10 February 2016
Institutional investors are increasingly seeking to look beyond typical environmental, social and governance issues to identify and address risks to the business resulting from mismanagement of human rights issues.
Companies and their investors are frequently unaware of the sheer extent of the costs incurred or value foregone when companies fail to identify and address risks to human rights. These costs are rarely tied back to their root cause or aggregated across business units and functions. In addition, costs to companies from neglecting human rights are steadily on the rise as a result of increased litigation and compliance costs, more effective reputation-damaging campaigns, more severe disruption and delays to operations and increased costs of managing conflict. As recent cases demonstrate, they can also be brought to account for not doing so.
There have been a number of recent developments in the financial services’ approach to business and human rights:
- An increasingly large number of mainstream investors are starting to pay attention to human rights. The International Corporate Governance Network (ICGN) published a viewpoint entirely dedicated to human rights for the first time in 2015. The viewpoint calls on investors to better understand and engage companies on material human rights risks and concerns. In addition, investors that have signed up to the UN Principles for Responsible Investment are increasingly seeking innovative ways to build their leverage, as demonstrated for instance by the creation of a working group of investors to engage with extractive companies ;
- Dutch Bank ABN Amro (consisting of ABN AMRO Netherlands, ABN AMRO Private Banking, the International Diamond and Jewelry Group, and Fortis Bank Netherlands) was the first financial institution to report on its human rights approach following the UN Guiding Principles Reporting Framework. ABN Amro’s report was released in December 2015 and has triggered considerable interest amongst financial institutions. In particular, the Thun Group, which was formed by a group of banks in May 2011 to discuss what the UN Guiding Principles mean for the banking sector, has been discussing its approach since its discussion paper was released in October 2013 ;
- The Corporate Human Rights Benchmark (CHRB), coordinated by Aviva Investors, Calvert Investments and the Dutch association of investors for sustainable development VBDO amongst others, is seeking to rank the top 500 globally listed companies on their human rights policies, processes and performance to harness the competitive nature of the markets to drive better human rights performance ;
- Institutional investors are adopting a longer-term approach to their investments, seeking to integrate human rights on a more systematic basis into their work. A number of ethical councils, pension funds and other long-term investors are changing their approach in this area, moving from materiality to salient human rights identification, and from automatic divestment to engagement ; and
- The investor coalition supporting the UN Guiding Principles Reporting Framework has grown to include 82 investors representing $4.8 trillion assets under management. This is the largest investor ask for a human rights-related area in recent history.
In addition, there is increasing pressure for financial institutions to know where their human rights risks are the greatest and where their due diligence efforts can be strengthened.
Financial institutions can be involved in a range of human rights impacts. By way of example, ABN Amro in its human rights report published in December 2015 identified that negative impacts could occur both in its own operations as well through the activities of it clients. In its own operations, a bank could adversely impact upon human rights through their handling of large amounts of data that in the hands of the wrong people could infringe on their clients’ privacy. The bank’s relationship managers could discriminate – intentionally or unintentionally – when deciding whether or not to offer a mortgage to a family. Female employees could be paid less than male employees for the same work. Bank staff could be under pressure to work long hours. The bank could be connected through their suppliers to abuses like underpayment of janitors and canteen cooks. ABN Amro’s report also provides examples of potential impacts that could arise through the activities of the bank’s clients. The bank could finance a clothing designer that sources its fabric from a company that forces cotton pickers to work excessive hours without pay and denies these workers their freedom to leave the fields. The bank could provide a loan to an oil company that uses the money to build a facility on land seized from local people. A diamond trader the bank provides credit to may buy and sell diamonds mined by child labourers.