As The University of Manchester prepares to celebrate the 70th Anniversary of the Universal Declaration of Human Rights, Dr Lara Bianchi from the Business and Human Rights Catalyst at the Alliance Manchester Business School discusses the responsibility investors have in ensuring human rights are part of a company’s strategy.
- 82% of all of the growth in global wealth in the last year went to the top 1%, whereas the bottom 50% saw no increase at all.
- Only 8% of more than 1,700 social indicators recently examined evaluate the effects of company practices on people. The great majority of social indicators used for evaluating corporate social performance measure company’s efforts and good-willing activities (eg number of policies issued) rather than real outcomes.
- The social (S) of environmental, social and governance (ESG) indicators has to find more space within the investment community, which needs to be more aware of the materiality of human rights and its implications in corporate value.
In September, I visited San Francisco to attend the UN Principle for Responsible Investment in Person Conference. At the same time, Apple hosted its annual conference and announced the launch of iOS 12; the Global Climate Action Summit was held, promising to “Take Ambition to the Next Level”; and PRI leading global convention welcomed over 1,200 investment professionals discussing topical societal issues.
Using the basic rules of supply and demand, it is no wonder my two-star hotel costed almost £300 a night. The high cost of living also sadly goes some way to explain the reason a man and his three-year-old daughter slept on a bench outside of the hotel each night I was there. The civil San Francisco welcomed brilliant geeks, global leaders, and wealthy investors – but miserably failed to take care of a little one. Both the Global Climate Action Summit and the UN PRI convention focused on the potentials of the UN Sustainable Development Goals (SDGs), and on the fact that there can’t be a business case in enduring poverty and abusing rights. But still, that pre-schooler had nowhere to stay.
One thing all the investment professionals – responsible or not – would agree on is the ability of our capital market to create financial wealth. However, the need to create the SDGs lies exactly on the fact that this wealth is not fairly distributed: 82% of all of the growth in global wealth in the last year went to the top 1%, whereas the bottom 50% saw no increase at all. Common sense should tell us that the dogmatic adherence to neoliberal economics is not working for the great majority of people – and the creation of a human economy depends on a fairer distribution of wealth and the respect of everybody’s dignity.
The PRI conference
Former Vice-President Al Gore gave the opening address to the PRI conference with a clear message to investors. If they don’t start to integrate more seriously environmental, social and governance (ESG) factors in their companies’ evaluation, they are actually violating their fiduciary duties. They are not acting in the best interests of their beneficiaries – who are, at the end of the day, actual people living on this planet. The way the market is currently rewarding companies doesn’t recognise the impacts and outcomes of business activities on people. And the first reason is that there is no robust accounting nor accountability on human rights; performance indicators are missing; benchmarking exercises are only now emerging; and the business value on markets ignore the outcomes on people.
There was another very passionate keynote speaker at the conference, Paul Polman, Unilever’s CEO. He stated that he is trying to create a different form of capitalism (“a human economy”), where the financial market meets a longer-term view, and where the maximisation of the returns on financial capital should be matched by returns on social and environmental capitals. Investors can demand more from their money, and they should use their influence to drive long-term, socially useful value creation. In Polman’s opinion, the compelling objective is to create awareness among investment professionals on the financial downside of short-termism. Asset owners – and their asset managers – have the power to decide how fast companies should move from basic corporate social responsibility to value creation and responsible business conduct.
Currently, the market is not rewarding responsible performance because of the way financial risks and returns are modelled – which sees no alignment between the way capital is deployed and its impacts on society. The reason for this discrepancy is that the market doesn’t know how to align financial and societal risks, and how to evaluate corporate social performance. Only 8% of more than 1,700 social indicators recently examined evaluate the effects of company practices on people. The great majority of social indicators used for evaluating corporate social performance measure company’s efforts and good-willing activities (eg number of policies issued) rather than real outcomes. Moreover, many studies have sustained a positive relationship between corporate financial performance and social performance as a result of a better ability of companies to manage different risks and be competitive in a global market. However, the scope of such studies was to force numerical metrics – usually employed in quantitative analyses of financial performance – to the measurement of outcomes of social performance, which are highly complex because of their multidimensional nature and context specific characteristics.
The PRI conference was held at one of the Marriott’s hotels in San Francisco. One of the Spanish-speaking janitors working in that very same building was invited to give a talk – telling her story of job insecurity, lack of living wage, and health and safety issues. She shared a story of a violent sexual harassment that happened to her three years ago, and how the managers at Marriott asked her to keep such a story to herself. In front of a community of investors which proclaims to be responsible, she said that many of them were probably investing in Marriott and should reflect on what they consider a valuable company. Her message was a moving and courageous testimony. But what could the consequences to her speech be? Marriott won’t lose any investor because this very same responsible investment community has still no idea how to link and evaluate this worker’s abuses with Marriott’s market value, and it wouldn’t know how to implement a disinvestment policy based on human rights abuses. When the violent harassment occurred to this lady, Marriott neglected her a secure working environment; it didn’t even consider the provision of remedy; and it safely kept on doing business as usual, making sure its guests weren’t informed of what happened. And this happened despite the fact that Marriott’s responsibility is clearly set in the UN Guiding Principles on Business and Human Rights (UNGPs). The question is to what extent Marriott’s investors are co-responsible of its conduct. To what extent, in line with the UNGPs, could the investment community be held co-responsible for what their portfolio companies are doing.
Investors’ human rights responsibilities
What investors should do is to explore new meaningful ways to measure a corporate’s performance, demanding from data providers more information that can help conjugate social and financial performance. Asset owners and managers should engage with companies they hold for stressing the importance they place on societal issues. New technologies of audits and performance evaluation should be suggested and encouraged. The alignment of a company’s strategy and core business to the requirements of the UNGPs (namely, a human rights due diligence and the provision of remedy) should be added as a proxy of a good corporate governance. And the recognition of a good short-term financial performance shouldn’t always prevail over a solid social performance. The S of ESG indicators has to find more space within the investment community, which needs to be more aware of the materiality of human rights and its implications in corporate value.
The three-year-old sleeping on the street in the city capital of the digital revolution is an infringement of several sustainable development goals of which investors are a tacit accomplice – 1 no poverty, 2 zero hunger, 3 good health and well-being, 4 quality education, 6 clean water and sanitation, and 10 reduced inequalities. The investment eco-system can be an agent of change in the achievement of the SDGs, and in making a difference to all the pre-schoolers who currently have no digital nor sustainable future ahead.