By Lindsey Simek (Lead on ESG Portfolios for Capstone Investment Financial Group)
It seems these days we hear about ESG Investing (environmental, social, governance), and we hear about it quite often. We are aware that the environment needs to be protected. Women and minority rights need protection. Pollution is out of control, and we even know that CEOs and owners of companies, insiders within corporations, being placed on the board of directors is inappropriate.
However, in many instances, all our ESG awareness and investing are immaterial if we don’t understand basic human rights, which falls under the social factor of ESG. In too many instances, companies are not being held accountable and human rights are being abused. Until this is not only brought to everyone’s attention, but also an active stance is taken against human rights abuse, ESG investing, and awareness is no longer sustainable.
Human rights are abused in several different ways. In most instances when we think about human rights, child labor is our first thought. While this is definitely an aspect of human rights abuse, the problem goes well beyond. We have forced labor, child labor, as well as poor and dangerous working conditions. Many of our large corporations are sitting at the end of the supply chain and because they are at the end, they tend to ignore what is happening in their very own supply chains (Barclays Live – Login. (n.d.)). Plain and simple, it is of utmost importance that these businesses and corporations are held responsible and that they have a good reason to pay more attention.
ESG investing is a trend that has been growing steadily. However, the criteria for ESG investing does not capture the detriments to many individuals. By not creating boundaries and taking human rights into careful consideration, when considering ESG, we are ignoring a core concept of corporate sustainability, which is the responsibility to protect human rights (Quick, P. M. (n.d.). Bridging the Human Rights Gap in ESG | Blog | Sustainable Business Network and Consultancy | BSR.). Human rights are not just a social topic that is maybe discussed at a company’s annual board meeting, human rights are a global standard that need to be upheld at all times, under all circumstances.
Unfortunately, not all companies will take human rights into consideration. They are looking at a different picture, they are looking at their balance sheets. So, if corners need to be cut, but a dollar can be made, what’s the harm? Well as investor, we must realize that there are risks to this type of business practices. A company’s reputation can be ruined in a matter of minutes if abuse of human rights is evident. Contracts can be lost as well as access to local governments and markets. Yet, many companies are apprehensive to adopt human rights policies. According to Paloma Munoz Quick and Christen Dobson, “The UNWG cites data indicating that members of the Principles for Responsible Investment (PRI), which commit to incorporating ESG issues in their investment activities, mostly vote against social and environmental shareholder proposals, including human rights proposals” (Quick, P. M. (n.d.). Bridging the Human Rights Gap in ESG | Blog | Sustainable Business Network and Consultancy | BSR). The lack of attention from large corporations is largely due to companies looking that the bottom line. Many of their supplies and products can be manufactured overseas at a lower cost and therefore it becomes an “out of sight, out of mind” situation.
Regrettably, not many of the head decision makers within a corporation are touring factories in China and seeing for themselves the working conditions, ages of workers, and in in some extreme cases, the anti-jump/anti suicide nets as with Foxconn. Even in cases not this extreme, many of these companies don’t fully understand the parameters of human rights nor do they understand how they relate to ESG investing (Quick, “Bridging the Human Rights Gap in ESG | Blog | Sustainable Business Network and Consultancy (BSR).
While many businesses are hesitant to address the issue of human rights, investors on the other hand are beginning to see the importance of making a commitment and integrating criteria focused on human rights. They are communicating to the large corporations the importance of conducting their due diligence when it comes to upholding human rights, especially in their supply chain. Investors are taking an active role in promoting human rights across the globe and holding the big corporations accountable when they fail to respect them.
As investors we need to take important steps in not only understanding the abuse of human rights but also in eliminating the problem. When basic human rights are ignored, then the integrity of ESG and sustainable investing is put into jeopardy. So, while cleaning up the environment, recycling and reducing pollution is of extreme importance, so are the methods of conducting business and global standard of human rights that we, as a society, in many cases, are not meeting.