Human rights now on menu for institutional investorsMay 2015
Lauren Compere, md at Boston Common Asset Management, says that investors are finally waking up to the importance of human rights risk
Human rights used to be a subject discussed mainly in public and civil society circles. In more recent years it has emerged in the corporate world as a significant business concern. Now it is time for institutional investors to grasp the nettle.
Although institutional investors can rarely be expected to undertake due diligence on every activity by all companies they invest in, they still face public censure if they are not assessing investee company risks related to human rights.
For example in 2013 two European investors, including Norges Bank Investment Management, were rebuked by the OECD for applying insufficient human rights due diligence over their investments in South Korean company POSCO. This criticism came even though both were only minority shareholders. (In the wake of this censure it is perhaps no coincidence that last week the Norwegian government decided not to renew the mandate of the head of the OECD’s ‘National Contact Point’ body in the country).
The evidence of investor interest in human rights is growing every month. For example earlier this year we saw a group of investors launch the ‘Corporate Human Rights Benchmark’ a new ranking analyzing the human rights performance of 500 large global companies; and in February a $4 trillion coalition of major investors from North America, Europe and Australia came together to urge investors to use a new guide to help them manage human rights risks in their portfolio.
That latter coalition, led by Boston Common Asset Management, backed detailed new guidance on how investors can help the companies they invest in to assess, manage and report on those human rights risks that are salient to their business. The coalition is still growing and later this year will also launch a collaborative investor engagement to ask a select group of companies in high-risk sectors - such as extractives and ICT - to consider adopting use of a new human rights Reporting Framework.
As reported by Ethical Performance in April, Ericsson has now released a sustainability report which makes them the first company to report in line with this new reporting framework. Unilever is set to include the framework in their sustainability report in June.
However I believe that the biggest factor driving pressure on investors in this area is the increasing evidence that mismanagement of human rights risks leads to real value destruction.
Two recent examples of this from the extractives sector include the 30% share price decline at platinum producer Lonmin a week after 34 mineworkers were shot dead at its Marikana mine in 2012; and the research by Aviva Investors that mining firm Vedanta Resources has underperformed its peers by 29% due, in part, to a lack of focus on human rights management.
Another example came last month when US marine company Signal International were forced to pay $14m for luring five Indian men to work in inhumane conditions on a ship repair.
Investors should also be aware of a growing regulatory trend in this area. For example the EU Directive on the disclosure of non-financial information which passed in 2014, and the 2010 US Dodd Frank Act (focused on conflict minerals) both compel thousands more companies to release information on human rights performance.
I have spoken with many investors about this issue and it is increasingly the case that analysts and CIOs are using human rights management as a litmus test to help understand the overall quality (or not) of a company’s management. If a company is not competent in putting sufficient resources into fully understanding and managing human rights issues throughout its supply chain, argue the investors, then that tells us a lot about the governance of that company.
A study by the Economist Intelligence Unit in April found that while 83% of Executives agree that human rights are a matter for business, less than 50% had an explicit policy statement that references human rights. This is the sort of mis-match that investors are seizing upon.
For many years investors have been able to pass the buck to civil society or corporate responsibility when human rights issues have been put on the table. Now these issues are increasingly landing on the plates of investors themselves.
Lauren Compere is a Managing Director at Boston Common Asset Management and sits on the Governing Board of the Interfaith Center on Corporate Responsibility.
The information in this article should not be considered a recommendation to buy or sell any security.
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