre of these is the social system, for which WBA outlines 12 key expectations companies should meet to leave no one behind, support the SDGs and help create a future that works for everyone. The CHRB methodology supplements this with a focus on human rights in high-risk sectors.
Investors can use these metrics and the resulting benchmarks to compare companies, with the aim of encouraging a race to the top. This needs to be complemented by a bottom-up approach to understand which companies might engage, or risk engaging, in the most harmful behaviours.
Building relationships with NGOs focusing on human rights can also help investors deepen their own understanding of sectors that present the highest risks of negative impacts on people. For CHRB and KnowTheChain, those encompass food and agricultural products, apparel, and ICT manufacturing. CHRB also covers automotive manufacturing and extractive industries, including mining and oil and gas.
As far as engaging with companies goes, prioritisation is critical.
“Engagement takes a lot of one-on-one work with a company’s management, because you need to develop a relationship, an understanding of their business, and a shared understanding of each other’s views. That takes time,” says Borhaug.
Some of the key factors for investors to think about are the strength of their existing relationships with companies, which is often linked to the size of ownership, as well as the likelihood of change.
Coordinated action by shareholder groups with organisations like KnowTheChain has driven change. “We engage with a lot of investors, both to support company-specific engagement and a collaborative engagement led by the Interfaith Center on Corporate Responsibility and supported by the Principles for Responsible Investment on the apparel sector and forced labour,” says Weber.
Engagement should also be complemented in a much more systematic way by voting at AGMs. A survey conducted by Dalriada, a provider of independent professional trustee services to UK pension funds, found only one-third of asset managers were able to provide details of how they used their influence through voting.
There has been some improvement on climate-related voting, because of its momentum, public attention on the need for firms to transition, and public criticism of investors not using their voting rights. However, the same cannot yet be said for human rights.
Regulators must define good practice
Although engagement is a powerful tool, changes in regulation can also play a key role in making responsible practices mandatory and companies more accountable.
“We’ve given businesses a number of years now to improve voluntarily; in some cases, it has not worked,” says Borhaug. “Human rights can’t be voluntary. That is the big weakness that needs to be addressed if we are to see progress.”
Until human rights become a mandatory responsibility, many companies will continue to ignore them, largely because it is cheaper to do so.
“One of the issues is that if one company does this properly it costs it money, whereas a company that closes its eyes to the issue possibly saves costs,” says Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence.
Although human rights are recognised in international law, as well as in some local laws like the UK Modern Slavery Act, clear and time-bound targets for companies are lacking.
“The CHRB results show some companies at the bottom that have not improved since the first benchmark in 2016,” says Borhaug. “If year after year companies are not improving, the only thing to do is raise the minimum standard.”
However, setting targets requires nuance, adapting requirements to the key human rights risks facing each sector. Ten years after the initial publication of its Guiding Principles on Business and Human Rights, the UN is launching a review to assess what has and hasn’t worked so far and to create an updated framework for the next ten years.
Holding companies to account
“We need governments to enforce legislation, ensuring there are legal avenues for remedies for workers,” says KnowTheChain’s Weber.
This is the case at a global level, where creating an ombudsperson would open avenues for redress, and at a country and regional level, where the Guiding Principles are translated into law.
Following consultation by the EU on this and related governance issues at the end of 2020, Tayler says a question remains on what will happen if companies don’t do enough to uncover human rights abuses in their supply chains, or do find them and don’t do enough to tackle them.
“Fines are ultimately borne by consumers and investors and don’t necessarily change company behaviour, although of course there are cases where they are successful,” he says. “The key is to create jeopardy for the directors, who are the controlling mind of the company and hold the responsibility. Creating responsibility for directors could be a more effective sanction than litigation and fines alone.”