Healthy and happy employees, consumers, and communities are all critical ingredients in a company’s long-term success. Investors have a key responsibility in ensuring the rights of these groups are respected.
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 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 how every business operates,” 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. “A company’s approach to human rights tells us something powerful about the way it interacts with people.”
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. But by holding companies to account for poor practices and directing capital to strong-performing businesses who value human rights, investors have a big role to play.
In this article, we look at the interdependencies between people and businesses, discuss what companies and investors can do to respect and protect human rights, and explore the crucial role of regulation.
Human rights and the ‘S’ in ESG
Communities have been destroyed and lives lost from catastrophes brought on by bad governance and cutting corners. Tragic examples include the Vale dam collapse in Brazil in 2019, which killed 270 people, and the Union Carbide factory explosion in Bhopal, India in 1984, which exposed over 500,000 people to the toxic methyl isocyanate gas, causing immediate deaths and health issues thousands of people still suffer from.1,2
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.3 For investors, this means human rights essentially encompass all the social issues meant by the S in ESG (see What we mean when we talk about human rights).
Civil society organisation KnowTheChain aims to help companies and investors understand and address forced labour risks within their supply chains. To that 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.4
“So far, the average company score has always failed to meet the 50 per cent 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?
Companies interact with people at four different levels, all of which present distinct risks and opportunities, but respecting human rights, offering fair working conditions and pay, and adopting responsible behaviours should form the basis of every company’s approach.
The approaches companies need to implement or improve will differ across sectors
“Companies across all sectors need to adopt those three core tenets because without them we risk lurching yet further into a deeply unequal and unstable society and economy,” says Sachdev. “We’ve been too slow to connect the dots – we have to meet these basic expectations to ensure people, communities and societies are more resilient and capable of withstanding the transformation needed to align with other major issues like climate change and biodiversity loss.”
That said, the approaches companies need to implement or improve will differ across sectors. From a human rights perspective, tech companies like Facebook and Twitter will mainly impact on their customers through the way they manage content and protect freedom of speech. In contrast, their direct employees tend to be highly skilled, highly paid, and therefore less likely to suffer from poor working conditions. On the other hand, a mining company’s largest human rights impacts will be on local communities on whose land it operates, and on its large and often low-paid workforce.
Figure 1: How a company manages its social footprint brings risk and opportunity
Source: Aviva Investors, March 2022
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).
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 – for example, when Tesco got called out for systemic underpayment of workers over several years – 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), an organisation set up to rank 2,000 global companies on their contribution towards delivering the Sustainable Development Goals.5
The issue lies in connecting companies to real-world impacts
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 (i.e. whether they are causing, contributing or directly linked to an impact, and the leverage they have). Opaque supply chains can allow companies to deny any linkage, while other companies may argue they do not ‘contribute’ to an issue, and therefore deny any responsibility to take meaningful action.
Neale points to the tragic collapse of the Rana Plaza garment factory in Bangladesh in 2013 as a critical case study. Over 1,110 people died in the incident, many of them workers sewing clothes for big brands such as Primark, Benetton, and Walmart.6
“The Rana Plaza case was a seminal point,” says Neale. “None of the big brands we talk about owned that factory, none of them directly employed anybody there, but they were a massive part of the problem. If a firm decides to relocate everything from India to Bangladesh on the basis of two cents an hour, that tells you exactly what its priorities are. And if ‘chasing the needle’ and driving down costs incentivises cutting corners on safety, companies are surely contributing to the issue, not just linked to it.”
Clarke agrees that situations where firms abuse the vulnerability of workers are often linked to discrimination (on the base of gender, race or migration status), and to the lack of labour protection laws or their enforcement, as well as demand factors.7
“Companies have business models and purchasing practices that essentially create demand for forced labour,” she says. “With the COVID-19 pandemic, we saw a lot of companies not paying for their orders. Even now, amid widespread calls for companies to live up to their responsibilities and pay their workers, companies still fail to commit to responsible purchasing practices.
There is a massive power imbalance between companies and suppliers, and between suppliers and workers
“There is a massive power imbalance between companies and suppliers, and between suppliers and workers. The fact that workers are often unable to organise, and don’t have access to effective grievance mechanisms or remedy, is a pervasive pattern we unfortunately see across regions. Until these power imbalances are addressed, I don’t think forced labour can be rooted out,” she adds.
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.
“Encouraged by the shareholder-primacy model of capitalism, companies had chosen just-in-time supply chains, with a minimal amount of worker protection through the value chain, over resilience. COVID-19 really shone a spotlight on that,” says Neale.
Beyond the moral imperative, ensuring human rights are respected and protected and violations remedied also creates opportunities for companies. Not only will it make communities more resilient in the face of climate transition efforts, but a healthy and happy workforce is more productive, while treating consumers fairly breeds trust and loyalty.8 It can also end up costing less than letting people get hurt and having to remediate for it.
At a community level, businesses can also ensure they maintain their social licence to operate. Some companies have built their entire business model on ethical behaviours like the Fairtrade approach. Investors can play a significant role in persuading those that do not have a good track record to change.
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. To see this become more mainstream would be very important to drive progress,” she says.
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, treating workers and customers fairly, and setting up avenues for claims, whistleblowing and remediation.9
Every two years, we agree a human rights and modern slavery action plan
“Every two years, we agree a human rights and modern slavery action plan,” says David Schofield, group head of corporate responsibility at Aviva. “We have a longstanding partnership with the Slave-Free Alliance, an NGO that provides us with external ‘critical friend’ support. They conducted a risk review on Aviva, we consult with them regularly when we are updating policies and approaches, and they stress test pieces we are doing. We have also involved them in training our people, suppliers, and conducting a modern slavery threat assessment among our higher-risk suppliers.”
Schofield explains engagement across the supply chain is a critical element.
“If you look at our assessment on the UK, one of the highest risk areas of our business value chain would be car garages where the car gets cleaned before it goes back to the customer,” he says. “Valets is a classic UK vulnerability point. Part of our engagement is helping suppliers understand where vulnerabilities are, such as more than two employees sharing the same postal address or bank account, or local modern slavery training that isn’t translated.”
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.
Creating a ‘race to the top’
The WBA has identified seven global systems transformations needed to achieve the UN’s Sustainable Development Goals (SDGs).10 At the centre of these is the social system, for which the WBA outlines 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.
We look at policy commitments and how these are embedded in a company's management systems
“The CHRB methodology is public and grounded in existing international instruments, especially the UN Guiding Principles on Business and Human Rights,” explains Le Pors. “We look at policy commitments and how these are embedded in a company's management systems, throughout its operations and supply chain. We look at whether it conducts human rights due diligence and has appropriate grievance mechanisms. And we also look at how a company performs against specific industry risks. Issues like child labour, forced labour, working hours, freedom of association and collective bargaining, land rights… the mix of those will vary by sector.”
Some themes are also brought to the fore by events or momentum, such as the just transition, which has highlighted the close links between the environment and human rights; racism and discrimination, which grew in urgency following the murder of George Floyd and the Black Lives Matter movement; or modern slavery, following the review of the UK’s Modern Slavery Act in 2019.11
This needs to be complemented by a bottom-up approach to understand which companies might engage, or risk engaging, in the most harmful behaviours. Identifying the main risks for each sector and conducting research and analysis of the key issues across companies is crucial.
Having joined Aviva Investors from the non-profit organisation ShareAction, Sachdev believes there is a need to widen the range of information used to make investment decisions. If the intention is to pivot away from purely looking at financially material information towards real economy impacts and outcomes, the investment industry needs more people to challenge decisions and the types of information sources they use.
It is impossible to get an accurate view of a company and its human rights performance just from corporate reporting
“Investors need to apply the same rigour to social issues as financial analysis,” she says. “That means gathering information and collaborating with a wide variety of sources and groups. This might include trade unions, workers groups and others to ‘ground truth’ the information investors receive from companies. But this takes time and resource. It is impossible for an investor/analyst to get an accurate view of a company and its human rights performance just based on conversations with senior executives and from corporate reporting.”
Building relationships with NGOs focused on human rights can help investors deepen their 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.
The power of engagement
As far as engaging with companies goes, prioritisation is critical.
Engagement takes time, and a lot of one-on-one work with a company’s management, to gain an understanding of the firm’s business and develop a relationship, including a shared understanding of each other’s views.
Investors need to think about the strength of their existing relationships with companies
Some of the key factors for investors to think about are the strength of their existing relationships with companies, which is often linked to the size of ownership, as well as the likelihood of change.
A good example is tech giant Alphabet. Aviva Investors engaged with the group on human rights, encouraging it to do more to identify and manage its human rights risks. This included countering the inherent discrimination embedded in artificial intelligence, and controls governing the distribution of disinformation and hate speech.
But although the company introduced positive improvements, investors felt its actions did not reflect the urgency or gravity of the risks. To encourage further action, Aviva Investors co-filed a resolution at Alphabet’s 2020 AGM, calling on it to establish a human rights risk oversight committee composed of independent directors.
While the resolution didn’t get passed because its founders, who have a majority share, voted against, the resolution received an unprecedented level of support, accounting for 45 per cent of independent shareholders. That sent a clear signal to the company of the need to act.
And in October 2020, Alphabet revised the mandate of the board’s audit committee to include risk oversight of data privacy and security, civil and human rights, sustainability, and reputational risks. Although this fell short of fully meeting investor demands, it was a positive step towards greater ownership of human rights risks by the board.
More positively, coordinated action by shareholder groups with organisations like KnowTheChain has driven change.
Although big gaps remain, most companies across sectors have improved
“We engage with a lot of investors, both to support company-specific engagement and a collaborative engagement led by the Interfaith Center on Corporate Responsibility12 and supported by the Principles for Responsible Investment13 on the apparel sector and forced labour,” says Clarke. “Although big gaps remain, most companies across sectors have improved – since 2018, but also since 2016. We continue to see good practices emerge. In the ICT sector last year, we saw for the first time remediation efforts in tier two and three suppliers, and companies starting to use responsible recruitment agencies in different sourcing countries.”
Similarly, the WBA is a multi-stakeholder alliance of more than 200 organisations.
“Many investors are engaging with companies on their human-rights due diligence,” says Le Pors. “In March 2020, a group of over 170 investors, including Aviva Investors, came together and published a statement directed at the companies who scored zero on human-rights due diligence in the CHRB. The statement essentially told those companies it's unacceptable to score zero, because you cannot be a responsible company if you're not aware of and managing your human rights risks.”14
While 79 of these firms still scored zero in the following assessment in November 2020, 16 of the 95 had made improvements. Although more remains to be done to shift corporate behaviour, this shows the combination of public rankings and investor pressure can help catalyse change.
Voting rights (and wrongs)
Engagement should also be complemented in a much more systematic way by voting at AGMs.
“Human rights aspects are embedded into our voting policies, so we will be aware whether a company has scored particularly poorly in the CHRB for instance and is failing to conduct human-rights due diligence, and we will vote against at the AGM. But we will also try and engage with the company to give it the opportunity to act,” says Sachdev.
Yet 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.15
Voting is simply another mechanism for engaging with a company and pushing it to change
Sachdev says human rights issues would benefit from more urgency and shareholder activism.
“It's irresponsible of investors not to activate their vote,” she says. “This is one of the key tools investors have, yet it seems voting is a last resort or point of escalation for many, when it's simply another mechanism for engaging with a company and pushing it to change. I’d argue the same could be said for showing up to AGMs and filing shareholder resolutions.”
She also believes pre-declaring voting intentions can be a powerful signal of intent to a company’s board and other stakeholders, which can help build momentum and public pressure for change.
“It's also helpful for other stakeholders to hold managers like ourselves to account. When they vote, institutional investors and asset managers are voting on behalf of their clients and clients’ beneficiaries. Pre-declaring can be a way of building trust and accountability with them,” she says.
Although engagement is a powerful tool, changes in regulation can also play a key role in making responsible practices mandatory and companies more accountable. Investors can and should support regulatory change through their engagement with policymakers.
Regulation, regulation, regulation
Aviva Investors has also supported calls for better legislation on business and human rights, in particular legislation that would make it mandatory for companies to follow the UN Guiding Principles, including delivering a human-rights due diligence framework.
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.16
Until human rights become a mandatory responsibility, many companies will continue to ignore them, largely because it is cheaper to do so.
Every company should have to reflect the cost of looking after people in their supply chains
“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 in Aviva Investors' Sustainable Finance Centre for Excellence. “You need both push and pull incentives to make sure this is an issue all companies focus on. That would create a level playing field, as every company would have to reflect the cost of looking after people in their supply chains.”
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.
The lack of enforcement (in the six years from 2014 to 2020, only six employers were prosecuted for paying employees less than the minimum wage, despite tax authorities finding more than 6,500 violations17) has also put the onus on civil society and, to a lesser degree, investors, to monitor and report on cases of modern slavery and exploitation in supply chains. This is inefficient, especially as many investors have chosen to ignore such issues, despite longstanding concerns and warnings.
“The investigations into Boohoo made clear forced labour was taking place in the UK for a number of years,” says Sachdev. “There were committee hearings, media investigations, yet not only was the law never properly enforced, but most investors did not comment, take action, or even engage with the company. Investors are similarly quiet on the labour exploitation taking place in the gig economy.
We’ve seen more and more investors be more vocal about human rights
“Things are changing, though. We’ve seen more and more investors – largely as a result of the pandemic – be more vocal about human rights and we’re on the cusp of creating a number of international collaborations that will increase the pressure on companies. This will hopefully move us away from investors only looking into these issues once the violations make the headlines, for fear of reputational damage,” she adds.18,19
While investor attitudes finally seem to be shifting, the prospect of upcoming regulation, such as the EU’s plans to introduce mandatory environmental and human-rights due diligence laws that would oblige companies and investors to conduct due diligence within their value chains, has certainly helped focus minds. The Modern Slavery Act is also looking to expand, to cover financial institutions.
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.
Regulators must define good practice
Although human rights are recognised in international law, as well as in some local laws like the UK Modern Slavery Act, clear and time-bound targets for companies are lacking.
“The CHRB results show companies at the bottom that have not improved since the first benchmark in 2016,” says Sachdev. “If, year after year, companies are not improving, the only thing to do is raise the minimum standard. We need a clearer roadmap or minimum set of expectations for human rights that defines not just what companies need to do, but by when and how we measure it.”
However, setting targets requires nuance, adapting requirements to the key human rights risks facing each sector. This would help companies and investors and what the World Benchmarking Alliance’s recently launched social framework now provides, which can constitute a blueprint for regulators to leverage.20
What isn’t helpful is if we get mandatory human rights disclosure against some uber-detailed framework
“Bringing together simple, consensual definitions around scopes of responsibility and the level of responsibility is really helpful,” says Aviva’s Schofield. “What isn’t helpful is if we get mandatory human rights disclosure against some uber-detailed framework effectively designed for people who are committing the most egregious breaches.
“This is not the issue for most businesses, so forcing that onto companies means you end up in a world of overengineered box-ticking, which doesn’t necessarily translate to real-life risk management and better outcomes,” he adds. “Sector-based approaches are really helpful because they are easier to translate into practical action and focus on real and material issues.”
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.
“We need a human rights ombudsperson, a role the UN Office of the High Commissioner is ideally placed to play,” says Steve Waygood, chief responsible investment officer at Aviva Investors. “We need a select committee arbitration process, which should enable civil society to bring a case against companies that do not comply with the UN Guiding Principles.”
Holding companies to account
“We need governments to enforce legislation, ensuring there are legal avenues for remedies for workers,” says KnowTheChain’s Clarke. “In the US, the Customs and Border Protection is making use of the Tariff Act, issuing ‘withhold release’ orders on products made with forced labour, including in the apparel sector. This has had massive effects on companies taking action. Momentum for mandatory human-rights due diligence legislation is also increasing pressure on companies to both detect and act on risks in their supply chains.”21
We need governments to enforce legislation, ensuring there are legal avenues for remedies for workers
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. It is a key part of the criticism aimed at the UK Modern Slavery Act, and of the recommendations made in the 2019 independent review by the UK government.22 Mandatory rules and the means of enforcing them are also something the upcoming EU regulation on human-rights due diligence should include.
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 find them but don't do enough to tackle them. Because the EU will look for the regulation to apply to any company that does business in the bloc regardless of its domicile, that extraterritorial reach means the rules could have a big impact. The EU needs to get it right.
“Fines are ultimately borne by consumers and investors and don'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, potentially up to being disqualified if they closed their eyes to the issue or knowingly allowed business to continue where there are human rights offences, could be a more effective sanction than litigation and fines alone.”