Rory Sullivan considers the barriers and solutions to getting investors engaged in business human rights risk

Rory Sullivan considers the barriers and solutions to getting investors engaged in business human rights risk
In Greek legend Sisyphus was “punished in Hades for his misdeeds in life by being condemned eternally to roll a heavy stone up a hill”.

Business and human rights campaigners will know how he felt.

Over the past five years we have seen significant progress in the integration of environmental issues into ‘mainstream’ investment decision-making processes.

The ‘cost of carbon’ is now a standard part of the evaluation of the prospects of companies in the electricity sector, and investors appear increasingly comfortable with discussing issues such as water and waste as part of their investment thinking.

Yet, despite the holistic scope of the responsible investment literature (with its embrace of the term ‘environmental, social and governance issues’), we have seen far less progress on the integration of human rights into mainstream investment practice.

This may seem surprising given the maturity of international human rights and labour law, and the significant effort that has been invested in defining corporate responsibilities for human rights and labour issues.

Practical steps needed

But the reality is that there are some very practical impediments to the integration of these issues into investment practice. These include (see Roca and Manta (2010), referenced below):

o There is no shared and uniform methodological framework for integrating social information into financial processes.
o There is a general lack of understanding of human rights issues in the financial sector.
o Financial actors have a weak capacity to integrate human rights information into their investment practices and processes.
o Social issues are generally presented in qualitative terms, making it difficult to integrate them into investment decisions.

Human rights advocates face another difficulty; the basic assumption underpinning much investment research in practice is that materiality (or financial significance) needs to be proven before an issue will be considered relevant.

Therefore, for a particular human rights issue to be explicitly considered in an investment decision, it would be necessary to explain:

o How does the issue impact on recognised drivers of investment value for the company in question?
o What is the financial impact of the issue on these drivers?
o Is the impact significant? This requires that attention is paid to the timeframe over which the impact occurs, the company’s ability to respond, and the scale of the financial impact relative to other financial metrics such as turnover.

It is important to recognise that the fact that investment analysts do not explicitly consider human rights issues does not mean that these are not being taken into account. In practice, investors have rules of thumb that allow them to account for these issues.

For example, they frequently will have some sort of measure of ‘country risk’ or ‘project risk’ that accounts for a whole series of issues including human rights-related aspects such as freedom of expression, rule of law, security and freedom of association.

Do we need a business case?

It is not clear that – from an investment perspective – the additional investment insights that would be generated from an explicit focus on human rights issues would outweigh the transaction costs of additional research on these issues.

We are then faced with a dilemma. Given the structural obstacles to the integration of human rights into mainstream investment processes and the huge amount of research and capacity building work that would be required to address the practical impediments identified by Roca and Manta, is there nothing that can be done?

My view is that the biggest opportunities for investors to contribute to improving corporate human rights performance relate to their ability to exert influence through the dialogue (or engagement) that they have with companies.

Human rights has many of the characteristics of environmental issues ten or fifteen years ago: relatively poorly understood, lack of consensus around the systems and processes that companies should have in place, significant weaknesses in corporate disclosures that make assessing performance or comparing companies very difficult.

There is a strong case for arguing that our focus – investors, companies, civil society - over the next one to two years should be on this aspect of investors’ activity.

Framework, anyone?

What is missing – although it should be a relatively straightforward matter to develop – is a basic governance framework for companies on human rights (covering aspects such as the scope and content of a human rights policy, the systems that need to be in place to implement the policy and the reporting required) that could become a standard reference for all investors in their dialogue with companies.

Inevitably, such a framework will only deal with high level systems and processes, rather than on the ground performance. However, these are critical building blocks to raising standards across the board, through ensuring that companies have the ability to identify and respond appropriately to human rights issues as and when they encounter them.

The other advantage of focusing on engagement first is that it should help drive better reporting on corporate human rights performance. This, in turn, should enable significant progress to be made on the development of a set of indicators that can then be built systematically into investment processes in a similar manner to conventional financial indicators and metrics.

Further reading: Roca, R. and Manta, F. (2010), Values Added: The Challenges of Integrating Human Rights into the Financial Sector (The Danish Institute for Human Rights, Copenhagen).

Rory Sullivan is a member of the Ethical Corporation advisory board, and was previously Head of Responsible Investment at Insight Investment. He is the editor of Business and Human Rights: Dilemmas and Solutions (Greenleaf, 2003) and the co-author of the 2008 UNEPFI CEO Briefing on Human Rights. rory@rorysullivan.org