Social issues take back seat to environmental concerns

Institutional investors aren't paying enough attention to whether portfolio companies are actively working to protect human rights, focusing their engagement efforts this year on reducing carbon emissions, industry sources said.

Acute social issues such as human trafficking as well as gender and income inequality have played second fiddle to environmental and governance issues during annual meetings this year, they added.

More aggressive engagement efforts are needed from investors because many corporations still do not disclose or openly ignore due diligence on human rights issues at their portfolio companies' operations and supply chains, sources added.

According to the London-based Corporate Human Rights Benchmark Ltd., an initiative lead by institutional asset owners, asset managers and civil society organizations that monitors human rights performance of 200 large, publicly listed corporations worldwide, some 49% of these monitored corporations neglected human rights abuses in 2019.

These corporations scored zero in how they perform human rights due diligence, while less than 10% of all 200 companies received higher than a 50% score.

"Our problem remains that the United Nations' Guiding Principles on Business and Human Rights are largely being ignored in practice," said Steve Waygood, London-based chief responsible investment officer at Aviva Investors and chairman of the Corporate Human Rights Benchmark in a telephone interview.

In 2011, the United Nations' members implemented a human rights framework outlining obligations on how international businesses are expected to respect and protect fundamental freedoms and human rights.

But nine years on, "Human rights risks are not priced into the market. You can be the most profitable company out there and not respect human rights," said Daniel Neale, program director of the Corporate Human Rights Benchmark, London, in a telephone interview.

Still, some three-quarters of companies in extracting, agriculture and apparel industries that were assessed under the 2019 criteria showed some improvement since the benchmark's launch in 2017. On average, companies in these sectors scored 31% in 2019, up from 18% in 2017, CHRB's study, published Nov. 15, showed.

But Mr. Waygood noted: "There could be companies which are doing badly but we don't know about it" because they are not disclosing their practices.

He said the main challenge for investors is how they can evaluate potential effects on a company's bottom line if a portfolio company's human rights policy is not disclosed to investors.

"It's a market failure," Mr. Waygood said, if there are salient human rights issues at the company and investors are not taking action.

Aviva Investors raised the issue of human rights abuses with 37 companies during annual general meetings in 2019 due to concern about their CHRB performance.

However, the U.K.-based investor is an isolated player in that it integrates human rights into engagement policy to such a degree, sources said

Anna Pot, New York-based head of responsible investment Americas at APG Asset Management, the manager of the €459 billion ($505.6 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands — one of the CHRB's founders — said in a telephone interview: "More institutional investors have to engage on human rights issues," adding that through engagement, company disclosures will improve, leading to better performance.

Still, she said some companies are slowly improving. For example, Macy's Inc. improved to a 19% score in 2019 from 4% in 2018, following a successful shareholder intervention on human rights that prompted the retailer's board to review its supply chains and work only with suppliers that offer safe and non-exploitative working conditions.

"We need to see the data on policies and practices from companies. If companies say they don't have the data (about supply chains), that is not good enough and reason for us to continue engagement," Ms. Pot added.

Mr. Neale said: "We have seen a mix of companies which aren't disclosing due diligence but (also companies which) are not implementing new policies to deal with human rights issues."

Some 20% of companies across all sectors measured by the CHR benchmark "are static," he said, and haven't moved in their approach.

"They just haven't seen the pressure (from investors) to move," he said.

Bettina Reinboth, head of social issues at the United Nations-supported Principles for Responsible Investment in London, said more asset owners are becoming more aware that issues such as not paying a living wage — also known as modern slavery — exist as much in emerging markets as in developed markets. Ms. Reinboth said asset owners are realizing, "It happens everywhere, not just in emerging markets," where they may not be as invested.

But the task to keep corporations accountable for respecting human rights is not an easy one for investors. If investors were to ask for a full implementation of the Organization for Economic Cooperation and Development standards in all countries, it would not be possible to invest in some countries, said Philippe Desfossés, former CEO of the €33 billion Etablissement de Retraite Additionnelle de la Fonction Publique, Paris. Now an adviser at the Institutional Investor Group on Climate Change, Mr. Desfossés added: "When kids are working in legal businesses there should be clear limitations on their working hours and a program implemented by these businesses to teach them or send them to school."

Lina Sandström, sustainability analyst at the 367.4 billion Swedish kronor ($37.8 billion) AP2, Gothenburg, Sweden, said in a telephone interview that global investors tend to react to human rights violations when they come to light. But she said it is harder to be proactive without a full picture of human rights risks.

"We are trying to find a proxy for country breakdown data. We haven't solved the issue," she said, adding that the CHR benchmark currently does not include enough companies for an investor like AP2.

"It's a very good initiative and if the scope would be broader, it would work better as a benchmark for AP2. We have 3,000 companies in our portfolio vs. the (200 in the) benchmark," she said.

Ms. Sandström added that the benchmark has other limitations because providing geographical context of where companies have supply chains is currently not possible.

For this reason, the World Benchmarking Alliance, an initiative encompassing financial institutions, business networks and multilateral organizations to boost the effectiveness of U.N.'s Sustainable Development Goals, is aiming to merge its data with CHR benchmark to increase the number of monitored companies to 2,000 by 2023.

Still, Ms. Reinboth said asset owners should think how they can use their leverage more creatively, rather than divesting from a company. "One way would be to think how they can enable an effective remedy," she said. Such a remedy could be ensuring survivors of modern slavery and human trafficking are able to access the financial system after they escape exploitation, she added.

AP2 and the NZ$42 billion ($26.5 billion) New Zealand Superannuation Fund, Auckland, were the only two asset owners to have signed the G-7, G-20 and the United Nations' Liechtenstein Initiative for a Financial Sector Commission on Modern Slavery and Human Trafficking's Blueprint for Mobilizing Finance against Slavery and Trafficking on Sept. 30, which sets out how financial services companies can detect criminal rings responsible for such abuses through payment systems and financial services.

Further, after the 2019 Christchurch terrorist attack the New Zealand investor is engaging with the world's three leading social media companies: Facebook Inc., Alphabet Inc. and Twitter Inc. to strengthen controls to prevent the live streaming and distribution of objectionable content.