Most everyone can agree that every person is born with a set of inalienable universal human rights that must be protected and respected. However, there is less consensus on how companies should address a topic that until recently has been perceived as solely the duty of the state. With the endorsement of the UN Guiding Principles for Business and Human Rights, companies have begun to recognize that they too have an important role in ensuring their activities do not have a negative impact on human rights. Sustainability Investing Analyst Melissa Castillo Spinoso highlights the business case for protecting human rights and explains how RobecoSAM evaluates companies’ approach to addressing human rights issues.
Melissa Castillo Spinoso
Sustainability Investing Analyst
For many years, companies’ responsibility for respecting human rights has been the big elephant in the room. Although companies have long been familiar with international labor standards such as the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work (see Box), until recently companies did not really consider how the broader concept of human rights is relevant to their business activities. This all began to change after June 2011, when the United Nations Human Rights Council endorsed the Guiding Principles for Business and Human Rights (“Guiding Principles,” see Box), which clarified the state’s duty to protect human rights and the corporate duty to respect human rights. Nonetheless, many companies are still in the process of understanding how this new framework is relevant to their bottom line, as well as how and where they should be focusing their efforts when it comes to ensuring their activities do not have a negative impact on human rights.
Business and human rights frameworks
Over the past 20 years, a number of national and transnational frameworks and initiatives providing guidance on how companies should address human rights issues associated with their business activities have been launched. Below is a brief summary of the most significant business and human rights initiatives:
International Labour Organization Declaration on Fundamental Principles and Rights at Work:
Adopted in 1998, the Declaration commits UN members to respect and promote four fundamental principles: the right to the freedom of association and collective bargaining, the elimination of forced labor, the abolition of child labor, and the elimination of discrimination in the workplace. The Declaration further states that these rights are universal, and apply to all people in all states, regardless of level of economic development.
In 2008, Special Representative for Business and Human Rights to the UN, John Ruggie, proposed the “Protect, Respect, and Remedy” framework clarifying the roles of businesses when it comes to safeguarding human rights, laying the groundwork for the adoption of the UN Guiding Principles on Business and Human Rights three years later. The Framework is based on three key principles: the state’s duty to protect against human rights abuses by third parties − including business − through appropriate policies, regulation, and adjudication; the corporate responsibility to respect human rights and to address adverse impacts that occur; and the importance of providing victims of human rights abuses with access to effective remedy.
UN Guiding Principles on Business and Human Rights:
Endorsed in 2011 by the UN Human Rights Commission in 2011 and based on the Ruggie Framework, the Guiding Principles serve as the basis for developing further policy and standards on business and human rights. As the most authoritative international guidelines for addressing human rights topics, the UN Guiding Principles and the Ruggie Framework upon which they are based are often cited or incorporated into regulations, policies and principles adopted by governments, businesses, international organizations and business associations.
National Action Plans (NAPs):
As part of the state’s responsibility to implement the “Guiding Principles,” the UN Working Group on Business and Human Rights has urged all countries to develop and implement a National Action Plan on business and human rights. The NAPs are meant to be a policy strategy reflecting the state’s responsibility to protect against business-related human rights violations. Ten countries have produced an NAP, and another 19 have committed to or are in the process of developing an NAP.
Launched in 2003, the Equator Principles are a risk management framework to help financial institutions assess and manage environmental and social risks when making project financing decisions. The framework aims to provide a minimum due diligence standard for making risk decisions.
The Equator Principles III, which went into effect in 2013, specifically refer to the importance of respecting human rights, based on the tenets outlined in the “Guiding Principles,” when making financing decisions. Currently 85 financial institutions in 35 countries have adopted the Equator Principles.1
UK Modern Slavery Act:
Passed into law in 2015, the Modern Slavery Act is the first national legislation of its kind. It requires companies operating in the UK with an annual turnover of at least GBP 36 million to publish a “slavery and human trafficking statement” as part of their annual reports, outlining the steps they have taken to ensure that slavery and human rights abuses do not take place within their operations and supply chain.
The business case for human rights
Currently, the business case for human rights is mostly driven by a risk mitigation or risk management approach rather than by an opportunity or value-oriented one. However, it is important to note that human rights risk means different things to different players. From the United Nations’ perspective, a corporation’s human rights risks refer to the risks that its operations represent to human rights: in other words, risks to people. From a company’s perspective, however, human rights risk has been traditionally perceived as the risk that human rights-related incidents may pose to the business itself. Clearly, these are two sides of the same coin, and the more these two differing yet complementary perspectives are aligned, the more powerful the business case for respecting human rights.
By identifying which risks to people they might cause or be responsible for, companies can also gain a better understanding of human rights-related business risks that are relevant to their bottom line. Such business risks generally fall into one of three broad categories:
By identifying which risks to people they might be responsible for, companies can also gain a better understanding of human rights-related business risks that are relevant to their bottom line.
Operational risk: Perhaps the most obvious of the human rights-related business risks, operational risk includes project delays or cancellation, community grievances, increased difficulty to obtain or renew permits, or loss of the license to operate, among others.
Reputational risk: A companies’ involvement in human rights violations is often accompanied by negative media coverage, which may result in consumer boycotts, loss of brand value, or difficulty to attract new talent, among others. In addition, a company’s reputation can be damaged as a result of an alleged or perceived human rights violation, regardless of whether it actually took place.
Legal risk: A failure to respect human rights may also have legal ramifications for companies. These can include drawn-out lawsuits or punitive fines stemming from the government’s enforcement of domestic legislation such as UK’s Modern Slavery Act (see Box). Regarding domestic legislation, it is worth noting that there have been ongoing discussions to introduce a legally binding instrument enshrining the protection of human rights into international law, holding businesses accountable for their activities and representing a potential new regulatory risk that companies must closely monitor.
All of these risks can directly affect a company’s bottom line by impacting key value drivers such as profitability through increased costs that lead to lower margins, or through a drop in revenues. They may also hinder a company’s growth prospects in new markets or more obviously increase its risk profile. All of these aspects will ultimately influence a company’s value and its attractiveness to investors.
But it’s not only about risks …
While it is more difficult to quantify the positive impacts of companies’ human rights policies on profits, it is worth noting that respecting human rights can lead to improved relationships with stakeholders such as governments and communities, improved brand recognition, and in the long or medium term, a business environment that provides companies with greater certainty.
Moreover, the rise of the socially conscious consumer who increasingly decides to purchase products that have been responsibly produced represents a market opportunity favoring companies that are committed to protecting human rights. Some examples of this are fair trade initiatives that advocate fair wages for producers as well as improved social and environmental standards. According to the American Marketing Association, Millennials represent USD 2.45 trillion in spending power, and 70% of them will spend more on brands supporting causes they care about.2
Respecting human rights can lead to improved relationships with stakeholders, improved brand recognition, and a business environment that provides companies with greater certainty.
Finally, a company’s most important asset − human capital − may also be positively impacted through increased employee engagement and productivity, as well as from improved talent attraction and retention, particularly as Millennials look for employers that focus on the triple bottom line. According to the 2014 Millennial Impact Report, more than 50% of Millennials were influenced to accept a job based on that company’s involvement with causes they support.3
2 American Marketing Association. https://www.ama.org/publications/MarketingNews/Pages/millennial-demand-for-social-responsibility-changes-brand-strategies.aspx
3 The 2014 Millennial Impact Report. http://fi.fudwaca.com/mi/files/2015/04/MIR_2014.pdf
RobecoSAM framework for assessing human rights
RobecoSAM believes that robust human rights practices contribute to long-term value, and that investors who select companies that are better equipped to prevent and manage the risks coming from negative human rights impacts can maximize long-term returns by reaping the positive benefits highlighted earlier.
Likewise, institutional investors, and pension funds in particular, have begun to apply human rights parameters to their portfolios. For example, last February, the Norwegian Government Pension Fund (USD 700 billion) published a new human rights policy in which it outlines its expectation for companies to integrate human rights policies and report on progress; it also states its intention to divest from companies that consistently ignore or fail to respect human rights. Likewise, last September, the Canada Pension Plan Investment Board (CPPIB-USD 221.1 billion), announced that it added human rights as one of its four focus areas for engaging with companies in which it invests.
Robust human rights practices contribute to long-term value.
Accordingly, RobecoSAM has embraced the UN Guiding Principles on Business and Human Rights and aims to identify those companies that have an active commitment to respecting human rights in their business and business relationships.
The human rights criterion in the RobecoSAM Corporate Sustainability Assessment (CSA) consists of three main components outlined in Figure 1: human rights commitment, human rights due diligence and assessment, and human rights disclosure. It is also complemented by a Media & Stakeholder Analysis (MSA), which monitors whether external news sources or other organizations report about companies’ potential or actual human rights violations that could have a negative impact on their reputation or bottom line, and how companies responded to such incidents.
Figure 1: RobecoSAM Framework for assessing companies’ human rights policies
Human rights commitment
According to the Ruggie Framework (see Box), a company’s commitment to respecting human rights should be rooted in company policy. Therefore, we asked companies to provide us with their actual human rights policies or detailed descriptions of their commitment to respecting human rights and how this is embedded throughout their activities. Mentioning participation in global initiatives such as the Global Compact or other industry-specific initiatives was not considered a proxy for a comprehensive human rights policy. A comprehensive policy should include at least the following three key elements:
- an explicit commitment to respecting all internationally recognized human rights standards − understood, at a minimum, as the International Bill of Human Rights and the ILO’s Declaration on the Fundamental Principles and Rights at Work
- an outline of what the company expects from its personnel, business partners and other related parties when it comes to respecting human rights
- information on how the company plans to implement its commitment.4
We also scored companies depending on the extent to which their human rights policy covered direct company activities, downstream and upstream segments of the value chain, and joint ventures. In order to award points for this question, we expected companies to provide supporting documentation.
A company’s commitment to respecting human rights should be rooted in
Human rights due diligence & assessment
The Ruggie Framework also recommends that companies carry out a human rights due diligence in order to identify, prevent, mitigate and account for how they address their adverse human rights impacts. Therefore, this question evaluates how companies’ human rights policies are translated into real action.
We ask companies whether or not they have carried out a systematic due diligence within the last three years. We also ask companies to quantify how much of their business has been assessed for exposure to human rights issues and to disclose what percentage of the company’s activities has been determined to be at risk. Finally, we ask companies to state the portion of at risk areas for which mitigation plans have been developed.
Lastly, we ask companies to state which vulnerable groups, such as children, migrant labor or indigenous groups, have been identified through this assessment process and to provide supporting evidence.
Transparency is important for building trust with customers, investors and communities.
Human rights disclosure
Transparency is important for building trust with customers, investors and communities. It also helps investors understand the progress of a company’s efforts, the potential risks it faces, and allows them to hold companies accountable for their commitments.
Therefore, this question rewards those companies that have a transparent approach to disclosing their efforts, achievements, and outcomes of their due diligence on the topic of human rights. Companies’ public disclosures shouldn’t be limited only to mentioning broad themes, but should actually provide detailed information on a range of topics related to their human rights policy and its implementation. Ideally, public disclosures should include the company’s commitment, the process for identifying and mitigating human rights-related risks, number of sites with mitigation plans, the main issues identified, vulnerable groups identified, and remediation actions taken in cases where violations have occurred.
Findings from 2016 data analysis
The results outlined in the following pages are based on the 867 companies that completed the 2016 Corporate Sustainability Assessment. A comparative analysis of the total criterion scores by geographical region and by industry group (using GICs industry groups) offers interesting insights into how well companies in different industries and regions approach human rights issues.
Figure 2: Average human rights criterion score* by region
Europe leads the way
Companies in Europe achieved the highest average scores. At the country level, Spain leads the region, followed by the Netherlands, France and Finland. This comes as no surprise, with Europe leading the way on the creation of National Action Plans (NAP, see Box). Out of the ten countries that have developed an NAP, nine are European.5 Spain, Finland and the Netherlands have finalized an NAP, and France is pushing the agenda for the creation of a mandatory human rights due diligence at the EU level.6
Latin America follows, with Colombia being the 10th state with an NAP in place, and Argentina, Chile, Guatemala and Mexico in the process of developing one.7
The Africa region mostly consists of South African companies in our data sample. South Africa is one of those states in which National Human Rights Institutions (NHRI) and/or civil society have taken steps towards the development of an NAP: in March 2015, the South African Human Rights Commission and the Danish Institute for Human Rights developed a Human Rights and Business Country Guide to improve the human rights practices of companies operating in South Africa.
North American companies are still lagging on integrating human rights in their corporate policies and processes. That may change soon, as the US is currently developing an NAP seeking to partner with American businesses to promote responsible and transparent business conduct.8
Finally, the Asia-Pacific region had the lowest average criterion score, with Thailand receiving the highest score in the region, and Qatar, China and Indonesia at the lower end of the spectrum.
5 United Nations Human Rights Office of the High Commissioner (2016). http://www.ohchr.org/EN/Issues/Business/Pages/NationalActionPlans.aspx
6 Eckert, Vanina (2016). The French Attempt to Legalize Human Rights Due Diligence: Is France leading the European Union in Business and Human Rights? https://lup.lub.lu.se/student-papers/search/publication/8893265
7 United Nations Human Rights Office of the High Commissioner (2016). http://www.ohchr.org/EN/Issues/Business/Pages/NationalActionPlans.aspx
8 United States Government website for human rights (2016). www.humanrights.gov/dyn/issues/business-and-human-rights/national-action-plan.html
Figure 3: Average human rights criterion score by industry group
Utilities lead, while retailers lag
At the industry level, utilities are the leading industry group. Utilities companies’ human rights risks derive mostly from labor rights and potential impacts to vulnerable groups (such as indigenous populations), as their large fixed assets can impact large areas of populated land. Additionally, the utilities industry is highly regulated, with investor-owned utilities often competing with public utilities to obtain a license to operate, providing them with an important incentive to incorporate public concerns into their management processes.
Retailing is lagging behind all other industries. This is a very diverse sector encompassing traditional store-based as well as online retailers, both specialist and department stores and distributors. Many have a complex supply chain and some have made excellent progress in addressing supply chain issues, notably the apparel sector (following the lead of the textile and sporting goods manufacturers). However, many retailers neither have nor seek direct contact with the original manufacturers, disowning responsibility for manufacturing-related issues such as worker pay and conditions in supply chain factories, and frequently switching suppliers in the quest for ever cheaper manufacturing locations. In some product areas there is increasing consumer awareness of the social impact of cheap goods – again, apparel has made headway here – but buying decisions are still often driven solely by price and quality. With a few retailers attempting to challenge the status quo and even turn responsible retailing into a brand competitive advantage, we expect to see some improvement in transparency and commitment to addressing labor rights, but it is likely to be inconsistent and slow progress unless there is a major shift in the consumer emphasis on low price at any cost.
Human Rights commitment coverage
As shown in Figure 4, companies have been proactively implementing policies that cover their own activities and their value chain. However, coverage for joint ventures remains poor across all regions. 86% of the participating companies have a human rights commitment in place, and only 66% have a satisfactory human rights policy (containing the three key elements described earlier) covering their direct activities. 60% of the participating companies have human rights policies that cover their value chain, and only 24% of the companies have human rights policies extending to their joint ventures. Once again, Europe leads the group with 93% of participating companies having a commitment in place, and with 77% of the companies having satisfactory coverage for their direct activities, 75% for their value chain, and 39% for joint ventures.
Figure 4: What do companies’ human rights policies cover?
A human rights commitment is a good first step, but is not sufficient to help investors understand how well companies have embedded human rights practices into corporate processes and standards.
Due Diligence and Assessment
A human rights commitment is a good first step, but is not sufficient to help investors understand how well companies have embedded human rights practices into corporate processes and standards. As we dig deeper, we can see that 66% of the companies carry out a due diligence process and only 64% have assessed which of their business activities are exposed to human rights issues within the last three years. Among the companies that identified groups that are vulnerable to human rights abuses, the top three groups cited were: children (cited by 46% of the companies), indigenous people (26%), and migrant labor (27%). 48% of the companies cited other vulnerable groups such as women and religious minorities, among others.
Figure 5: Companies conducting assessment of their exposure to human rights issues
27% of participating companies do not publicly disclose any information on human-rights related issues.
Transparency in human rights reporting is still a challenge
Of the 744 companies that have a human rights policy in place, 73% have made it publicly available. Yet, out of the 575 companies that have carried out a due diligence process, only 37% make the results of their due diligence public. Only 39% of companies that have identified potential human rights issues and vulnerable groups have publicly disclosed this information, and of the companies that that have mitigation plans in place, only 14% report on the number of sites with mitigation plans. Out of the 203 companies that took remediation actions to compensate for negative impacts on human rights, only 26% reported on this. Finally, 233, or 27% of all 867 participating companies have no disclosure on human rights-related issues at all.
Figure 6: Companies reporting on human rights topics
Banks lead on transparency
According to RobecoSAM data, banks are the industry with the best disclosure on human rights. This reflects banks’ efforts to regain stakeholders’ trust and fulfill their expectations on compliance, ethics and good governance. This is also in line with the growing adoption of the Principles of Responsible Investment and the recognition of the importance of considering the impacts of their financing on human rights, in line the Equator Principles III (see Box).
Conclusions and outlook
Corporations have tremendous power to advance the human rights agenda. The business case becomes even more compelling when we consider that 69 of the world’s top 100 economic entities are corporations, not countries, and that the 10 largest corporations combined make more money than most countries in the world combined.9
The 2016 average score on this criterion (60/100) is still rather low, with on the one hand few companies leading the way and having fully integrated processes in place, and on the other, many companies struggling to integrate their existing mechanisms into a holistic coordinated approach.
However, if we put it in perspective, we can say that overall companies have quickly embraced the Guiding Principles since their endorsement in 2011. Most have already responded by creating policies and commitments, and many have carried out at least a partial due diligence and assessment of their potential or actual human rights impacts. Disclosure is still poor, as businesses fear consequences of increased transparency such as accountability and reputational damage.
Corporations have tremendous power to advance the human rights agenda.
Many challenges still remain, but the elephant is now slowly leaving the room. The paradigm is shifting towards a clear framework that expects companies to play a more proactive role in respecting human rights. Stakeholders and investors in particular, want to better understand how companies are managing and mitigating their human rights-related risks and are therefore demanding greater transparency. And finally, companies are now beginning to recognize a more compelling business case for human rights – one that goes beyond compliance with new regulations such as UK’s Modern Slavery Act, to one that recognizes the benefits that strong human rights practices can bring to a company’s bottom line. This, in turn, will ultimately generate positive externalities that will provide businesses with a more stable operating environment.
RobecoSAM will continue to encourage companies to implement human rights policies through our Corporate Sustainability Assessment. By developing questions that capture the most material aspects of human rights issues for companies and investors, and by engaging with companies through feedback calls, we can highlight the importance and benefits of having human rights policies and processes in place. Finally, we will continue to communicate with companies on best practices and create relevant research that provides companies with learning opportunities to improve their performance and to better understand where they are positioned relative to their peers.