Read this article to understand:
- Why the rights of employees, consumers and communities need to be respected to ensure companies’ success – and protect investment returns – over the long term
- What investors can do to encourage companies in their portfolios to respect and protect human rights across their supply chains
- Why lobbying for strong, well enforced regulation is essential
In the grand pursuit of profit, companies have not always prioritised the rights and wellbeing of people. Meanwhile, others have failed in their due diligence, closing their eyes to what might happen across their supply chains.
“Human rights should be the foundation of business,” says Vaidehee Sachdev, people pillar lead and impact analyst in the sustainable outcomes team at Aviva Investors, leading the firm’s research and engagement on social issues.
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.1
Civil society organisation KnowTheChain aims to help companies and investors understand and address forced labour risks within their supply chains. To this 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.2
“So far, the average company score has always failed to meet the 50 percent mark,” says Evie Clarke, researcher 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.”
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).
Figure 1: How a company manages its social footprint brings risk and opportunity
Source: Aviva Investors, March 2022
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).1
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.
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 systemic market failure that needs to be addressed.
Yet 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 is to understand and apply the UN Guiding Principles within their own organisation
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.2
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).3 At the centre of these is the social system, for which WBA has identified 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 that focus 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.
Investors need to think about the strength of existing relationships with companies as well as the likelihood of change
Some of the key factors for investors to think about are the strength of 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 Responsibility4 and supported by the Principles for Responsible Investment5 on the apparel sector and forced labour,” says Clarke.
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.6
Sachdev says 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
There is now growing support among the private sector to go beyond voluntary guidelines and reporting requirements, because it recognises voluntary principles have failed to tackle the endemic issues in corporate value chains and to level the playing field.
Yet, 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.
There are still companies failing to fulfil the requirements of the UK’s Modern Slavery Act
Sachdev concurs, noting that more than five years on from the introduction of the UK’s Modern Slavery Act, there are still companies failing to fulfil the requirements of the law.
“That raises questions about, firstly, the validity of voluntary, light-touch regulation that simply requires companies to produce a statement; and secondly, the enforcement mechanisms around a law, which for the Modern Slavery Act have been non-existent,” she says.
This goes back to the fact human rights failures need to be addressed at a systemic level; they constitute a market failure too big for investors and companies to address on their own. Governments and regulators need to enforce change; investors can play a role in calling for this change and publicly supporting stronger standards.
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 create an updated framework for the next ten years.
In the consultation process, Aviva Investors has called for clear targets, but also accountability and enforcement.
Holding companies to account
“We need governments to enforce legislation, ensuring there are legal avenues for remedies for workers,” says KnowTheChain’s Clarke.
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.
Creating responsibility for directors could be a more effective sanction than litigation and fines alone
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.
“A fine is ultimately borne by consumers and investors and doesn'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 more a effective sanction than litigation and fines alone.”