On April 21, 2020, a group of 101 international investors representing US$5 trillion in assets under management have, in a common statement, called on “all governments to develop, implement, and enforce mandatory human rights due diligence requirements for companies headquartered or operating within their own jurisdictions”.
Such demand followed the March 23, 2020 letter by 176 investors representing over US$4.5 trillion in assets under management calling on 95 companies scoring 0 on human rights due diligence 2019 Corporate Human Rights Benchmark indicators to take immediate actions to improve their due diligence.
Tight relationship between investors’ due diligence and companies’ own
In the letter addressed to companies, investors detailed their expectations regarding companies’ respect for human rights, including through “(1) the disclosure of strong public commitments on human rights, (2) explanations of rigorous human rights due diligence processes, and (3) transparent mechanisms that enable remediation of negative impacts”.
In fact, when calling on governments to adopt mandatory human rights due diligence for companies, investors stated that such due diligence is “a necessary component for investors to fulfil our own responsibility to respect human rights”. They explained that in order to make informed and responsible investment decisions, they need companies to undertake proper due diligence encompassing mandatory disclosure. In short, investors’ respect for human rights depends on how companies undertake their due diligence.
While the OECD Guidelines for Multinational Enterprises (OECD Guidelines) expect enterprises to seek ways to prevent or mitigate adverse human rights impacts directly linked to their business operations by a business relationship, and to carry out human rights due diligence, the OECD Guidance on Responsible Business Conduct for Institutional Investors (OECD Guidance) clarifies the application of the OECD Guidelines in the context of financial sector.
In that context, a business relationship is characterised by a relationship between an investor and investee company, including minority shareholding. Hence, investors are expected to consider responsible business conduct risks (i.e. risk of adverse impacts on issues covered by the OECD Guidelines, here human rights) throughout their investment process and to use their leverage with companies they invest in to influence those investee companies to prevent or mitigate adverse impacts.
Furthermore, investors are expected to undertake due diligence to identify, prevent and mitigate responsible business conduct risk and impacts in their own portfolios. The OECD Guidance underlines that due diligence should not be limited to an initial investigation of a potential business relationship or transaction, but should also be applied proactively through establishment of systematic measures to identify responsible business conduct risk and prevent or mitigate potential adverse impact, as well as through on-going monitoring of business relationship and related operations.
It is noteworthy to indicate that the OECD Guidance recognises the complementary nature of due diligence processes across business relationships. “An investor which has investments in companies operating in high risk sectors that can demonstrate they are adequately carrying out due diligence, the investor may not need to further identify risks with regard to those companies.”
Despite some exceptions, the financial sector far from being an example in terms of human rights
Among the long list of investors calling for better due diligence, some are ones of the world’s largest assets managers whose own human rights performances have been assessed by ShareAction in its March 2020 Point of No Returns report. Out of 75 institutions monitored, 7 have called companies and governments to take actions: Rebeco, Legal& General Investment Management, APG Asset Management, Aviva Investors, NN Investment Partners, BMO Global Asset Management, and Union Investment. None obtained the maximum score possible, one scored between 75 and 87.5%, one between 62.5 and 75%, three scored between 50 and 62.5%, and two scored between 25 and 37.5% (the percentage corresponds to the number of points scored relative to the maximum available number of points).
The report concluded that most of investors’ voting policies lack commitments on human rights due diligence, considering that only a minority of asset managers’ voting policies include an acknowledgment of investee companies’ responsibility for upholding human rights and a commitment to vote for resolutions calling for improvement of due diligence.
Another report from BankTrack, evaluating 50 of the largest private sector commercial banks globally reached the conclusion that the implementation of the UN Guiding Principles on Business and Human Rights is “alarmingly poor among the great majority of banks”. While a large majority of banks have adopted a clear policy commitment to respect human rights, only 24% demonstrated both senior-level sign-off of the commitment and specific governance of human rights at Board level. As a result, only 28% were found to have a human right due diligence process extending across the bank’s entire operations.
While companies’ human rights due diligence is complementary to investors’ own, it must not conceal investors’ responsibilities. Irrespective of companies’ compliance with their own due diligence obligations, investors have to carry their own. The call for mandatory human rights due diligence must apply to all sectors, including the financial one.