Within both the capital markets and wider public consciousness, ‘Environmental, Social, and Governance' (ESG) considerations in capital allocation have become increasingly mainstream. The University of Oxford has become the latest institution to divest from the fossil fuel industry, for example.
However, there have been few meaningful attempts by asset managers to integrate human rights considerations into investment decisions, according to a report by responsible investment charity ShareAction.
PAYING MERE “LIP SERVICE” TO HUMAN RIGHTS INTEGRATION
In a survey of seventy-five of the world’s largest asset managers, ShareAction discovered that 75% make reference to human rights issues in their ESG policy documents. However, the charity found that funds are “largely failing to hold the companies in their portfolios to account for human and labour rights abuses. The majority of the most influential investors not only fail to do the minimum by complying with international human and labour rights frameworks, but also actively finance activities which cause human harm and violate labour rights.”
According to the charity, 84% of the asset managers surveyed have no prohibition on purchasing sovereign bonds from countries under international sanction for human rights abuses. Issuing sovereign debt is a key instrument enabling governments to borrow money, and can therefore be used as a leverage in order to force a regime to improve its record on human rights.
On the equity side, ShareAction found that 61% of the asset managers surveyed have a “weak or non-existent approach to engagement on human rights” with company management. ShareAction ranked higher asset managers that take a proactive approach and engage companies in a dialogue over potential human rights abuses, such as in the garment supply chain.
REGIONAL DISCREPENCIES – EUROPEAN UNION OUTSHINES USA
The six asset managers ranked highest by ShareAction were all European, evidence of the current divergence in ESG implementation between Europe and the rest of the world. Since 2015, Europe has accounted for over 65% of global ESG regulatory proposals, with the EU Commission taking additional steps through the introduction of the EU Action Plan for Financing Sustainable Growth to drive awareness of ESG factors across the investment value chain.
On a country level, there has also been a push to increase reporting on human rights issues. Key examples include the UK’s 2015 Modern Slavery Act, the Dutch Child Labour Due Diligence Law, and the French 2017 Duty of Vigilance Law.
On the flip side, none of the American asset managers ranked in the A band, listing as some of the worst performance across the regions. This seems to align with the political mood in the USA where ESG issues are less of a focus, with the Trump administration withdrawing from the UN Human Rights Council, amongst other actions which have indicated a wider shift from global human rights policies.
WHAT DOES THIS MEAN FOR HUMAN RIGHTS?
The six largest asset managers in the survey all ranked poorly, with a D or E grade, and have a combined AUM of over $20 trillion (assets under management), one third of the total surveyed. Access to capital is crucial for all operations worldwide, both private and public. This gives enormous power to asset managers to prevent human rights abuses through the allocation of capital, with the effective integration of human rights policy into investment decisions.
Furthermore, through actively voting their shares with human rights principles in mind, asset managers can actively influence management decisions at companies. ShareAction found that only 55% of asset managers publicly disclose their voting records, and only 17% publish the rationale behind their decisions.
Providers of capital have considerable ability to influence corporations and countries to improve their human rights records and to develop more sustainable practices.
There needs to be greater accountability for asset managers to actively integrate ESG policies into investment decisions, and to vote their shares. Regulation, especially in Europe, will aid in this process, as will the new Principles of Responsible Investment (PRI) requirement asking signatories (totally $90 trillion in AUM) to integrate ESG factors into >50% of their AUM by mid-2020. Both the international human rights community and the capital market need to hold asset managers to account on acting to prevent human rights abuses.
There is evidently huge room for improvement for asset managers to further integrate human rights into investment decisions, and actively vote on human rights decisions. Asset managers have the potential to be one of the greatest influences worldwide on human rights issues, due to the capital they control, and this potential should be realised.
Annabel is currently a law student in London. She graduated with a BA in History from the University of Oxford. Previously, she worked in Equity Research at a large investment bank. Annabel hopes to pursue a career at the Criminal Bar; to contribute to ensuring that all receive equal and fair access to the justice system. She is also an editor at Human Rights Pulse.