The Principles for Responsible Investment (PRI) has called on asset owners to include human rights in their request for proposals (RFPs), highlighting that pre-investment, assessing negative human rights outcomes should be a central part of understanding new securities’ risk profiles.
The PRI has this week issued a guide for asset owners – How to identify human rights risks: a practical guide in due dilligence – that states that in carrying out due diligence “investors should, where necessary, prioritise companies with the most severe actual and potential adverse human rights outcomes (herein also referred to as ‘risk identification and prioritisation’)”.
Post-investment, investors should take both proactive and reactive actions to identify negative human rights outcomes associated with their investments, the guide added.
Acknowledging that data availability is imperfect and that inconsistencies exist between ESG ratings from data providers, it is vital that investors take a methodological approach when assessing human rights risks to ensure that the most salient risks are identified, the PRI stated.
While it is beyond the scope of PRI’s guide, investors should also be able to:
- respond to emerging human rights impacts identified in their portfolio – for example, via controversies alerts; and
- assess potential risk profiles of new securities by considering the trading frequency and volumes across their investment strategies.
PRI’s guide applies to both asset owners and asset managers who assess human rights risks in their investment portfolios, it said.
Asset owners who outsource some or all of their investment management should also set clear expectations to their asset managers in terms of how human rights risks are identified and prioritised, and ensure that they monitor risk exposure and actions to address issues via regular information from their fund managers, PRI suggested.
Prioritisation, the guide added, is typically important for investors with highly diversified investment portfolios. According to the UN Guiding Principles (UNGPs):
Guiding Principle 24: Where it is necessary to prioritise actions to address actual and potential adverse human rights impacts, business enterprises should first seek to prevent and mitigate those that are most severe or where delayed response would make them irremediable.
The severity of actual and potential human rights outcomes is a deciding factor in company prioritisation, the PRI said. “Investors should take a similar approach to the UNGPs in evaluating severity i.e., judged by their scale, scope and irremediability,” it added.
Prioritisation framework and course of action
The PRI suggested a prioritisation framework – three ways to identify and prioritise companies’ human rights risks (sector, company and country assessments) – should be tailored to suit investors’ individual investment strategies.
Once companies have been prioritised, investors have various ways to act, the PRI said.
Investors have diverse stewardship tools at their disposal to influence how investees prevent, mitigate, and remedy negative human rights outcomes. Depending on the rights afforded to the investor by the kind of equity or debt they hold in the company, they can consider:
- engaging directly with the company to address the relevant issue;
- voting at shareholder meetings (including in relation to board composition or remuneration);
- filing shareholder resolutions setting expectations for sustainability performance improvements;
- seeking direct roles on investee boards and board committees; and/or
- litigation (where necessary).
Regulation and its enforcement are also crucial in safeguarding human rights, the PRI continued.
“Where regulatory clarity, new regulation or enforcement of existing regulation are needed to level the playing field in which investee companies operate, investor engagement with policy makers and regulators can support improved outcomes,” the guide noted.
However, if the investor is unable, through engagement, to alter the behaviour of the investee to prevent or mitigate a negative outcome they could consider divestment, the PRI concluded.
“The severity and the human rights consequence of divesting should, however, always be considered first.”
Read the digital edition of IPE’s latest magazine