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Strengthening the ‘S’ in ESG: What New Developments in Human Rights and Business Bring to the Table for Investors

  • Chapter
Responsible Investment Banking

Part of the book series: CSR, Sustainability, Ethics & Governance ((CSEG))

Abstract

Attention to environmental, social and governance (ESG) issues is moving along a trajectory from being a niche topic of specialised investors to a conventional consideration among an increasingly wide range of mainstream investors. The S (social) factor has always been the junior partner in the triumvirate, lagging behind the increasingly systematic and formalised approaches to environmental and corporate governance issues. This is partly due to a perceived lack of clarity and standards, a vagueness surrounding what falls into the S pot and a lack of the hard edges of national corporate governance or environmental regulations. S issues have often been seen instead as something nice to have in the annual report. However, with the infusion of human rights into the S agenda, the S is changing, taking on a more defined shape along with some hard edges that are prompting businesses, and increasingly investors, to wake up and pay attention.

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Notes

  1. 1.

    The Principles for Responsible Investment (PRI) (2011), Report on Progress 2011, welcome message from the Executive Director, notes that ‘the tanker is turning’ and that while mainstream capital markets still have a long way to go, ‘new mainstream investment practices have clearly emerged in the last half-decade’, p. 1, http://www.unpri.org/publications/?category=PRI%20Reports%20on%20Progress

  2. 2.

    For example, corporate governance issue continue to dominate PRI collaborative engagements. As reported in the PRI Annual Report 2012, 35 % of engagements covered corporate governance; 26 % were related to environmental issues; 24 % were about environmental, social and governance (ESG) issues; and only 15 % were on social issues. PRI Annual Report 2012, p. 5. This is a similar ratio to engagements reported in the 2010 report, PRI Annual Report 2010, p. 10. http://www.unpri.org/publications/?category=PRI%20Annual%20Reports

  3. 3.

    The PRI was founded with 20 institutional investors in 2006; by 2013 membership has grown to almost 1200 spanning asset owners, investment managers and professional service providers.

  4. 4.

    UNEP FI has over 200 finance sector members, including investors, and was established to understand the impacts of environmental and social considerations on financial performance, http://www.unepfi.org/index.html

  5. 5.

    ICGN members are largely institutional investors who collectively represent funds under management of around US$18 trillion with a mission to raise standards of corporate governance worldwide, https://www.icgn.org/

  6. 6.

    PRI is launching a new collaborative engagement on labour standards in agricultural supply chains and human rights in the extractive sector, http://www.unpri.org/areas-of-work/clearinghouse/coordinated-collaborative-engagements; UNEP FI has a workstream on human rights, http://www.unepfi.org/work_streams/human_rights/index.html; and ICGN has incorporated human rights issues into its ESG Integration Programme, https://www.icgn.org/education

  7. 7.

    For a brief overview of some of the issues investors have been involved in, see Institute for Human Rights and Business, ‘Investing the Rights Way: A Guide for Investors on Business and Human Rights’, 2013, Part Three, which reviews investor initiatives on a range of human rights issues, http://www.ihrb.org/publications/reports/investing-the-rights-way.html and E. Umlas ‘Human Rights and SRI in North America: An Overview’, 2009.

  8. 8.

    There is the Universal Declaration of Human Rights, nine core international human rights treaties and a much wider range of additional human rights instruments, declarations, recommendations and guidance documents. http://www.ohchr.org/EN/ProfessionalInterest/Pages/UniversalHumanRightsInstruments.aspx

  9. 9.

    For example, at a recent meeting of OECD National Contact Points (NCP) for the OECD Guidelines on Multinational Enterprises, the NCPs noted that since the update of the OECD Guidelines in 2011 adding a chapter on human rights, virtually all of the complaints have cited the human rights chapter.

  10. 10.

    OECD Guidelines on Multinational Enterprises, 2011, see Chapter IV on human rights, http://mneguidelines.oecd.org/text/

  11. 11.

    ISO 26000 Guidance on Social Responsibility, Sect. 6.3 on human rights, http://www.iso.org/iso/home/standards/iso26000.htm

  12. 12.

    Just tracking the Business and Human Rights Resource Centre website for a few days is enough to give some understanding of the rapid development of the field. www.bhrrc.org

  13. 13.

    For example, the California Transparency in Supply Chains Act of 2010 applies to all retailers and manufacturers with annual global revenues of more than US$100 million that do business in California. It requires these businesses to disclose their efforts to eradicate slavery and human trafficking in their supply chains by publicly posting information on their websites.

  14. 14.

    Directive of the European Parliament and of the Council amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, http://ec.europa.eu/internal_market/accounting/non-financial_reporting/, and the Danish reporting initiative which has been updated to include a requirement to report on human rights. http://csrgov.dk/legislation

  15. 15.

    Institute for Human Rights and Business and the Global Business Initiative on Human Rights, ‘State of Play: The Corporate Responsibility to Respect Human Rights in Business Relationships’, (2012), http://www.ihrb.org/publications/reports/state-of-play.html

  16. 16.

    International Bar Association, Interview with Professor John Ruggie, Special Representative of the UN Secretary-General on business and human rights—transcript. http://www.ibanet.org/Article/Detail.aspx?ArticleUid=4b5233cb-f4b9-4fcd-9779-77e7e85e4d83

  17. 17.

    Member States on the Human Rights Council at the time included, notably, China, Russia, Brazil, the United States, the United Kingdom and Saudi Arabia.

  18. 18.

    The earlier, draft UN ‘Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’ of 2003 aimed to spell out business responsibilities, specifically, to set out, in a single, succinct statement, a comprehensive list of the human rights obligations of companies. While many civil society organisations welcomed the Norms, business generally opposed them, rejecting the notion that companies had direct legal obligations in relation to human rights. States, for the most part, came out on the same side as business.

  19. 19.

    ‘How institutional investors can tackle poverty and development’, Posted by Rory Sullivan and Helena Viñes Fiestas on Aug 8, 2013, Ethical Corporation. http://www.ethicalcorp.com/print/36858?utm_source=http%3A%2F%2Fuk.ethicalcorp.com%2Ffc_ethicalcorporationlz%2 F&utm_medium=email&utm_campaign=1679%20Finance%20Clicks%20Aug%2013%20Content%20e2&utm_term=How%20institutional%20investors%20can%20tackle%20poverty%20and%20development& utm_content=45952

  20. 20.

    NEI Investments, letter to UN Working Group on Human Rights and Transnational Corporations and Other Business Enterprises, 8 December 2011. http://www.google.be/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDAQFjAA&url=http%3A%2 F%2Fwww.ohchr.org%2FDocuments%2FIssues%2FTransCorporations%2FSubmissions%2FBusiness%2FNEIInvestments.pdf&ei=xTubUu-NFYShyQPq34GAAw&usg=AFQjCNFIKDuKWq5fOKgJsnPuMnhtz71gSA&bvm=bv.57155469,d.bGQ

  21. 21.

    ‘How institutional investors can tackle poverty and development’,

    Posted by Rory Sullivan and Helena Viñes Fiestas on Aug 8, 2013, Ethical Corporation, http://www.ethicalcorp.com/print/36858?utm_source=http%3A%2F%2Fuk.ethicalcorp.com%2Ffc_ethicalcorporationlz%2F&utm_medium=email&utm_campaign=1679%20Finance% 20Clicks%20Aug%2013%20Content%20e2&utm_term=How%20institutional%20investors%20can%20tackle%20poverty%20and%20development&utm_content=45952 Sullivan article

  22. 22.

    See: http://oecdwatch.org/cases/Case_262. The UN Office of the High Commissioner for Human Rights (OHCHR) issued a corroborating interpretation of the UN Guiding Principles on Business and Human Rights that comes to the same conclusion as the Norwegian NCP.

  23. 23.

    See: The Norwegian National Contact Point for the OECD Guidelines for Multinational Enterprises, Final Statement, Complaint from Lok Shakti Abhiyan, Korean Transnational Corporations Watch, Fair Green and Global Alliance and Forum for Environment and Development v Posco (South Korea), ABP/APG (Netherlands) and NBIM (Norway), 27 May 2013, http://oecdwatch.org/cases/Case_262.

  24. 24.

    See: The Norwegian National Contact Point for the OECD Guidelines for Multinational Enterprises, Final Statement, Complaint from Lok Shakti Abhiyan, Korean Transnational Corporations Watch, Fair Green and Global Alliance and Forum for Environment and Development v Posco (South Korea), ABP/APG (Netherlands) and NBIM (Norway), 27 May 2013 http://oecdwatch.org/cases/Case_262. The UN Office of the High Commissioner for Human Rights issued a corroborating interpretation on the application of the UN Guiding Principles on Business and Human Rights to minority investors that comes to the same conclusion as the Norwegian NCP.

  25. 25.

    UN Guiding Principle 15 provides: ‘In order to meet their responsibility to respect human rights, business enterprises should have in place policies and processes appropriate to their size and circumstances, including: (a) A policy commitment to meet their responsibility to respect human rights; (b) A human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights; (c) Processes to enable the remediation of any adverse human rights impacts they cause or to which they contribute’. http://www.ohchr.org/EN/Issues/Business/Pages/InternationalStandards.aspx

  26. 26.

    See the list of companies with some form of human rights statement: http://www.business-humanrights.org/Documents/Policies

  27. 27.

    The UN Guiding Principles 17–21 refer to a four-part human rights due diligence process: assessing human rights risks, acting on those risks and integrating that action into the company’s risk management system, tracking how the risks have been dealt with (and making any necessary corrections) and then communicating with relevant stakeholders about the issues. http://www.ohchr.org/EN/Issues/Business/Pages/InternationalStandards.aspx

  28. 28.

    See, for example, Red Flags – Liability Risks for Companies Operating in High Risk Zones – which highlights liability risks for companies operating in high-risk zones, www.redflag.info

  29. 29.

    See, for example, European Commission guides for three sectors (employment and recruitment, ICT and oil and gas) that highlight the very different kinds of human rights issues relevant to different sectors. http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/human-rights/

  30. 30.

    The OECD Guidelines Commentary indicates that context and severity should be the considerations. OECD Guidelines for Multinational Enterprises, Chapter IV, Commentary, para. 40. The UN Guiding Principles themselves indicate that context and types of operations, products or services should be used in the prioritisation process. UN Guiding Principles, II (B) (16), Commentary.

  31. 31.

    See PRI, collaborative engagements, http://www.unpri.org/areas-of-work/clearinghouse/

  32. 32.

    Raz Godelnik, Shareholder Resolutions Receive Record Levels of Support in 2011, 17 August 2011 http://www.triplepundit.com/2011/08/shareholder-resolutions-2011/

  33. 33.

    See: The Norwegian National Contact Point for the OECD Guidelines for Multinational Enterprises, Final Statement, Complaint from Lok Shakti Abhiyan, Korean Transnational Corporations Watch, Fair Green and Global Alliance and Forum for Environment and Development v Posco (South Korea), ABP/APG (Netherlands) and NBIM (Norway), 27 May 2013, http://oecdwatch.org/cases/Case_262.

  34. 34.

    Professor John Ruggie, the UN Special Representative on Business and Human Rights, who led the development of the UN Protect, Respect and Remedy Framework and the UN Guiding Principles on Business and Human Rights, coined the phrase ‘knowing and showing’ to capture the essence of the human rights due diligence process.

  35. 35.

    Richard Milne, Nordic Correspondent, ‘Norway’s oil fund urged to boost ethical credentials’,

    Financial Times, Aug 8, 2013. http://www.ft.com/intl/cms/s/0/735865bc-ef07-11e2-9269-00144feabdc0.html?siteedition=intl#axzz2df47Caai

  36. 36.

    UN Guiding Principle 31 sets forth criteria for the effectiveness of such nonjudicial grievance mechanisms that provide relevant guidance for investors to assess whether companies are addressing grievances appropriately.

  37. 37.

    See Novethic, ‘Controversial Companies: Do Investor Blacklists Make a Difference?’, June 2013, www.novethic.fr/novethic/…/2013_controversial_companies_study.pdf or GMIRatings, CSR Concerns at Vedanta Resources, Sept 10, 2010, http://www3.gmiratings.com/home/2010/09/csr-concerns-at-vedanta-resources/

  38. 38.

    For more explanation of the application of the UN Guiding Principles on Business and Human Rights and their relevance for investors, see Institute for Human Rights and Business, ‘Investing the Rights Way: A Guide for Investors on Business and Human Rights’. http://www.ihrb.org/publications/reports/investing-the-rights-way.html

  39. 39.

    See Corporate Human Rights Benchmark, http://business-humanrights.org/en/corporate-human-rights-benchmark

  40. 40.

    See, for example, Smith School of Enterprise and the Environment, University of Oxford, Programme on Stranded Assets, http://www.smithschool.ox.ac.uk/research/stranded-assets/

  41. 41.

    Jack McGinn, ‘Green bookkeeping shows real business costs’, Financial Times, Financial Markets Supplement, 24 June 2013. The article highlighted the move by Puma to account for its environmental costs—145 million euros of environmental damage compared to its 202 million euros of net profit, noting that if the true costs of its environmental damage were expensed, its recognised earnings would fall by more than two-thirds.

  42. 42.

    Most titled properties are in cities and towns, which account for less than one per cent of the land area of sub-Saharan Africa; only one-third to one-quarter of Kenya’s land is subject to formal title. Rights and Resources, Briefs on Reviewing the Fate of Customary Tenure in Africa (2012). www.rightsandresources.org/documents/files/doc_4699.pdf

  43. 43.

    The World Bank works on large-scale land acquisitions, http://www.worldbank.org/en/news/press-release/2013/04/08/world-bank-group-access-to-land-is-critical-for-the-poor, PRI, Principles for Responsible Investment in Farmland, http://www.unpri.org/areas-of-work/implementation-support/the-principles-for-responsible-investment-in-farmland/

  44. 44.

    See, for example, the land matrix which records land acquisitions, http://www.commercialpressuresonland.org/land-matrix and the Land Rights and the Rush for Land: Findings of the Global Commercial Pressures on Land Research Project, http://pubs.iied.org/X00053.html?a=Lorenzo%20Cotula

  45. 45.

    See, for example, Nicholas Hildyard, ‘More than Bricks and Mortar, Infrastructure-as-asset-class: Financing Development or developing finance? A critical look at private equity infrastructure funds’, 2012. At: http://www.thecornerhouse.org.uk/resource/more-bricks-and-mortar

  46. 46.

    See, for example, M. Wachenfeld (2011), ‘The Hidden Impact of Large Infrastructure Projects on Children’, http://www.theguardian.com/sustainable-business/children-large-infrastructure-honeypot-effect

  47. 47.

    See the UN Special Rapporteur on the Right to Food, http://www.srfood.org/en/speculation

  48. 48.

    Cannes Summit Final Declaration: ‘Building our common future: Renewed collective action for the benefit of all’, November 2011. http://www.g20civil.com/documents/Cannes_Declaration_4_November_2011.pdf; and UNCTAD, Price formation in financialized commodity markets, June 2011. http://unctad.org/ en/Docs/gds20111_en.pdf; and Institute for Agriculture and Trade Policy, More evidence on speculators and food prices, June 2011. At: http://www.iatp.org/blog/201106/more-evidence-on-speculators-and-food-prices

  49. 49.

    See: Farms and Funds—Investment Funds in the Global Land Rush, http://pubs.iied.org/17121IIED.html?a=Lorenzo%20Cotula

  50. 50.

    In human rights terminology, this is referred to as ‘respecting, protecting and fulfilling’ human rights.

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  1. Institute for Human Rights and Business, Brussels, Belgium

    Margaret Wachenfeld

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  1. Margaret Wachenfeld
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Correspondence to Margaret Wachenfeld .

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  1. Responsible Investmentbanking, Groebenzell, Germany

    Karen Wendt

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Wachenfeld, M. (2015). Strengthening the ‘S’ in ESG: What New Developments in Human Rights and Business Bring to the Table for Investors. In: Wendt, K. (eds) Responsible Investment Banking. CSR, Sustainability, Ethics & Governance. Springer, Cham. https://doi.org/10.1007/978-3-319-10311-2_13

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