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Human rights: The key to understanding the 'S' in ESG

Companies cannot thrive without healthy and happy employees, consumers and communities. Investors must use their influence with companies and other stakeholders to ensure the basic rights of these groups are respected.

Human rights: The key to understanding the 'S' in ESG

In the grand pursuit of profit, some companies have not always prioritised the rights and wellbeing of people. Meanwhile, others have closed their eyes to what might happen at their suppliers.

Investors, however, cannot ignore these issues. The consequences of human rights failures are complex and finding solutions to them will require the full participation of all stakeholders. By holding companies to account for poor practices and directing money to strong-performing businesses that value human rights, investors have a big role to play.

Communities have been destroyed and lives lost in catastrophes brought on by negligent companies. Examples include the Union Carbide factory explosion in Bhopal, India in 1984, which exposed over 500,000 people to a toxic gas, causing immediate deaths and thousands of health issues people still suffer from.1

At any given time 25 million people around the world are trapped in forced labour

Modern slavery is also a key risk, rendered even more difficult to find and eradicate by the layers of suppliers across multiple countries that some companies rely on. According to the International Labour Organisation, at any given time 25 million people around the world are trapped in forced labour; one in four victims of modern slavery are children.2

According to the Ethical Trading Initiative, the most important thing companies can do is recognise “workers’ right to organise, to collectively negotiate terms and conditions of work, and to have the freedom to leave abusive employers. The risk of modern slavery dramatically decreases at workplaces where trade unions are encouraged to operate”.

Why should investors care?

Respecting human rights, offering fair working conditions and pay, and adopting responsible behaviours should form the basis of every company’s approach.

Respecting human rights should form the basis of every company’s approach

The approaches companies need to implement or improve will be different across sectors. “Tech companies such as Facebook and Twitter’s human rights impact will be focused on their customers and how they manage content and protect their freedom of speech,” says Marte Borhaug, global head of sustainable outcomes at Aviva Investors. “In contrast, their direct employees tend to be highly skilled, highly paid, and therefore less likely to suffer from poor working conditions. A mining company, on the other hand, will have the biggest human rights impact on local communities on whose land it operates, and on its large and often low-paid workforce.”

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).

What investors can do

Incorporating human rights in investment decisions requires investors to identify cross-industry themes and understand key risks at a sector level. They need to discuss these issues with companies and governments, bilaterally and collaboratively with likeminded investors, including using their voting rights as shareholders.

Changes in regulation can play a key role in enforcing responsible behaviour

Talking directly to companies is a powerful tool, but changes in regulation can also play a key role in enforcing responsible behaviour and making companies more accountable. Investors can and should support such regulatory change by liaising with policymakers.

Enforcement of the law on human rights and other areas is vital. In this respect, ensuring that company directors are personally held to account when the law is broken could be more effective than solely imposing fines, which can be passed on to the company’s customers through higher prices for goods and services.

Three points to remember

  • Investors have a key role to play in influencing companies to respect the basic human rights of employees, consumers and local communities.
  • Investors can influence behaviour by talking directly with companies and other concerned parties, and by pushing governments to adopt legislation that requires companies to behave responsibly.
  • Investors can also pressure law enforcement agencies to ensure companies, and in particular their directors, are held to account.

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