Global events in recent years including the Covid-19 pandemic and invasion of Ukraine by Russia have increased investors’ awareness of the link between human and workers’ rights, and the impact on their pensions and savings.
During the early phases of the coronavirus pandemic, the companies that actively sought to protect their staff and supply chains were looked upon favourably. Meanwhile, other companies, that criticised the furlough scheme and told employees to seek work in essential businesses such as supermarkets, have had long lasting reputational damage.
Another specific example is Boohoo, which lost investor support amid reports it was facing a modern slavery investigation through claims that is was underpaying factory workers and also not following social distancing measures to protect them from catching Covid-19.
Jack Dominy, research manager at Research in Finance, said: “Whilst environmental concerns are still largely top of mind for many retail intermediaries, largely reflective of their clients’ concerns, social issues have undoubtedly risen in prominence recently. This has been driven by the direct impact of Covid-19 on health and safety as well as working conditions, but also on workers’ rights more broadly. This has magnified scrutiny on how companies treat their employee base which will in-turn impact how investable they are, particularly as society and communities adapt to the fallout from the pandemic and other challenges.”
All companies have a responsibility to respect human rights, something that was formalised by the United Nations in 2011. This addresses a number of areas including wages, labour, discrimination, workplace environment, as well as the ‘just transition’ (which we have explored here to name a few. In 2021, the UN’s Human Rights Council adopted a resolution recognising the human right to a clean, healthy and sustainable environment.
Meanwhile, the UN’s Guiding Principles on Business and Human Rights outlines companies’ responsibility to respect human rights, which requires conducting human rights due diligence to prevent, mitigate and account for how the negative impacts (or externalities) of their business activities and value chains are addressed.
But it is not just about investors ‘doing the right thing’. A recent study from the Business for Social Responsibility (BSR) found taking a human rights approach to investing can help identify risks before they become material.
“Respect for human rights is not just beneficial for people – it is also good for returns. Research has shown a positive correlation between attention to human rights risks and corporate financial performance,” the Human Rights Roadmap for Transforming Finance report said. As an example, it pointed to a recent case where the cost for investors when companies failed to act with due diligence to respect the rights of Indigenous People in the Dakota Access Pipeline project was no less than $7.5bn.
There is also a litigation risk; earlier this year, the European Court of Human Rights saw a case where a group of children and young adults from Portugal were suing multiple states for damaging the climate following the wildfires and heatwaves the country has experienced in recent years. Part of the claim is that the polluting countries are breaching their right to exercise outdoors and live without anxiety.
The asset management industry is taking strides forward in terms of its human rights due diligence. In 2020, an investor coalition wrote to 23 FTSE-350 companies urging them to take action and meet the reporting requirements of Section 54 of the UK Modern Slavery Act 2015.
Fund groups are also ramping up their engagement programmes to focus on what could be deemed as violating these rights, and when this is ineffective, homing in on those investments and potentially excluding from portfolios by divestment.
As the cost of living crisis deepens, and as climate change and war wreak havoc around the world, companies that ignore human rights in their due diligence could see themselves shunned by investors.
*The UK Responsible Investing Study (UKRIS) quantitative research surveyed 215 retail intermediaries, providing a wealth of information in responsible investing. The latest findings are taken from Wave 3 of this annual study conducted by Research in Finance. The study included feedback from a mix of DFMs (110) and IAs (105), and fieldwork was conducted in December 2021 to January 2022.
Why and how investors should act on human rights download (unpri.org)