27
MAY
2015

ICGN: Investors and Human Rights Risk

Recently, the International Corporate Governance Network (ICGN) published an article, “Viewpoint: Human Rights Through a Corporate Governance Lens.” The crux of the piece was that human rights pose governance risk to the corporate enterprise and investors must consider human rights in assessing corporate conduct. As noted in the article, “Human rights are at once a growing business risk for companies, and they also present important questions of business ethics that both companies and investors must consider as a fundamental component of good management and long-term stewardship.” This insight by a leading voice in the corporate governance community is a promising development in the promotion of human rights protections in the course of business development. The authors, Lauren Compere and George Dallas, raise several interesting questions that all investors should ponder as human rights norms intersect with business activities throughout the world.

The first question that Compere and Dallas pose is what should investors expect of companies with regard to human rights management? Noting the UN Guiding Principles on Business and Human Rights, they recognize that companies have a responsibility to conduct the necessary due diligence to ensure that human rights risks are considered as part of business operations and that boards must hold management accountable and create a corporate culture that ensures management of those risks.

The second question raised in the Viewpoint is perhaps a more critical one for institutional investors: What should be expected of investors in companies where human rights concerns may arise? Implicit in that question is the notion that investors have some duty to respect human rights as described in the UN Guiding Principles. For readers unfamiliar with the UN Guiding Principles on Business and Human Rights, the Principles set forth a framework for governments and businesses: States have a responsibility to protect human rights in the context of business activities that may infringe on those rights; Companies have a responsibility to respect human rights in the conduct of business activity, and; There must be adequate remedies afforded people whose human rights have been impacted by business activity. In this context, investors have a responsibility to respect human rights impacted by their investments in business activities. While at first glance this notion seems tenuous in terms of passive investment and rights affected, it is becoming the norm.

For example, with the easing of sanctions against the government of Myanmar as it began to ease social and economic restrictions on its citizens, the U.S. State Department imposed its “Reporting Requirement” for investments in excess of $500,000 by U.S. companies operating in that country. Several of the initial reports from companies operating in Myanmar that fit in the definition of the Reporting Requirement made the argument that passive investment in business development in the country was exempt from the Reporting Requirement. However, the Reporting Requirement makes no distinction with respect to any investment in excess of $500,000. In another context, the ICGN authors note that the OECD National Contact Point network found that:

“[H]uman rights concerns at the South Korean steel company POSCO resulted in two prominent European investment funds facing OECD criticism on the basis that they may have applied insufficient human rights due diligence in monitoring or engaging on human rights at POSCO—even though both were only minority shareholders with relatively small stakes in the company.”

This raises a fundamental question as to what institutional investors should do to address human rights concerns. ICGN suggests that investors should (1) develop proportionate due diligence with respect to their investments; (2) develop appropriate strategies with respect to their investment policies and practices; (3) public disclosure of investors’ human rights policies; and (4) engage in public policy and multi-stakeholder initiatives in order to extend their influence in regard to business and human rights.

All of the actions proposed by the ICGN are not new concepts for institutional investors but what has changed is the recognition that there exists emerging international legal norms that investors must recognize as part of their obligations as investors. Shareholder engagement, appropriate due diligence with respect to their investments and transparency with respect to investment policies are all subjects that have been discussed by responsible investors for some time. What has changed is the recognition that institutional investors cannot remain on the sidelines as human rights pose ever-increasing risks for companies throughout the world. The traditional view of investors and the corporate enterprise wherein investors are only liable to the extent of their investment is rapidly giving way to the recognition that non-financial risks, including human rights impacts, transcend those 20th century views.

 

 

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