ESG investing, the integration of environmental, social and governance issues – has become mainstream. However human rights, as part of the S in ESG, remains, an unfamiliar and abstract concept for many investors. This is set to change with increasing scrutiny of the finance sector’s role and responsibility to ensure that minimum requirements on labour and human rights are upheld, and that investments are not facilitating abuses such as forced labour or attacks on indigenous communities. This shift is driven by increasing regulations, a growing recognition that human rights is financially material, and that focusing on human rights is important to protect and enhance value, as well as align with the demands of beneficiaries and clients.
The Principles for Responsible Investment (PRI), the leading sustainable finance initiative, has pledged to put human rights on par with climate change as a strategic priority, to ensure that the financial system respects both the boundaries of the planet and the dignity and rights of its people. Its new programme includes Advance, a new stewardship initiative to drive collaborative action to improve human rights outcomes in high-risk sectors which is backed by 220 investors with $30 trillion assets under management. For the first time, human rights will be integrated into the mandatory annual PRI reporting assessment for the PRI’s 5000 signatories.
With the PRI reporting framework opening last month, we examined how human rights indicators have been included in the framework, and why getting on top of human rights now will help investors futureproof their ESG agenda.
How have human rights been integrated into the PRI framework?
There are over 40 indicators that dig into how investors consider and manage social factors and human rights. These are included across the core reporting modules, asset specific modules, in particular the real estate and infrastructure modules, and the voluntary sustainability outcomes module. For now, 25 of these indicators are mandatory to report.
Crucially, the indicators are aligned with the global go-to-standards: the UN Guiding Principles for Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Collectively, these set out how the private sector should respect labour and human rights. As these standards are increasingly being adopted in regulations – in particular at the EU level – which is leading the way on sustainable finance – aligning with them now will help investors future proof their ESG agenda.
Indicators cover the core expectations that investors:
- Commit to respect internationally recognised human rights – by integrating this into formal Responsible Investment Policies and procedures. Indicators look at how this informs action in other areas, from proxy voting to stewardship with investees, and contracts with external investment managers. Within the context of real estate investing, indicators include whether investors have specific social requirements to help reduce the negative effects of constructing new buildings and renovations on people.
- Adopt due diligence processes to identify and assess potential negative outcomes for people connected to investment activities. It’s important to note that unlike much ESG risk analysis, human rights due diligence is based on risk to people, not just risk to business. Indicators in the PRI include what frameworks, tools, standards and data are used to assess risks and how investors determine the most important outcomes their investment activities have on people and the planet. For infrastructure investors, indicators examine the extent of consultation with potentially affected groups and other relevant stakeholders which is a key part of understanding and managing human rights issues.
- Prevent and mitigate actual and potential negative outcomes identified – this looks at how risk assessment findings are acted upon and integrated in the investment process. Asset specific modules cover the processes and resources investors have to address to meet their targets on material ESG factors in private equity investments, and how third-party property manager(s) consult with tenants on social issues.
- Track ongoing management of human rights outcomes – while most of the indicators are in the voluntary sustainability outcomes module, mandatory questions in asset specific modules include whether investors track KPIs on relevant social factors across their investments.
- Communicate – this covers the information investors include in their regular reporting to clients and/or beneficiaries on their human rights-related commitments and actions taken.
- Provide or enable access to remedy – rectifying harms to people is central to what it means to respect human rights. Leading investors are using their leverage to promote investee companies’ preparedness for and provision of remedy – which could include compensation (financial or otherwise), cessation of an activity or apologies. The PRI Policy, Governance and Strategy module also includes an indicator to understand whether investors, directly or through influence over investees, enable access to remedy for people affected by negative human rights outcomes when they are either contributing to or causing negative outcomes.
The PRI reporting framework serves as a tool to help investors better familiarise themselves with what human rights means for the finance sector and for their portfolios, and how they are currently performing against changing expectations.
You can find out more about how human rights has been integrated into the PRI framework here. If you are seeking support on your PRI reporting journey, Sancroft can work with you as a ‘critical friend’ or help you to assess where you can practically improve your approach and your potential score. As you embed your responsible investment practices, we can help you find ways to tailor your approach to best fit your strategy, delivering more value, and more sustainable results, for your clients. Get in touch with Rachel Weller (firstname.lastname@example.org) to talk about how we can help you achieve your ambitions.