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Investors Set Sights on Human Rights and Get Some Help

f you’re like us, you probably keep an eye on sustainability trends, especially as they’re developing, so you can keep up with important changes. And if you’ve been watching what’s been going on in 2017, you may have noticed something we couldn’t miss: a recent, significant uptick in activity focused on investors’ assessments of corporate performance in human and workers’ rights (HWR). In just the first six months of 2017, we’ve seen three significant new releases, all focused on HWR performance:

What’s going on and why the investor focus on HWR performance? Drivers, regulatory, and business trends are converging from a variety of directions:

  • Human rights issues are looming large on global radar screens with media coverage of human rights issues increasing and shining a spotlight on corporate practices that have been largely hidden from view. A human rights problem hidden deep in your supply chain is becoming your problem.
  • Investors are increasingly seeking to integrate HWR information into their investment decision-making processes. Led by pension boards who are particularly sensitive to HWR performance, investors across the landscape have begun integrating social risks to the value of long-term investments. Until now, though, investors have largely lacked useful frameworks for assessing HWR performance. That’s starting to change.
  • Governmental developments are driving the movement as well. The EU Non-financial Reporting Directive went into effect in January. Human rights are one of the issues covered by the new reporting requirements. Similarly, the UK’s Modern Slavery Act and the California Transparency in Supply Chains Act require covered companies to report on the steps they are taking to eradicate forced labor and human trafficking from their supply chains.
  • Consumers are increasingly demanding social impact information about the companies that are behind the products they buy.

The new processes for assessing HWR performance are aimed at increasing understanding and evaluating what HWR risks a company faces, and how the company is – and isn’t – managing those risks. Each of the new tools comes at this issue from a different angle, but the focus of the inquiry is essentially the same. And that’s what makes them so invaluable for any company trying to build a solid strategy for understanding and managing HWR risks.

Let’s take a closer look at each of these new tools and resources:

1. The Report:  HUMAN RIGHTS REPORTING: Are companies telling investors what they need to know? (released May 2017)

We guessed, just from the title, that the answer is probably “umm, no.” And we were right. It’s no secret that investors have expressed frustration with the quantity and quality of information companies report about their human rights policies and practices. In response to that problem, The Shift Project– created by the team responsible for developing the UN Guiding Principles on Business and Human Rights – in collaboration with E&Y and Hermes Investment Management, assessed 74 of the world’s largest companies, representing seven sectors.

The team created a six-level “Maturity Model” for human rights reporting, ranging from “Negligible” to “Leading.” The model is based on the expectations set by the UN Guiding Principles (UNGP) and on company reporting within the UNGP Reporting Framework.  They then used the model to assess the 74 companies, based on eight indicators of human rights performance:

  • Committing to respect human rights
  • Embedding respect for human rights
  • Defining a focus of reporting
  • Engaging with stakeholders on human rights issues
  • Assessing human rights risks
  • Taking action to prevent and address risks
  • Tracking performance
  • Enabling effective remedies for impacted, harmed people

The results of the assessments are, in a word, dismal. Some key findings include:

  • More than half of companies provide no clarification about which human rights are most relevant to their operations and value chains. Instead, these companies refer to certain human rights related issues, without any apparent rationale. This lack of clarity means that these companies may not be managing their most significant impacts on and risks to people they affect. It’s connected to the next finding:
  • A staggering 90% of the companies examined do not have a coherent narrative about how risk or impact assessments inform mitigation actions taken, how decisions are made, or if senior management is ever involved.
  • 45% of companies provide no information at all about how they track their performance on human rights.
  • 45% do not identify who in the company is responsible (and accountable) for managing human rights risks.
Image courtesy of Shift

2. The Benchmarking Framework:  The Corporate Human Rights Benchmark, (CHRB): (released March 2017).

Almost as if in response to the Human Rights Reporting findings, the CHRB, a new human rights benchmarking framework, launched. The CHRB was developed over the past two years by a group including 85 institutional investors and 400 companies and non-profit groups. They came together to create an incentive system to motivate companies to continuously improve their human rights practices. The group’s stated mission is to create the first public benchmark of human rights performance and make that performance easier to see and simpler to understand for a wide range of audiences – inside and outside companies.

The theory behind the benchmarking is to tap into the competitive nature of the market, combining transparency and public performance ratings to “drive a race to the top” in human rights performance.

The assessment process applied 100 performance indicators that serve as a proxy for good human rights management across six human rights “measurement themes”:

Image courtesy of the Corporate Human Rights Benchmark

Once the benchmarking framework was completed, the group used it to assess 98 companies from three high-risk industries (from a human rights perspective):  agricultural products, apparel, and extractives. They assessed each company on each practice theme

The results? They’re available here, and aren’t particularly surprising. Key findings include:

  • There’s the usual handful of outstanding leaders (BHP Bilton, Marks & Spencer, and Rio Tinto top the chart, followed by Nestle, Adidas, and Unilever).
  • Then there’s the large majority of companies, underperforming across all the indicators. The average score across all themes is only 29% – ouch.
  • Companies generally performed best in “Responses to Serious Allegations,” where the average score is 73%. This may be due to the relative absence of public “serious allegations” for many companies. So far.

A pessimist might call the results disheartening, while an optimist might say there’s a lot of room for improvement. Regardless of how you view these results, the new benchmarking framework is welcome news, and not just to investors looking for better information. For companies, the framework forms a useful roadmap to developing strategies for continuous improvement in HWR performance. And that’s good news for everyone.

3. The Guidelines for the Evaluation of Workers’ Human Rights and Labor Standards (released May 2017).

Developed by the Committee on Workers’ Capital (CWC), an international labor union network, these new Guidelines are designed to help investors assess company performance on HWR issues. The CWC highlights ten HWR issues for assessment, including workforce composition, social dialogue, workforce participation in management, supply chain, and pay levels, among others. Each of these issues is then analyzed using specific key performance indicators, which are grouped into five performance categories:

  • Disclosure: These indicators are the raw numbers reported by companies that inform analysis of the other KPIs (e.g., the number of workers employed through agencies or the number of tier 2 and tier 3 suppliers reported);
  • Governance and policy commitments: These indicators evaluate whether a company’s policies reflect a high-level commitment to HRW;
  • Due diligence: These indicators look at the quality and extent of due diligence carried out by companies in their own operations and/or their suppliers and sub-contractors;
  • Performance assessment: These indicators are outcome-based and assess how well a company performs given its policy commitments. These can be used to benchmark the company year over year or against peers;
  • External engagements: These indicators evaluate whether a company’s engagements with relevant external stakeholders reflect a commitment to avoiding adverse HWR impacts.

The pressure is mounting on companies to address HWR issues. Many now have formal policy commitments, but that’s just a preliminary step. Too many fail to report (and we have to assume fail to act) on implementing those commitments. Too many still lack clear accountability for overseeing adherence to the commitments or even tracking progress towards stated goals. These are basic failures of sustainability management.

Bottom line? It’s clear that investor interest in and demand for actionable information about a company’s HWR policies, practices, and performance is only going to keep increasing. Companies that have not focused on this issue will find themselves increasingly challenged by customers, and passed over by potential investors. Here are some strategies to begin improving HWR performance:

  • Understand the HWR risks in your industry, your operations, and all locations where those operations occur. Further, work to identify and understand those same risks in your supply chain.
  • Prioritize those risks, using a materiality assessment.
  • Develop formal commitment statements or policies narrowly tailored to address the prioritized risks.
  • Work to establish and integrate company practices that support the commitments.
  • Overwhelmed and unsure where to start? Sustrana’s sustainability management platform can help you to move through these critical steps easily and quickly! For example:
  • The Issue Value Assessment tool provides a workspace for systematically evaluating and prioritizing HWR issues and risks.
  • The Policy Builder’s well-researched Human Rights Policy template is easy to review and edit to create a right-sized policy that legal and management can easily accept.
  • The Project Selector gives you a database of best practice project ideas to choose from.  Pick projects based on your priorities and create the support that your policy commitments need for proper implementation.

For more information, sign up for a demo of the Sustrana platform.