Sustainable investing has been a hot topic among investors for some time, with a particular focus on environmental, social and governance (ESG) factors. Throughout the COVID-19 pandemic, ESG stocks and assets have outperformed the market. While the ’S’ has often been overlooked, recent trends are fuelling attention on the cornerstone of ‘social’ – human rights.
Human rights due diligence – the evolving legal landscape
The United Nations Guiding Principles on Business and Human Rights (UNGPs) (2011) were the first globally accepted voluntary standard holding businesses accountable for adverse human rights impacts.
Under the UNGPs, businesses have a responsibility to identify, prevent, mitigate and account for adverse human rights impacts in their supply chains.
Increasingly, the UNGPs are being translated into mandatory human rights due diligence laws – for example: the French Duty of Vigilance Law 2017 requires certain companies to take measures to identify and prevent adverse human rights and environmental impacts within their supply chain; and the Dutch Child Labour Due Diligence Act 2019 requires certain companies to certify that they have conducted due diligence in relation to child labour.
A number of other countries – including Germany and Switzerland – are contemplating similar laws.
The European Union is also set to introduce an EU-wide mandatory human rights due diligence law by 2021.
A draft directive was published in September 2020 and, broadly speaking, would apply to all businesses governed by an EU Member State or established in the territory, as well as any business which provides goods or services in the EU.
Significantly, the draft directive outlines a framework for criminal and civil sanctions for non-compliance.
The impact of this development on the asset management industry is significant. Asset managers, and their portfolio companies, will be subject to a new obligation to conduct human rights due diligence in their investment due diligence process and on an ongoing basis throughout the investment where they have business activities in the EU.
Increased attention on human rights issues – reputational risk
The COVID-19 pandemic and the rise of “stakeholder capitalism” is fuelling attention from investors, civil society and consumers alike on the human rights track record of companies.
For example, this summer one of the UK’s best known online fashion brands, Boohoo plc, saw over £1bn (€1.1bn) wiped off its share price in just 48 hours amid allegations of modern slavery in its UK supply chain.
Following the release of an independent review into Boohoo’s supply chain, major investors are being called upon by civil society to pressure the company’s management over the way it is handling the allegations.
Such investigations into human rights abuses can be extremely expensive: for example, according to a public filing in May 2020, Camellia Plc spent £3.5m in relation to the notification of claims alleging human rights abuses committed by employees of its African subsidiary.
Mastering human rights risks – practical steps
Going forward, paying attention to this widespread interest in sustainability and particularly human rights could be a source of significant value creation and preservation for asset managers and their portfolio companies.
Whilst existing ESG indices go some way in measuring human rights performance, enlightened asset managers are taking more substantive steps to mitigate for potential legal and reputational risk.
Asset managers and their portfolio companies can create value and mitigate non-financial human rights by:
- Integrating human rights into group policies and strategic planning processes;
- Disclosing how human rights considerations are integrated into strategies, policies and procedures;
- Carrying out a human rights impact assessment and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken;
- Reviewing and reinforcing complaints mechanisms and speak-up programmes;
- Ensuring the business is well equipped to deal with ‘crises’;
- Reviewing the extent to which their board is equipped to address supply chain risks; and
- Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.
1. An increasing tide of mandatory human rights due diligence legislation means that many asset managers will soon be required to consider human rights in the investment due diligence process.
2. The COVID-19 pandemic has resulted in an increased focus on supply chains, which has exposed human rights violations and led to reputational damage.
3. ESG indices can often be a useful point of reference, but they have distinct limitations and more enlightened asset managers are looking beyond the indices to the substance of a company’s approach to the identification and management of its human rights impact.
4. Asset managers can create value and mitigate non-financial human rights by acting now to anticipate legal change, secure their investments and protect their reputations.
By partner Sam Eastwood, senior associate James Ford, and associate Elizabeth Reynolds, at Mayer Brown