How investors can address human rights abuses and modern slavery.
- We believe investors should act to prevent human rights abuses
- Risks can be buried deep within company supply chains
- Action is needed to address poverty – the root cause of much abuse
The concept of human rights has evolved and been recognized through various pieces of national legislation, including the UK’s Modern Slavery Act 2015. But the milestone document was the 1948 Universal Declaration of Human Rights which stipulates “all human beings are born free and equal in dignity and rights”, and that these rights are applicable “without distinction of any kind, such as race, color, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.”1
Investors can, and in our view must, play a role in preventing human rights abuses. Ignoring modern slavery, or human rights abuses, poses material risks to companies. It may result in fines or litigation against businesses or adverse reputational impacts. Furthermore, it is now a societal expectation that investors are not complicit in human rights abuses or modern slavery. But investors face several challenges when implementing human rights considerations into investment and stewardship practices.
National governments and supranational organizations, such as the European Union, are often central to upholding human rights, and have a range of legislative, constitutional and judicial tools at their disposal. They also have the ability to enforce the principles of human rights that are internationally agreed. While it is the role of United Nations (UN) member states to uphold human rights, it is also the case that corporate actors and private institutions can infringe these rights. Not all human rights are as obviously related to corporate and business activity as others. Different considerations are required when analyzing a company, where, for example, freedom of association may be a concern, versus sovereign analysis, which may require the consideration of whether citizens enjoy the right to a fair and public trial.
As human rights requirements fall on both states and companies, clearly the best outcomes are likely to occur when both government and corporate actors respect human rights. In a state where the legal infrastructure does not protect human rights, it is difficult for companies and investors to address human rights abuses.
The UK’s Modern Slavery Act sets out corporate responsibilities in relation to human rights and modern slavery, which can be punishable by unlimited fines. This landmark legislation has since been replicated across numerous jurisdictions, including Australia. However, since this law came into force, there has been substantial criticism that companies are not meeting their legal requirements, and that modern slavery persists. Analysis by law firm Linklaters2 suggests just 19% of the more than 7,000 statements on the Modern Slavery Registry meet the core requirements. Without adequate enforcement of legislation by the state, the financial risks to businesses are potentially lower, and it inevitably becomes more difficult for investors to make the case to companies that such risks must be addressed. This is even more problematic where there is a lack of relevant legislation, as the international principles that businesses are required to follow in relation to human rights are not legally enforceable alone.
Risks to People Paramount
A further challenge when analyzing human rights risks is that it requires a different perspective, or lens, to that usually used by companies and investors. The UN Guiding Principles on Human Rights set out how companies should fulfil their responsibilities in relation to human rights. Businesses are required to respect human rights, and address salient human rights abuses. Saliency differs from materiality in that the former focuses on the potential scope, severity and irremediable nature of human rights impacts. It is crucial that this is viewed from the perspective of the impact on people and their human rights, rather than potential business impacts. In effect, this does not look at financial materiality or whether human rights risks also pose business risks. It is solely interested in whether there are risks to people, requiring a different lens through which investors typically view risks.
Risks can be buried deep within corporate supply chains. For example, agriculture and apparel industries may have more obvious exposure to human rights and modern slavery risks, but food retailers and clothing outlets are likely to be some distance away in the value chain from these risks. Supply chains are frequently complex, and lack transparency, making it difficult for businesses to identify and manage risks, and even more so for investors to understand supply-chain risks.
Remediating Human Rights Infringement, Without Creating Adverse Consequences
Should a company find instances of human rights abuses within its supply chain, the simplest solution can be to terminate the relationship with the supplier, which distances the company from the breaches. A company can reduce its financial risk, as the risks of legal action or negative publicity are minimized, via this distancing. However, this action could lead to far worse consequences for the victims, whose human rights have already been infringed, particularly as they are in a precarious position to begin with. As active investors, we encourage companies to engage with suppliers with the intention of remediating human rights infringements, without creating adverse consequences. We also encourage participation in industry-wide initiatives designed to drive higher standards and alleviate human rights infringements at a systemic level.
Designing a program which effectively identifies and remediates human rights infringements is complex. It requires a deep and thorough understanding of the human rights at risk, as well as transparency across the entire corporate value chain. It also requires an understanding of the cultural, political, and socio-economic factors which influence conditions on the ground. Often investors and consumer-facing businesses are so far removed from these conditions that they need education in order to start addressing the root cause of human rights breaches.
Finally, investors cannot address the complexity and scale of human rights abuses alone. National governments and supranational organizations have a crucial role to play, and many other actors, such as NGOs (non-governmental organizations) and charities can support this. In order to make significant progress, there needs to be action to address the underlying causes of human rights abuses, which most often relate to poverty. There also needs to be adequate legislation which is robustly enforced. This sets clear expectations for companies and provides a universal framework that investors can apply to investment analysis and stewardship activities. Ultimately, it also creates a clear financial incentive for businesses and investors to get to grips with this complex issue.
Sources:
[1] https://www.ohchr.org/Documents/Publications/Compilation1.1en.pdf
Authors
Rebecca White
Global ESG integration lead
Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
Important information
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
