Commentary: Human Rights Are Not Just an “ESG Factor”
The notion that investors should use environmental, social, and governance (ESG) considerations to inform their decision-making is having a moment. This is undoubtedly a good thing for those who believe that just and sustainable business has an essential role to play in the creation of a more equitable future. However, there is a risk of fundamental concepts getting lost in the process. One of these concepts is the responsibility of business—including institutional investors—to respect human rights.
The profile received by ESG today may seem sudden, but is happening for good reason: The physical impacts of climate change are becoming more apparent with each season, the global pandemic has forced a renewed examination of human capital across company value chains, and the decline of democracy and trend towards political polarization has significantly increased legal, operational, and reputational risks for companies everywhere. In this context, it is not hard to convince investors of the material significance of ESG to enterprise value creation.
However, this lens—of viewing ESG considerations solely as a series of factors that impact enterprise value creation and financial returns—may jeopardize the very outcomes we are seeking to achieve.
Put simply, respect for human rights is not just an ESG factor, but a global standard of expected conduct for all companies, including institutional investors. Human rights are not a subset of discreet social topics to be addressed, but a globally agreed upon standard of achievement for all people, covering a wide range of interdependent civil, political, economic, social, cultural, and environmental rights.
In the business context, this is manifested in a responsibility to adopt a human rights policy, embed respect for human rights throughout the business, and undertake human rights due diligence—in other words, a fundamental methodology and mindset, not simply an issue to address. And crucially, taking action to address human rights risks should not be contingent on their relevance to enterprise value creation; enterprise value creation should only happen when business can meet its responsibility to respect human rights.
However, too often the opposite is the case. When investors position risks and opportunities for the business as the core metric for evaluating ESG performance, companies will respond by focusing too much on what shareholders have to say, and not enough on the voices of those whose rights are impacted. And by aggregating ratings across E, S, and G factors, companies may be labeled as strong ESG performers by investors due to their high ranking on financially material environmental criteria, despite contributing to human rights harms on social criteria...