Investing in human rights: overcoming the human rights data problem

ABSTRACT

Human rights concerns are hardly integrated in investment decisions. That is a missed opportunity given investors’ crucial role in putting pressure on corporations to produce better information on adverse human rights impacts and addressing these impacts. This article investigates why human rights abuses by companies are so persistent. Explanations include the inherent complexity of global value chains; a lack of integration of human rights in business; insufficient legal enforcement; and inadequate data and limited pressure on corporations by investors. Although investors have launched several initiatives to improve their human rights performance they seem not yet able to solve the identified challenges and fulfil the requirements set out in the OECD guidelines and UNGP. We make suggestions to improve human rights data for investors by expanding the existing ecosystem and build two types of new institutions: specialised human rights data gatherers and dedicated human rights investment funds.

KEYWORDS:

• ESG
• corporate responsibility
• financial architecture
• institutional investors
• impact investment

1. Introduction

Across the globe people are continuously adversely affected by business activity. Human rights abuses by mining activities are still frequent (Paré and Chong 2017) and tobacco companies continue to present a serious threat to people’s right to health, even employing devious means to get children to smoke (e.g. Van der Eijk, Bialous, and Glantz 2018). A lot of human rights violations, however, happen out of sight, deep down the value chains, and multiple steps away from the large companies that commission the business activity. There are several reasons for the continuation of human rights abuses by business, such as the complexity of global value chains and the informal sectors involved. Moreover, Corporate Social Responsibility (CSR) efforts have paid relatively little attention to human rights so far (e.g. Wettstein 2012; Fiaschi and Giuliani 2012; Ramasastry 2015). In addition, legal enforcement is weak (e.g. Ruggie 2013; Debevoise and Plimpton 2021). And investor attention is limited (e.g. Wagemans, Van Koppen, and Mol 2018), putting little pressure on corporations to improve. This poses the problem of how to invest with respect and in support of human rights. In addition to the efforts of governments, families, and civil society, there is plenty of scope for institutional investors to help. Yet typically, institutional investors would claim that human rights are ‘not investable’. At best, one can currently invest in companies that supposedly behave relatively better than others, but without sufficient information to validate that, or to know if better is actually good enough. Information on companies’ adverse human rights impacts and on their corporate human rights performance is poor. And it hardly feeds into financial and sustainable databases and investment fund considerations.

This lack of data is problematic, first and foremost for affected people, since human rights ought to be protected and respected in line with international ratified human rights treaties to allow people to live with dignity. Add to that the effects of climate change, nature loss and pollution, which increasingly cause severe human rights impacts. Therefore, the UN Human Rights Council recently declared a healthy and sustainable environment to be a universal right. The lack of data is also problematic from a wider societal perspective, since society would benefit from more justice, more equality, and a better educated workforce. Countries where such institutions are stronger tend to have stronger economies and stronger social fabric (e.g. Acemoglu and Robinson 2012). Companies themselves should be concerned too: they run high business and reputational risks if they don’t ensure responsible business conduct in their value chain, which is increasingly becoming a consumer concern as well. Moreover, businesses would benefit from better societal outcomes. All of this makes it a concern for investors as well, in particular for universal owners such as large pension funds or insurers that are invested in most of the global economy. And it is even of concern to investors who take a more strictly financial perspective: given societal shifts, better financial performance is to be expected from companies that are better prepared for operating in more sustainable ways, including their performance on human rights (e.g. Khan, Serafeim, and Yoon 2016). Any investor who is able to identify and invest in such companies (or avoid the losers), should benefit.

This article is set up as follows. The next section gives an overview of the evolution of the field of Business and Human Rights. We do not intend to give an exhaustive summary but aim to set the expectations towards respecting human rights. This is followed by expectations towards investors; and an analysis of the reasons why data and performance on human rights continue to disappoint. We subsequently sketch the conditions for an environment in which these issues are solved or at least mitigated, and propose the creation of two new types of institutions: human rights data gatherers and dedicated human rights investment funds.

2. Business and Human Rights – a framework in development

The human rights regime is historically aimed towards state-actors and their obligation to promote and protect the rights of their citizens (Freeman 2017; International Council on Human Rights Policy 2002). Today it consists of nine core international human rights treaties and their United Nations (UN) monitoring bodies. Participation by states in the treaty system has expanded tremendously in terms of ratifications, the numbers of produced reports, individual cases, meetings of the treaty bodies and the generation of national legislation, which had a positive effect on a multitude of domestic legal and political systems (Bayefsky 2001; Abashidze and Koneva 2019). Meanwhile, globalisation caused a governance gap, which in turn generated growing awareness and focus on how states should protect their citizens from adverse impacts by transnational companies. There is also growing emphasis on the independent responsibility of transnational companies to respect human rights.

2.1. Limits to past initiatives

In the past, states mostly sought to fulfil their duty to protect by calling on business to commit themselves to initiatives. An examples is the UN Global Compact launched in 2000 by former UN Secretary General Kofi Annan (International Council on Human Rights Policy 2002). It counts ten principles, covering human rights, labour rights, the environment and anti-corruption. Success has been limited however. In an investigation of three codes, Doane and Holder (2007) find

violations of all three of the codes, even by company leaders whose rhetoric and policies purport to support the aims of the codes; a catch-22 situation, where market drivers contradict the principles of voluntary codes; and a failure to enforce sanctions for violations of the codes under the established governance schemes; governments fail to support the codes sufficiently to enable their full implementation and enforcement.

Similarly, an evaluation of the Dutch state’s Responsible Business Conduct (RBC) Agreement policy¹ concluded that it has ‘not observed a reduction in negative impacts in global value chains as a result of the RBC agreements’. This was due to factors such as not setting a minimum standard, falling short on incentivising companies and weakness in monitoring – even though the agreements were based on the OECD guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights (UNGP) (Bitzer et al. 2020). Then again, the UN Global Compact was meant as a learning network, not for accountability. Moreover, it is probably too early to judge its effectiveness, especially since the multifaceted nature of the problem means that there are no silver bullets, and a range of solutions is needed to get results over time.

2.2. UNGP

In 2011, the UN Human Rights Council adopted the UNGP, marking an important milestone in the advancement of business respecting human rights. It is a comprehensive framework to protect, respect and remedy human rights and consists of 31 principles. It has become the first globally accepted standard to set the expectations of states and companies on what they should do to address adverse human rights impacts by business. Most importantly, the UNGP show companies how to do effective ongoing human rights due diligence. In addition, the UNGP emphasises that prevention is key, as well as remedy when impacts occur and that special attention should be given to vulnerable groups (United Nations 2011).

Right after their adoption, the UNGP were integrated in the OECD guidelines for Multinational Enterprises and contributed to numerous pieces of sectoral guidance and the more general Due Diligence Guidance for Responsible Business Conduct (OECD 2018). One could argue that such guidance further operationalises the UNGP and gives step by step instructions to businesses on how to shape and improve their responsible business conduct.

2.3. Shift to mandatory human rights due diligence legislation

There is an ongoing shift of states moving to mandatory measures in relation to human rights due diligence. This shift is driven by an increased understanding of the role of business in respecting human rights; a growing awareness that corporate commitments alone are not enough; more interaction between state and non-state actors; improved guidance for business on how to respect human rights; and adoption of the UN Sustainable Development Goals (SDGs).² The shift is most noticeable in Europe, where at least 15 countries are discussing, developing or already have some kind of mandatory human rights due diligence law.³ Developments at the European Union (EU) level are ongoing. The European Commission (EC) published a report in January 2020 on regulatory options at EU level for broad mandatory due diligence legislation (European Commission et al. 2020). This was followed by a briefing called ‘Towards a mandatory EU system of due diligence for supply chains’ in October 2020, stating the hitherto followed approach ‘is considered largely insufficient’ (European Parliament 2020). And in March 2021 the European Parliament adopted a resolution calling for binding EU regulation on corporate human rights and environmental due diligence. The Sustainable Corporate Governance initiative is planned to be presented by the EC in the first half of 2022. Since the EU is a regulatory superpower that exports its rules (the ‘Brussels Effect’, Bradford 2020), the effect will mostly likely be experienced by corporates and investors on a global scale. So far, developments at the international level have been less fast paced but in the same direction. In 2014 a new attempt was pushed with the start of a discussion to develop a ‘Binding treaty’⁴ (United Nations 2004, 2014). The treaty is heavily discussed (e.g. Backer 2015; Bilchitz 2016; Cassel 2018; Cassell and Ramasastry 2016; De Schutter 2016; Ramasastry 2015; Ruggie 2014; Thielborger and Ackermann 2017) and its negotiations are still ongoing. Nevertheless, the trend is clear: the pressure by states on businesses is mounting to structurally improve the way they address adverse human rights impacts throughout their value chain.

3. Expectations towards investors

Investors are part of the institutional context in which companies are held accountable for human rights in their value chains. The UNGP and OECD guidelines (from now on mentioned as the Standards) are increasingly recognised amongst investors, yet a thorough understanding and implementation is still a challenge. To address this, the OECD published several pieces of sectoral guidance. For financial institutions the OECD developed the Responsible Business Conduct for Institutional Investors (OECD 2017) and Due Diligence for Responsible Corporate Lending and Securities Underwriting (OECD 2019). To ensure a common understanding of the framework used in this article, important expectations and recommendations stemming from the afore mentioned guidance will be clarified.

3.1. Due diligence as a continuous process

Where investors generally see due diligence as a process conducted prior to making certain investment decisions, the Standards perceive due diligence as a continuous process for identifying, preventing, mitigating and accounting for actual or potential adverse impacts on society and the environment throughout the investment value chain (OECD 2017). Indeed, it goes beyond simply identifying and managing material risks to investors themselves. This outward facing approach to risk – in which the impacts for affected parties are independently considered next to financial or commercial impacts – may represent a paradigm shift to some investors. However, in many cases there will be a strong correlation between the potential financial risks and responsible business conduct (RBC) risks⁵ associated with investments. In addition, the due diligence framework is designed in a way that is complementary across business relationships. The OECD (2018) emphasises that

As long as all entities in the investment value chain carry out due diligence and communicate about it to the other entities in the value chain who are relying on that due diligence, then the due diligence does not need to be duplicated. However, it will be for each entity in the value chain to judge the quality and reliability of due diligence undertaken by others in the value chain and whether supplementary action is needed.

3.2. Determining investor involvement

The Standards require investors to take several steps in the due diligence cycle (Figure 1). Investors should embed human rights in all the relevant policies and management systems and identify potential and actual adverse impacts. The identification process should enable them to undertake two key exercises: (1) the determination of investor involvement and (2) the prioritisation of adverse impacts. Three categories of investor involvement can be identified, in that an investor can (Figures 2–5):

1. Cause an adverse impact through its business operations (for example towards their employees);

2. Contribute to an adverse impact through an investment activity or a business relationship if it causes, facilitates or incentivise another entity (e.g. investee company) to cause an adverse impact;

3. Be directly linked to an adverse impact through the operations, products or services by an investee company or business relationship.

Figure 1. OECD guidelines on human rights. Source: OECD (2018, 2019).

Figure 2. Why abuses of human rights by business continue. Source: the authors.

Figure 3. Factors hampering investment in human rights. Source: the authors.

Figure 4. Advantages and disadvantages of a dedicated human rights fund versus a regular sustainable investing fund. Source: the authors.

Figure 5. Flows of information and funds. Source: the authors.

The degree of involvement shapes investor responsibility towards addressing the adverse impact. When causing or contributing to an adverse impact, the investor is required to cease and mitigate the adverse impact and provide remediation. Most cases however, fall in the third category, where investors are directly linked to an adverse impact due to a minority shareholder relationship with an investee company that causes or contributes to the adverse impact. Investors are then required to use their leverage, alone or in collaboration with others, to influence the investee company to prevent or mitigate the adverse impact. In addition, the investee company is required to remedy the victims.

An investor’s involvement in an adverse impact is not static. It may change over time depending upon the degree to which the investor could or should have known about such adverse impacts; whether it facilitated or incentivised adverse impacts; and the extent and quality of any measures the investor has taken to seek to prevent, mitigate and/or remedy the adverse impact. This includes all activities it has taken, but also those it has not taken and should have.

3.3. Prioritising adverse impact

Investors may invest in hundreds or even thousands of companies, creating a vast universe of potential and actual adverse impacts to identify and address. The standards recognise that not all adverse impacts can be responded to at once. Investors are allowed to prioritise identified adverse impacts based on their severity. The severity of an impact is determined on three criteria (OECD 2017):

1. Scale refers to the gravity of the adverse impact.

2. Scope concerns the reach of the impact, for example the number of individuals that are or will be affected or the extent of environmental damage.

3. Irremediable character means any limits on the ability to restore the individuals or environment affected to a situation equivalent to their situation before the adverse impact.

The most severe impacts should be addressed first, while the less severe impacts should be addressed over time. The ranking of severe impacts will be specific to each individual investor depending on the investment portfolio and the identified adverse impacts.

3.4. Engagement and divestment

Based on their prioritisation investors should undertake action to prevent and mitigate potential and actual adverse impacts. Investors have a diverse toolset of potential actions to do so. Active investors can engage with the investee company to exert leverage to mitigate the adverse impact. Passive investors can redesign the investment strategy to avoid investments with highly severe impacts. Divestment is typically seen as an option of last resort or reserved for the most severe adverse impacts, but investors might have an exclusion policy that dictates otherwise. Since divesting could exacerbate adverse impacts, investors are required to assess potential adverse impacts when deciding to divest.

It is crucial to account for the way in which adverse impacts are addressed. Investors can do so by tracking the performance of their own due diligence performance and impacts – and thus the performance of investee companies – and by communicating the results. It should be noted though, that these tools are quite new and investors are still learning to use them.

4. A complex reality to achieve results

Given the clear due diligence expectations towards investors and their investee companies and an increase in legislation to enforce it, why do human rights abuses by investee companies continue? Ruggie (2008) claims that ‘the root cause of the business and human rights predicament today lies in the governance gaps created by globalization – between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences.’ Accordingly, we explore four reasons why human rights abuses by investee companies are so persistent and why investors’ human rights performance is lacking:

1. Inherent complexity of global value chains

2. Corporations: a lack of integration of human rights in business;

3. Governments: insufficient legal enforcement;

4. Investors: inadequate data and limited pressure on corporations;

4.1. Inherent complexity of global value chains

Companies are part of complex networks of business actors involved in up- and downstream flows of products and services in globally dispersed multi-tier value chains that cross national borders, jurisdictions and sectors. Mapping business relationships in such a value chain is a demanding task, and ‘many companies have limited visibility of their supply chain information, have a poor understanding of their capabilities for capturing and reporting this information and have not overtly considered their supply chain information disclosure strategy’ as Marshall et al. (2016) mention. It therefore comes as no surprise that various studies (Grimm, Hofstetter, and Sarkis 2014; Hofmann, Schleper, and Blome 2018; Hutchins and Sutherland 2008; Lukas 2012; Lukas, Plank, and Staritz 2010; Marshall et al. 2016; Smit et al. 2021) show that companies struggle to address adverse human rights impacts. Companies face challenges achieving transparency in their own value chain due to for example suppliers’ unwillingness to disclose information about their own suppliers (e.g. Smit et al. 2021). It gets even worse in certain contexts, for example when the informal sector⁶ is part of the value chain – such as the garment supply chain in the largely informal economy of India. Companies may find it impossible to establish linkages with actual producers due to non-factory-based production and subcontracting (Venkatesan 2019).

4.1.1. Analysing root causes in context

Human rights abuses typically do not occur in isolation but in the context of systemic challenges, such as the informal sector. Therefore, the UNGP Interpretive Guide advises to investigate the ‘root causes’ of human rights abuses and to identify why and how the impact occurred. Though it might be more demanding for companies and investors, a root cause analysis does improve the understanding of deeper contextual factors of risk. It can thus help improve the effectiveness at both the ex-ante and ex-post stages of human rights due diligence (Mares 2018). In practice, NGOs observe that mitigation measures taken by companies often move the abuse to other parts of the value chain instead of actually solving it, since its root causes are not addressed. They are convinced that solutions are feasible but complex and that the support of local partners with in-depth local knowledge is required to achieve results in complex global value chains.

4.2. Corporations: lack of integration of human rights in business

Scherer and Palazzo (2011) argue that

under the conditions of globalization, the strict division of labour between private business and nation-state governance does not hold any more. Many business firms have started to assume social and political responsibilities that go beyond legal requirements and fill the regulatory vacuum in global governance.

However, that responsibility seems to be taken in other fields than human rights. Wettstein (2012) observes that human rights have not played an overwhelmingly prominent role in Corporate Social Responsibility (CSR) in the past. Fiaschi and Giuliani (2012) find that corporations practicing CSR appear less likely to be involved than non-adopters in the worst human rights abuses, but more likely than non-adopters to be involved in other types of ‘less serious’ abuse. They also find that while adoption of CSR seems to reduce direct corporate involvement in abuses, it has no such effect on indirect abuses allegedly committed by complicit third parties such as suppliers.

4.2.1. BHR goes beyond CSR

The field of Business and Human Rights (BHR) focuses on a clearer commitment in the area of human rights than CSR does. Ramasastry (2015) argues that BHR is, ‘in part, a response to CSR and its perceived failure’, and that ‘BHR is a distinct field with expectations that measure company actions in light of key universal human rights concepts not simply voluntary codes or principles.’ In contrast, she argues that ‘CSR is portrayed as important to the competitiveness of enterprise. The concept is meant to bring benefits in terms of risk management, cost savings, access to capital, customer relationships, human resource management, and innovation capacity’. Indeed, CSR seems to be instrumental to the corporate objective of shareholder value. The focus on shareholder value seems to be a major underlying cause of corporate negligence within value chains. It is what Mayer (2018) calls the corporate model of ‘rape and pillage’, since all concerns are secondary to the goal of maximising the corporation’s share price. Mayer argues that for corporations to systematically create positive societal value, they should be run for purpose, not just for shareholders. That means that they focus on doing what they are good at, say provide a certain good or service, and treat all stakeholders decently. Profit then becomes a result of delivering value, rather than an objective for which all else is sacrificed. For purposeful companies, human rights are a core obligation to respect, wherever they operate. The goal should be to do no harm, and where harm is caused, one should provide a meaningful remedy to victims. This is also consistent with the social boundaries of Raworth’s (2017) doughnut and the concept of integrated value that encompasses not just financial value but social and ecological value as well (Schoenmaker and Schramade 2019a). Some companies, such as GLS Bank in Germany, are starting to report on the degree to which their operations are within social and planetary boundaries.

4.3. Governments: insufficient legal enforcement

Another aspect is governments’ failure to ban human rights abuses committed either in their jurisdictions or by corporations headquartered in their jurisdictions. According to Ratner (2001), a governance gap often arises when a government is unwilling or unable to provide its citizens with access to remedies for human rights violations caused by businesses. This especially applies to transnational enterprise. Host countries are rarely able to hold transnational corporations accountable for the activities of their suppliers, while home country regulations are more reliant on market discipline through transparency and reporting rather than direct liability. Kinley and Navidi (2013) conclude that ‘neither regime provides sufficient incentives to eliminate human rights abuses’. Kaleck and Saage-Maaß (2010) argue that: ‘Although substantial international criminal law is well prepared to tackle corporate misbehaviour, enforcement mechanisms, available both at the international as well as the national level, are insufficient.’ Ryngaert (2018) observes that ‘in the implementation of the UN Guiding Principles on Business and Human Rights, little emphasis has been put on criminal law as a mechanism to hold corporations to account.’ He adds: ‘from a liability perspective, involvement of corporations in overseas human rights abuses often results from negligent behaviour rather than direct perpetration.’ He argues that the main challenge is to establish jurisdiction and liability with regard to corporate involvement in human rights violations in transnational value chains. This is consistent with the observed shift by states towards developing legal instruments and mandatory adherence to human rights by companies. Recent signs point to a shift in the judicial system where parent companies’ duties of care to foreign claimants are put in practice. The Dutch Court of Appeal was the first court to rule that RDS, the Shell group parent company, incurred a duty of care to farmers in the Niger Delta that suffered from oil leakages. Shortly afterward, the UK Supreme Court concluded in the Okpabi v. Shell case that it is at least arguable that RDS had a duty of care towards the inhabitants of the Ogale and Bille communities in Nigeria, confirming its decision in Vedanta v. Lungowe, and allowing the case to proceed in English courts. And in November 2021, two executives of oil company Lundin were charged with complicity in war crimes in Sudan. Another major milestone is the ruling in the Milieudefensie v. Shell case in which the Dutch court based its verdict heavily on the UNGP stating that ‘the responsibility of business enterprises to respect human rights, as formulated in the UNGP, is a global standard of expected conduct for all business enterprises wherever they operate’ and that ‘it is not an optional responsibility for companies. It applies everywhere, regardless of the local legal context, and is not passive’ (Rechtbank Den Haag 2021). However, on a global level there are few references to the UNGP by judicial bodies although their use in litigation against companies is increasingly common (Debevoise and Plimpton 2021). Ultimately, these are indications of a shift, but far from common practice yet, as such processes take time.

4.4. Investors: inadequate data and limited pressure on corporations

Investors are required to identify and prioritise adverse impacts, but detailed data on adverse human rights impacts is missing. This starts with poor data provision by companies. Self-reported information on human rights abuses by companies is often biased, insufficient to assess its severity, and unreliable due to lack of verification through independent third parties or inaccurate auditing. For example, Judd and Kuruvilla (2020) show that information given to auditors who inspect factories in the apparel industry is often inaccurate. It’s most notable in China and India where over half of the 31.652 conducted factory audits in a seven year period contained unreliable or falsified information. Lukomnik, Kwon, and Welsh (2018) found that while 78% of the S&P 500 companies issue a sustainability report, only 3% of those reports stated that the environmental and social performance data was externally verified. Wilmar is a case in point: labourers interviewed by Amnesty (2016) show human rights violations continued in Wilmar’s chain, in spite of the company’s prior efforts in building an impressive reporting system on human rights abuses.

In addition, information provided by generalist ESG data providers (such as Sustainalytics, MSCI, etc.) is often largely from company sources and thus integrates the same inaccuracy and unreliability. While generalist ESG data providers might include other sources, such as news reports and NGO reports, which could provide some degree of triangulation, they come with their own limitations. They typically capture a specific moment in time⁷; they are incomplete to assess whether international standards are met; and poor performance in one field can be offset by good performance in another. In regions with limited freedom of expression, association and peaceful assembly, such as countries like China and Russia, the possibility to gather and triangulate human rights information becomes even worse. As a result, the typical company report by an ESG ratings agency fails to notice many adverse impacts by companies. If it does mention them, it does not give clarity on the scale, scope and irremediable character of the adverse impact. These limitations are exacerbated by other methodological limitations observed by Kotsantonis and Serafeim (2019) and Fiaschi et al. (2020), such as the tendency to rate relative performance only, i.e. versus other companies, which can make poor performers look good if the others perform even worse.

Unfortunately, the poor quality of human rights data is matched by investors’ lack of integrating human rights in their investment practices. Most investors simply do not regard the topic as material with regard to their investment case. For example, research by Share Action shows that while most asset managers say that they consider human rights important, less than 20% have a serious policy on the subject.⁸ The lack of interest is also reflected in the relatively small number of active engagements with investee companies vis-à-vis the total amount of investee companies. Wagemans, Van Koppen, and Mol (2018) conclude that the full engagement potential is not achieved, not even in the relatively advanced Dutch pension fund sector. Moreover, integration of the topic into investment decisions at the fund level is typically lacking. Exceptions are funds that focus on these issues, but these tend to be private equity or private debt funds that fund small and medium-sized enterprises, not public equity ones that invest in MNEs and can challenge those MNEs. Interest could pick up if there were more scope for investors to pursue social returns. Currently, the vast majority of the financial system is focused on achieving short-term financial returns based on quantitative models, efficient markets thinking and long investment chains (Schoenmaker and Schramade 2019b). Ideally, social impact returns would be added as a third dimension to the traditional financial risk and return dimensions (Sardy and Lewin 2016).

In sum, investing for human rights is hampered by the following factors:

1.	Most companies do not publish sufficient and/or reliable information on their human rights performance, nor have a strategy on it. This makes it difficult to engage on it;
2.	There is no standard methodology yet to assess how well companies perform on the issue;

In addition, and underlying this:

3.	Generalist ESG data providers have limited incentives and resources to start gathering this information;
4.	There is insufficient demand for adequate human rights information since it is often not deemed financially material9 enough, nor central to investment strategies – while it could be if investors aimed for a positive human rights impact, i.e. going beyond doing no harm, and working actively to improve human rights in specific contexts.

5. Towards solutions

Some investors recognise that they fall short in respecting human rights and try to strengthen their responsible investment practices. Initiatives such as the Corporate and Human Rights Benchmark (CHRB) and the Workforce Disclosure Initiative (WDI) aim to increase the availability of data on investee companies’ responsible business conduct. The CHRB and the WDI provide an annual benchmark that scores investee companies on respectively their human rights performance and workforce metrics disclosure. In addition, the UN-supported Principles for Responsible Investment (PRI), the Investor Alliance for Human Rights and the Platform Living Wage Financials provide a platform for investors to collaborate and improve responsible investment practices.

5.1. Existing initiatives are limited by dependence on company disclosure

These initiatives and platforms are useful but have a common and crucial limitation in their approach: they mostly rely on information provided by companies themselves. At best, they assess the quality and reliability of due diligence undertaken by the companies based on the companies’ policies and self-reported practices. Hence, they don’t account for those that actually endure the adverse business impacts, such as labourers, local community members or other rights holders – those that should be at the centre of due diligence, as pointed out by the UNGP. Indeed, the CHRB does include allegations of human rights abuses from other sources such as media and NGOs but the included allegations are very few in numbers, even for notoriously poorly performing companies. And even top ranking companies cause severe human rights abuses, raising questions about deficiencies in the methodology of these benchmarks, as pointed out by Maher (2020) in several cases.

5.2. Towards deeper data gathering

The Standards allow for a complementary due diligence approach if the reliability of the due diligence can be assessed and found to be credible. This contrasts with the current practice of limiting this assessment to policies, publicly available resources or a few included allegations. The Standards require investors to consult additional sources to verify or triangulate claims by companies regarding their human rights performance. Most investors may lack the scale and incentives to that, but specialised human rights data gatherers could fill this gap. They could do in-depth research in cooperation with locally operating civil society organisations (CSOs); and produce information that does meet the above mentioned requirements, and feed that back to investors, either directly or through databases. Since such specialised human rights data gatherers need funding, they are ideally complemented by specialised human rights investors. Such investors would invest not just for financial returns but explicitly aim for better human rights outcomes as well. They would invest in a concentrated portfolio of transnational companies whom they carefully scrutinise on human rights and engage with – using information from the human rights data gatherers as well as feeding back information towards them. This would also allow investors to incorporate the voice of the affected rights holders, and truly invest in human rights.

5.3. Specialised human rights data gatherer

One or more specialised human rights data gatherers could fill the data gaps – left by insufficient company reporting and by insufficient probing by investors and generalist ESG data providers. The aim of such specialised data gatherers would be to facilitate a self-sustaining information flow between investors and (local) human rights organisations by:

• collecting and processing information from (inter)national and local human rights organisations¹⁰, in a much more thorough manner than currently done by generalist ESG data providers, to

• develop methods so as to convert the data to a form that is meaningful for investors, companies and other potentially interested actors, and

• make a high level subset of the data available to a wide audience, and sell customised in-depth data to its clients, in order to

• Provide support to the (inter) national and local human rights organisations that gather information on human rights abuses by companies.

A specialised human rights data gather would work closely with CSOs who defend and promote human rights and that are willing to provide information in return for support. The specialised data gatherer would be linked to community-based monitoring and information systems (CBMIS). These systems ‘refer to initiatives by indigenous peoples and local community organisations to monitor their community’s well-being and the state of their territories and natural resources, applying a mix of traditional knowledge and innovative tools and approaches’ as stated by Farhan Ferrari, de Jong, and Belohrad (2015). CBMIS are piloted and operational in at least a dozen countries, and monitor a wide variety of impacts, as well as the implementation of international agreements at the national or local level.

The specialised data gatherers would need to develop a viable business model or be assured of sufficient support of the involved stakeholders to become self-sustaining. A viable business model would imply that asset managers either pay directly for the data or indirectly via generalist ESG data providers who would have to pay a fee to integrate the data into their products. Admittedly, the ability to sell the product will be low at first, since the coverage will increase over time and clients need to be convinced of the need for such data. It will therefore be crucial to work with clients in pilots to prove the value add in addressing adverse impacts. It also means that cash flow will at first need to come from an associated dedicated fund and from other external sources, such as grants.

For the model and the specialised data gathers in it to function properly, it is fundamental that the specialised data gatherers are independent and act accordingly. This would warrant:

• An independent appraisal of the provided information by human rights organisations to triangulate and validate information, reduce bias and ensure high quality reliable data;

• The inclusion of information of sources that are under the threat of harm and vital yet very challenging to obtain by investors. The specialised data gather could serve as a buffer and offer the necessary level of anonymity to these sources, while validating the information before including it to the data.

• A clear distinction in roles between actors in the business and human rights domain, e.g. civil society actors, financial sector actors, etc.

• Safeguarding the purpose-driven nature of the specialised data gatherers.

Working independently with business, civil society and government would also allow the specialised data gatherer to serve as a linking pin when appropriate, and connect actors to allow for an increased information flow and the possibility for further engagement.

The human rights data gathers would help CSOs by means of training and funding, thereby strengthening the organisations, the data output and ultimately the visibility of human rights impacts. A risk is that direct funding could make actors in the system become susceptible to gathering inaccurate information on human rights abuses by companies, thereby becoming a perverse incentive. However, there are methods to address this risk and induce the gathering of information while safeguarding the reliability of the data. For example, a credit system could be set up and funded for in kind services with the aim to improve data gathering and (local) human rights initiatives. And a vetting system could improve the identification of credible actors in the system.

There are some examples that show elements of the proposed data gathering structure. One example is that of CNV International and its national partner in Guatemala setting up a Labour Rights Observatory.¹¹ Another is the collaboration between investors and CSOs in the Dutch Pension Funds Agreement on Responsible Investment.¹²

Specialised data gatherers would face several challenges, including access to data (and hence a strong working relationship with CSOs is required); ensuring the safety of its sources; resources and funding; development of consistent methods (and bringing together people who have experience in human rights and investing); ensuring data reliability and achieving scale to become widely relevant. The latter has to start with becoming relevant for a specific audience first, by doing pilots in a limited number of tough value chains; and then expand to include more chains so as to allow for meaningful comparisons across companies, industries and countries.

5.4. Dedicated human rights investment funds

Even if the required data is generated by specialised human rights data gatherers, that does not mean that the data is actually used. For that to happen, there needs to be demand for such data from investors. This would arise with the creation of dedicated funds whose purpose is to initiate demand, create information flows and show possibilities and added value: funds whose goal is to not only generate a financial return, but to increase adherence to human rights by investee companies. These funds could even go beyond the UNGP and generate positive human rights impact in specific contexts. Such funds would:

• engage on human rights using data from specialised data gatherers;

• charge higher fees (i.e. give up some net financial return) than ordinary funds so as to support and fund the development of specialised human rights data gatherers;

• report on human rights performance across its portfolio and in wider value chains;

• in the process become a frontrunner and catalyst for improving human rights.

Such a fund’s business model would resemble that of an ordinary investment fund, that is to generate fees as a percentage of its assets under management. However, it would be charging higher fees (to fund the specialised data gatherer), which would make it hard to sell the fund, except to purpose driven investors who would be willing to pay for the additional societal return. To cover expenses, the fund would likely have to be at least €100 million in size. Ideally the fund would be funded by a few anchor investors who are willing to commit for several years.

The most obvious set up of such a fund would be a concentrated listed equity fund with a best in class approach. That is, it would own shares in 30–50 MNEs with a decent ESG track record (high ESG scores and high quality of targets and reporting). Such ‘champions’ are interesting to engage since they have ambitious targets and are likely to want to improve further – and scope for improvement is there given the lack of visibility in the value chain. For example, one such champion, a Dutch medical technology firm, investigated its value chain a few years ago and found that it had over 10,000 suppliers. The fund would engage with all of the investee companies so as to find out the internal processes they have on human rights, and more generally their approach to creating value for society.

The dedicated funds would ideally be independent, but could also be set up in or with an asset manager. An asset manager would provide the fund with back office facilities, such as administration, risk management, perhaps also compliance, trading; and could help it to achieve scale through its brand, sales and marketing channel.

Challenges for dedicated funds would be similar to those of the specialised data gatherer. They would include resources and funding and development of methods. As their first user, the fund would be a major driver of the development of methods by dedicated data gatherers.

5.5. Expanding the existing eco-system

The above sketched infrastructure of specialised data gatherers and dedicated funds would ideally result in a stronger investment ecosystem with self-sustaining flows of information towards investors and of funds towards (local) human rights organisations.

Such an ecosystem could have several effects. For investors and companies, it could enable them to acquire improved information to identify potential and actual adverse human rights impacts caused by investee companies. This in turn allows them to respond quicker and make their engagement more effective. Networks of local organisations could give actionable advice to investors on how adverse impacts should be addressed; they could also provide information throughout the engagement on investee company performance to validate engagement effectiveness. At first this may lead to a higher, but ultimately a lower risk of controversies. This would result in a stronger connection with local stakeholders, improved human rights performance and improved compliance with international standards and (future) law.

For people and their communities it could mean a higher quality output of information on experienced human rights abuses and a more sustainable output of such information. The proposed system expansion also facilitates a more direct link between affected communities and investors, thereby lowering the threshold for meaningful stakeholder engagement. In turn, this could improve identification and remediation of human rights abuses by companies. Ultimately, this contributes to less human rights abuses by companies experienced by people.

In this set-up, the dedicated funds and specialised data gatherers would be mutually reinforcing. There would also be information flows from the dedicated fund to the specialised data gatherer, for example on the outcomes of engagement with companies. So, ideally, both would exist. Still, of the two types, the specialised data gatherers are most critical for creating the proposed self-sufficient ecosystem.

6. Conclusions: moving towards an enabling environment

The four systemic and sectoral challenges explain investee companies and investors’ lacking human rights performance. Admittedly, the systemic challenge is too big for investee companies and investors to solve by themselves, since they cannot unilaterally reduce the complexity of global value chains, and cannot fix insufficient legal enforcement. However, the other two challenges are in their sphere of influence.¹³ Companies can adopt a BHR approach, and investors can stimulate them to do so. Since investors currently have insufficient incentive and data to do so, we propose to expand the existing ecosystem with specialised human rights data gatherers and dedicated human rights investors. The latter put their reputation at stake and are committed to holding investee companies accountable. The former mitigate the data problems and would be natural partners to dedicated human rights investors.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 There international RBC agreements were agreed for the Dutch banking sector in 2016, the insurance sector in 2018 and the pension fund sector in 2019. While the banking agreement was implemented in 2019, the agreements in the pension fund and insurance sector are still being implement.

2 The SDGs are increasingly mentioned by both companies and investors in their reporting. Leaders actively try to align their operations with the SDGs.

3 (Business & Human Rights Resource Centre, 2022).

4 Discussion on a binding treaty started in June 2014 at the 26th session of the UN Human Rights Council with the adoption of a resolution drafted by Ecuador and South Africa.

5 The OECD guidelines use the term RBC risk instead of the more commonly used ESG risk in the financial sector. RBC risk refers specifically to the risk of adverse impacts with respect to the issues covered by the OECD Guidelines. The OECD mentioned that there might be some difference in scope between ESG and RBC risks and recommends investors to assess the differences to ensure they understand the overlaps and differences.

6 The ILO (2018) shows that 60% of the global population works in the informal sector; that it is a major challenge for sustainable development; and that it has a harmful effect on workers’ rights.

7 This is of specific importance when there is an ongoing potential or actual adverse impact and the impact continues after the publications of the news article or report. The news article or report could be an important source to flag the impact but is no longer up-to-date and can therefore no longer be used to fully determine its severity.

8 Share Action (2020). Point of No Returns Part II – Human Rights An assessment of asset managers’ approaches to human and labour rights. https://shareaction.org/wp-content/uploads/2020/05/ShareAction-Human-Rights-Report-2020-Final.pdf

9 Whether human right are material depends on the perspective taken. In terms of double materiality, human rights are material from an outward/impact perspective (i.e. for the people who are hurt), but often immaterial from an inward/financial perspective. For the inward/financial perspective, it matters how substantial the affected operations are to the total business (in terms of sales) and whether it can hurt its reputation, which is much more likely for consumer facing companies than for B2B activities.

10 Human rights organisations are used as a broad terminology to include all organisations that work on human rights regardless of their size, geographic location, focus and structure. This includes for example civil society organisations ranging from small, informal, community-based organisations to the large, high-profile, international non-governmental organisations and trade unions.

11 https://observatoriodl.org/ and https://www.cnvinternationaal.nl/en/our-work/news/2019/juli/cnv-internationaal-sets-up-observatory-for-labour-rights-in-guatemala

12 https://www.imvoconvenanten.nl/en/pension-funds/news/mijnbouwonderneming-peru

13 One could argue that legal enforcement is in the sphere of influence of investee companies and investors, because they could lobby governments for stronger legislation on responsible business conduct, including its enforcement.