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Human Rights Are Not Just an ESG Factor

Written by Dunstan Allison-Hope and Paloma Muñoz Quick | Oct 13, 2021 2:39:56 PM

 

The notion that investors should use environmental, social, and governance (ESG) considerations to inform their decision-making is having a moment. This is undoubtedly a good thing for those who believe that just and sustainable business has an essential role to play in the creation of a more equitable future. However, there is a risk of fundamental concepts getting lost in the process. One of these concepts is the responsibility of business and institutional investors to respect human rights.

 

The profile received by ESG today may seem sudden, but is happening for good reason: The physical impacts of climate change are becoming more apparent with each season; the global pandemic has forced a renewed examination of human capital across company value chains; and the decline of democracy and trend towards political polarization has significantly increased legal, operational, and reputational risks for companies everywhere. In this context, it is not hard to convince investors of the material significance of ESG to enterprise value creation.

 

However, this lens — of viewing ESG considerations solely as a series of factors that impact enterprise value creation and financial returns — may jeopardize the very outcomes we are seeking to achieve. 

 

Put simply, respect for human rights is not just an ESG factor, but a global standard of expected conduct for all companies, including institutional investors. Human rights are not a subset of discreet social topics to be addressed, but a globally agreed-upon standard of achievement for all people, covering a wide range of interdependent civil, political, economic, social, cultural, and environmental rights.

 

In the business context, this is manifested in a responsibility to adopt a human rights policy, embed respect for human rights throughout the business, and undertake human rights due diligence — in other words, a fundamental methodology and mindset, not simply an issue to address. And crucially, taking action to address human rights risks should not be contingent on their relevance to enterprise value creation. Enterprise value creation should only happen when business can meet its responsibility to respect human rights.

 

However, too often, the opposite is the case. When investors position risks and opportunities for the business as the core metric for evaluating ESG performance, companies will respond by focusing too much on what shareholders have to say, and not enough on the voices of those whose rights are impacted. And by aggregating ratings across E, S, and G factors, companies may be labeled as strong ESG performers by investors due to their high ranking on financially material environmental criteria despite contributing to human rights harms on social criteria. 

 

This is a problem. Many investors misinterpret fiduciary duties as limiting their ability to act on anything that does not demonstrably increase the financial standing of beneficiaries or customers in the short-term. While severe risks to people often converge with risks to business, measuring the returns of paying a living wage (for example) may not be apparent in the short-term. 

 

Public debates on the merits of ESG too often ignore the growth of business and human rights, such as the incorporation of the UN Guiding Principles on Business and Human Rights (UNGPs) into the OECD Guidelines on Multinational Enterprises and the subsequent creation of responsible business conduct guidance for institutional investors by the OCED. Emphasizing this shortcoming, a recent United Nations report found that “knowledge of human rights, including how human rights are defined, how they are relevant across ESG factors, and what meaningful human rights due diligence looks like remain limited in the investor community.” 

 

We believe that the business and human rights framework tackles many weaknesses in today’s ESG landscape, and important organizations are moving in this direction, too. The EU has taken on a leadership role in re-defining responsible business and ESG investing by codifying the human rights expectations of business actors. For example, the Sustainable Finance Disclosure Regulation requires investors to disclose the adverse impacts of ESG-branded investments on people and planet regardless of financial materiality, while the proposed EU “social taxonomy” is also grounded on human rights standards and frameworks.

 

The notion of “double materiality,” which features prominently in proposals for a new EU Corporate Sustainability Reporting Directive, is especially promising. Building upon two decades of standards development, double materiality makes clear that business is accountable in two different ways: to investors for the creation of enterprise value, and to society at large for impacts on people and the environment. We need standards for both.

 

The two dimensions of double materiality are connected because impacts on people and the environment increasingly interact with the creation of enterprise value creation. This has become known as “dynamic materiality,” and wise companies will seek to convey to investors how they address this relationship. However, the two dimensions of double materiality — to investors for the creation of enterprise value, and to society for impacts on people and the environment — are distinct and exist entirely on their own merits.

 

Ten years ago, the unanimous endorsement of the UNGPs by the UN Human Rights Council brought new clarity to the notion that all companies, including investors, have a responsibility to respect human rights, regardless of its significance to financial returns. By all means, let’s seize the moment of increased investor interest in ESG to advance more responsible forms of business. But let’s not forget the conceptual foundations that make for truly just and sustainable business, and make sure that the ESG movement meets its own responsibility to respect human rights.

 

Dunstan Allison-Hope is a vice president at BSR. He leads BSR’s work at the intersection of technology and human rights. Previously, Dunstan led BSR’s information and communications technology, heavy manufacturing, and human rights teams. He brings significant experience working on a diverse range of engagements and issues, including human rights due diligence, privacy and freedom of expression, sustainability reporting and strategy, and stakeholder engagement. Dunstan facilitated the multistakeholder process of developing global… Read More

 

 

Paloma Muñoz Quick is an associate director at BSR. She leads BSR’s work at the intersection of finance and human rights. She advises financial institutions on embedding respect for human rights into corporate governance, across products and services, and at each stage of the investment lifecycle. Prior to joining BSR, Paloma was Advisor to the UN Working Group on Business and Human Rights and Senior Consultant of the UN B-Tech Project, where she developed… Read More