The Covid pandemic has brought renewed focus on the social aspects of ESG investing. How can asset managers incorporate human rights into their approach? And what value does this add?
Human rights span a wide array of issues, from the right to quality education, healthcare and food, to the right not to be tortured or enslaved. Human rights is an area that’s under-researched by the investment community, largely because of the overwhelmingly broad remit and the difficulty of measuring human-rights factors.
But the Covid crisis has brought human rights to the fore. In a recent survey of signatories to the Principles of Responsible Investment (PRI), 64% said Covid-19 brought social issues to their attention. Respondents’ priorities for the future include human rights, mental health and access to healthcare.1
At abrdn, we believe that, as well as being an issue of social justice, there is a sound long-term investment case for upholding human rights. Our approach to human rights in investments explains how we tackle these issues. Doing so adds value to our bottom-up investment analysis.
The risks and opportunities
For companies, human rights risks and opportunities fall into three areas – reputation, operations and regulation. The fallout from failing to respect human rights can hit any or all of these, ultimately affecting asset valuations.
Controversies can do significant and lasting damage. Research has shown that, over five years, major ESG controversies wiped out US$500 billion of market cap from the S&P 500 Index.2 For example, in the late-1990s, revelations of child/slave labour and human rights abuses at Nike’s Indonesian factories prompted a storm of protests among consumers. Nike’s sales plummeted, forcing it to take remedial action to recover its reputation.
But, as well as avoiding risks, there are multiple financial benefits for establishing and maintaining a strong, positive corporate reputation.
- Increased investor confidence - a strong corporate reputation can signal future behaviour and decision-making. This is helpful for market predictions, making it easier to attract investment where positive returns are anticipated.
- Building customer loyalty – a good corporate reputation can reinforce customers’ attachment to a brand. Where customers perceive their values to be aligned with those of the company, they may be more inclined to buy its goods or services.
- Attracting and retaining talent - where corporate values match the personal values of current and potential employees, attracting and retaining talent becomes easier. This can reduce attrition and staff costs, and enhance the value of a company’s intellectual property and innovation capabilities.
Operational risk and human rights are closely connected to the idea of a ‘social licence to operate’ (SLO). There is no strict definition of an SLO. Rather, it’s a concept that recognises a company can only continue to operate as long as its employees, stakeholders and wider society are willing to accept it. It’s comparable to a regulatory licence in that, if revoked, it can potentially disrupt operations and lead to business losses.
The financial consequences can be severe. Research showed that, in the mining industry, delays caused by conflict with communities can cost up to US$20 million a week.3 In 2014, Vedanta Resources lost out on a $2 billion mining project in India’s Niyamgiri Hills due to the local Dongria Kondh community’s objections to the company's proposal. The company failed to seek the community’s consent before starting the mining project and, in fact, had already opened a refinery. It ended up losing millions on the refinery, as well as any potential profits from the mine.
By adopting a robust policy that ensures respect for human rights, companies can operate more efficiently and effectively, particularly in complex or unfamiliar environments, or areas of conflict.
Community engagement is a recognised way of establishing and maintaining an SLO, especially where land rights are weak, environmental impacts are likely, or where the local economy is dependent on a small number of industries for employment. A strong engagement approach can add considerable value for businesses. A study of 19 publicly traded gold-mining companies revealed that two-thirds of their market capitalisation was a function of the firm’s stakeholder engagement practices. Only one-third reflected the value of gold in the ground.4 ,5
As consumer awareness of corporate environmental and social impacts has grown, the importance of a company’s SLO has increased exponentially. The idea of shareholder primacy is beginning to wane. More business leaders now seek to balance profits with the needs of customers, employees, suppliers and local communities.
In August 2019, the Business Roundtable released a Statement on the Purpose of a Corporation signed by 181 CEOs, who committed to “leading their companies for the benefit of all stakeholders” and adopting “a modern standard for corporate responsibility.”6 Specific commitments include investing in employees via fair compensation and training programs, dealing with suppliers in a fair and ethical manner, and respecting people in communities.7
Corporate disclosures on human rights issues are generally poor, fuelling calls for mandatory reporting. Compliance with new requirements may require material operational and disclosure changes for companies. While this inevitably comes with costs, a robust human rights policy will help companies avoid possible legal penalties, while also providing the reputational and operational benefits described above.
As the regulatory and legal landscape evolves, enforcement will determine the effectiveness or otherwise of these initiatives in advancing human rights. Penalties associated with corporate human rights violations have so far been relatively weak. But it’s clear that the issue of corporate respect for human rights is moving up the regulatory agenda.
Driving positive change
We strongly believe in the value of company engagement, and it’s a crucial part of our investment process. We regularly engage with companies and integrate a ‘rights-holder’ perspective into our thinking. Through regular dialogue with company management, we seek to encourage good social practices and policies. Ultimately, we believe this will result in better long-term returns for our clients, as well as benefiting society.
Thorough assessments and understanding of human rights issues will mitigate risks and unlock opportunities for both companies and investors. Challenges remain, even for firms with advanced human rights policies. And there are big regional differences in progress. Nevertheless, global corporate influence is growing, driven by sound business rationale, with clear benefits to corporate reputation, profitability and regulatory risk mitigation. Firms that take ownership of human rights issues now will be well-positioned to support ongoing improvements - to the benefit of all.
1 Reynolds, F. (PRI) (2020) ‘COVID-19 accelerates ESG trends, global investors confirm’, PRI Blog, 3 September 2020 [Online]. Available at https://www.unpri.org/pri-blog/covid-19-accelerates-esg-trends-global-investors-confirm/6372.article (Accessed 27 April 2021).
2 Flood, C. (2019) ‘ESG controversies wipe $500bn off value of US companies’, Financial Times, 14 December 2019 [Online]. Available at https://www.ft.com/content/3f1d44d9-094f-4700-989f-616e27c89599 (Accessed 27 April 2021).
3 Davis, R. and Franks, D. (2014) ‘Costs of Company-Community Conflict in the Extractive Sector’, Cambridge, MA, Harvard Kennedy School Corporate Social Responsibility Initiative Report, no. 66.
4 Henisz, W. J., Dorobantu, S. and Nartey, L. J. (2013) ‘Spinning gold: The financial returns to stakeholder engagement’, Strategic Management Journal, vol, 35, no. 12, pp. 1727-1748.
5 Franks, D. M., et al (2014) ‘Conflict translates environmental and social risk into business costs’, Proceedings of the National Academy of Sciences, vol, 111, no. 21, p. 7576ff.
6 Business Roundtable (2019) Business Roundtable Redefines the Pupose of a Corporate to Promote ‘An Economy That Serves All Americans’ [Online]. Available at https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans (Accessed 13 November 2019).
7 Business Roundtable (2019) Statement on the Purpose of a Corporation [Online]. Available at https://opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-of-a-Corporation-with-Signatures-1.pdf (Accessed 13 November 2019).