1. The Investor Case for Mandatory Human Rights Due Diligence
When done responsibly, business activities can be a driving force for prosperity and inclusive economic development, helping to achieve the urgent vision laid out by the 2030 Sustainable Development Agenda. Yet, far too often, businesses of all sectors and sizes may harm human rights wherever they operate, fueling a global environment where people’s fundamental welfare and dignity remain under threat.
The undersigned 71 investors, representing US$XXX in assets under management, believe that all business actors have a responsibility to respect human rights and that the process of continuously conducting human rights due diligence is a core requirement for all companies – regardless of size, sector, or location – in fulfilling that responsibility. We also believe that governments have a duty to protect against human rights abuse by business through effective regulatory measures, particularly where voluntary corporate measures continue to leave significant gaps in human rights protections.
We therefore call on all governments to develop, implement, and enforce mandatory human rights due diligence requirements for all companies headquartered or operating within their own jurisdictions or, where appropriate, to further strengthen these regulatory regimes where they already exist.
Companies have long-engaged with the concept of due diligence through investigative processes that aim to identify financial risks associated with business transactions. Human rights due diligence is a continuation of those established risk management processes that takes the lens of risk to people, recognizing that where there are the most severe (i.e. salient) risks to human rights, there are material risks to business, including reputational harm, financial loss, and legal liabilities.
The UN Guiding Principles on Business and Human Rights, the authoritative global framework on business and human rights, defines human rights due diligence as an ongoing and iterative process to identify, prevent, mitigate, and account for how a company addresses the most severe risks to people in connection to its business.
The core steps of human rights due diligence include: assessing the actual and potential human rights impacts that may be caused by a business or to which it may contribute or be directly linked through its business relationships; integrating and acting upon those findings; tracking the effectiveness of those actions; and publicly communicating the company’s human rights policies, practices, and outcomes. Companies are also expected to develop and embed human rights policies across the business, enable remedy when impacts occur, and engage with stakeholders throughout all due diligence activities.
As members of the investment community, we urge governments to require companies to undertake robust human rights due diligence processes as this type of regulation is:
1. Materially good for business, investors, and the economy;
2. Essential in creating uniformity and efficiency as an increasing number of governments are already taking this step; and
3. A necessary component for investors to fulfill our own responsibility to respect human rights.
2. Mandatory human rights due diligence is good for business, investors, and the economy.
Mandatory human rights due diligence makes good business sense for companies, investors, and governments alike. This type of regulation increases the robustness of corporate risk management processes, helps investors achieve higher risk-adjusted returns, and contributes to economic growth. Positive performance on human rights and proactive management of risks to people can attract investment and procurement opportunities for both companies and governments.
Further demonstrating the business case, institutional investors and business associations have explicitly supported a number of mandatory human rights due diligence developments. For example:
- In June 2019, the National Council in Switzerland voted to support a bill introducing a broad mandatory human rights due diligence regime that received backing from five major Swiss business associations and a group of 27 institutional investors representing over US$808 billion in assets under management;
- In December 2018, more than 70 large Dutch pension funds with combined assets of almost €1.2 trillion signed a covenant with civil society organizations, trade unions, and the Dutch government committing to worldwide cooperation aimed at promoting sustainable investment based on respect for human and labor rights;
- Investors representing over US$4 trillion assets under management filed multiple statements in support of the Australian Modern Slavery Act in 2018, which is an issue-specific iteration of a this type of regulation that primarily focuses on reporting; and
- In late 2018, investors representing over US$5 trillion in assets under management called on the U.S. Securities and Exchange Commission to mandate corporate disclosure of ESG, including human rights information, which is a critical human rights due diligence step.
Conversely, failure to conduct proper human rights due diligence can impose significant costs on companies and, as a result, on their investors. Meaningful and ongoing human rights due diligence can help protect companies against costly litigation processes and settlements, high employee turnover rates, consumer boycotts, and other business risks. A lack of requirements in this area for companies is also bad for governments, as public trust in government institutions is increasingly eroded by harmful business activities that remain unregulated and unchecked.
2. Investors and companies require a level playing field as mandatory human rights due diligence regimes continue to develop world-wide.
The tide of government action on human rights has strongly turned toward this type of regulation, and many large multinational corporations already conduct human rights due diligence under emerging regulations. For example, France has already enacted a comprehensive mandatory human rights due diligence law, Switzerland has taken important steps toward a similar initiative, Finland has committed to pursuing its own initiative, and similar deliberations are ongoing in Denmark and Norway. Moreover, Austria, Germany, and the United States have recently introduced this type of legislation. On the critical step of disclosure, over 20 countries to date have independently passed legislation that requires reporting on human rights and broader ESG issues, including issue-specific requirements in Australia and the United Kingdom on modern slavery risks and in the Netherlands on child labor risks.
Governments across the globe continue to introduce and implement mandatory human rights due diligence regimes, including those that apply to export credit agencies, sovereign wealth funds, and development finance. However, multi-year rankings like the Corporate Human Rights Benchmark are showing how free-rider companies are failing to conduct adequate human rights due diligence. As such, companies and investors alike require policy coherence and a leveling of the playing field, where consistent expectations across sectors and geographies allow for more efficient and predictable business operations.
