Investors and human rights risk

How is the investment community -- especially institutional investors -- dealing with human rights risks in investment portfolios? What do they need most in order to pursue this agenda?

Most attention in the 'business and human rights' field is on the operations and supply chains of firms of various sorts. Until recent years there has been somewhat less attention to the all-important entities in the financial sector that invest in (or indeed insure) corporate activity.

Such actors are capable, in principle, of exerting very considerable influence over the behaviours of fundee businesses -- that is, preventive and remedial conduct in relation to human rights impacts of business activities. Indeed if there is to be some notable transformative shift corporate social (and enviro) impact it is perhaps more likely to come from what investors do or require than from other stakeholders (governments/regulators, or consumer/citizens -- accepting these groups shape each others' conduct).

Today was the deadline for submissions to the UN 'Principles for Responsible Investment' consultation on a framework (here) for shaping and guiding how investors implement respect for human rights into their pre-investment, portfolio management / screening / engagement, and exit processes.

My own submission covered a range of issues on which investors -- who of course vary significantly as a broad class -- will continue to need further practical guidance, including stuff tailored to the very different types of finance and investment entities and products.

• Some of that guidance must be drawn from / shared by responsible financial sector actors themselves as they implement, learn from and refine their practices on human rights risk. For example, it is remarkably difficult to find publicly available model examples of instructions on screening investees for human rights risks, although these do exist, and investors can resort to tools such as Parametric's one on forced labour (using the MSCI basis).
• Among other things, my submission suggests PRI and others can do more work to develop practical examples, model provisions, case studies, hypotheticals. The consultation paper reads as a very conceptual piece but the aim is to inform and equip investment sector actors: the more practical examples (from / for different investor types) the better.
• The aim is also to persuade investment sector actors. People in corporate responsibility talk a lot about the 'business case' for respecting human rights (in addition to the principled basis for doing so). We see expansive claims that conducting human rights due diligence (HRDD) is an effective proxy for generic commercial and business disruption risks. The PRI paper likewise says that HRDD will "often pick up issues that, left unaddressed, would go on to become financially material..." and that "assessing a company’s human rights due diligence process can therefore also be a good way to assess its overall governance and potential future financial risk..." This is potentially persuasive. But where is the evidence, the examples, the compelling 'business case'? This 'risk proxy' argument needs more meat to engage effectively with financiers and investors as a discerning and analytical group of people.

There is one issue I think will continue to trouble investors and their advisors, and which the 'business and human rights' field (scholars, activists, etc) has not itself perhaps quite come to terms with. This is the perennial vagueness -- or is it constructive ambiguity -- around terms such as 'adverse human rights impact' or 'negative human rights outcome'. The PRI paper talks of investors avoiding activities that 'remove or reduce someone's ability to enjoy a human right'. I can get my head around this -- but I am a law professor. This language strikes me as incredibly broad in ways that is potentially unhelpful for those trying to make investment decisions. Many things one does can impact rights or reduce enjoyment thereof yet not necessarily provide a coherent basis for responsibility let alone liability. I do wonder whether the credibility (for want of a better word) of the business and human rights project is undermined by these sorts of open-ended potentially very wide-ranging terms: how are investors to work with them?

Jo

For some primer resources on investors and human rights, see Investors for Human Rights and this guidance for institutional investors (on the OECD scheme). A range of more specific guidance exists, e.g. within Australia's superannuation sector, or on particular human rights risks (e.g. modern slavery).