This has been a big year for ESG disclosure and for human rights and social disclosure specifically. The European Commission it set to finalise its Corporate Sustainability Due Diligence Directive (CSDDD) later this year that will effectively codify the UNGPs into law for large companies, including potentially financial institutions.
Progress has also been made by the EU with the Corporate Sustainability Reporting Directive (CSRD), however many have been disappointed by the rolling back of mandatory social disclosures.
Meanwhile, ISSB has consulted on its next research agenda, where investors have been asked to make the somewhat odd choice between human capital and human rights. (The first two IFRS standards did not mention human rights at all.)
Investors have also begun to report human rights data against the Sustainable Finance Disclosures Regulation (SFDR) and the minimum safeguards of the EU Taxonomy.
In light of these developments, investors face growing pressures to access and integrate high-quality human rights data. Late last year, the PRI published a report detailing the types of human rights data investors need and the challenges they face in accessing it.
Investors are growing increasingly frustrated at the current data landscape. In response, some are taking their concerns straight to the source.
In 2022, the Church Commissioners, Aviva Investors and Scottish Widows came together as part of the World Benchmarking Alliance’s Social CIC (Collective Impact Coalition) with a view to enabling more investors to take systematic action against businesses that fail to meet societal expectations on human rights.
Building on the work of the Corporate Human Rights Benchmark (CHRB) and the Investor Alliance for Human Rights (IAHR), in 2023 we convened a group of 15 investors (including Fidelity International, CCLA, Sarasin & Partners LLP, Cardano, Nordea and the Church of England Pensions Board), who agree that:
- Corporate respect for human rights is intrinsic to advancing sustainable development, achieving just transitions to net zero and nature positive systems, and addressing systemic risks such as social inequality.
- Companies should demonstrate their respect for human rights across their operations and value chain, and we should be able to distinguish between leaders, compliers and laggards using analysis fed by public disclosures.
- The lack of consistent, decision-useful, human rights data at scale (and beyond just what are currently considered high-risk sectors) will impact the ability of investors to carry out effective stewardship and meet emerging regulatory requirements such as the Sustainable Finance Disclosure Regulation (SFDR).
- As clients of the major data providers and proxy advisors, we could – and should – try to use our collective influence to ensure service providers meet our growing needs for high-quality human rights data at scale, and for proxy advisors to have clear vote recommendations related to routine votes on lack of disclosures and performance on human rights.
- This will enable investors to conduct better due diligence, meet their own responsibilities to respect human rights, respond to expanding regulatory expectations and – ultimately – create the conditions where the market can reward or penalise companies based on their success or failures to respect human rights
At the end of Q1 this year, the group wrote to the major ESG data providers and proxy advisers setting out our requirements regarding the availability, quality and use of corporate human rights related data.
We called on the data providers to expand the ambition of their research on human rights (beyond controversies, norms breaches and the presence of policies) into their products and services, and on proxy advisers to integrate human rights considerations into voting recommendations for both management and shareholder resolutions.
To help frame our requests, we provided a list of core Corporate Human Rights Benchmark (CHRB) indicators, focusing on the commitment to respect human rights, the demonstration of due diligence and the provision of access to remedy, which we agreed gave a “bare minimum” insight into company performance.
Since then, we’ve been engaging with a core group of providers that dominate the market, getting further into the details of our expectations and their approaches. Their receptiveness has been encouraging. We now plan to analyse the gaps between our preferred data points and the data points “beneath” the providers’ methodologies.
Our conversations with data providers and proxy agencies echo themes emerging in the wider debate around sustainability disclosure and related voting action – namely, the need for standardised sustainability data at scale that enables investors and other stakeholders to assess company practices against international norms, and data that provides a meaningful measure of how effectively companies are managing risks and impacts to the business and to society.
Some of the key messages we shared – and that we feel bear sharing more broadly – are set out below:
Peers should agree on the fundamentals
It is understandable why major data providers suffer from “aggregate confusion” and disagree on corporate ESG scores as they have wildly different methodologies.
However, there are some ESG issues that are universal across providers, which do not require a “secret sauce” approach. Fundamentals around human rights fall into this category.
Data providers should not be in disagreement on fundamental data points, such as whether a company has made a commitment to respect human rights or conducted a human rights impact assessment. Users of environmental data do not have to wonder whether Scope 1 emissions mean the same thing at different providers.
Transparency down to the individual data points will enable comparability between providers. In the absence of global metrics, we have recommended the World Benchmarking Alliance’s Core Social Indicators as a starting point to achieve greater alignment between data providers and civil society on this issue.
Trust in the materiality process
The CSRD (the ESRS) and the ISSB (IFRS S1 and S2) both rely on materiality assessments to determine what needs to be disclosed. Human rights due diligence, as detailed in the UNGPs and the OECD Guidelines, is the way to identify the risks to and impacts on people.
This is clearly critical for ESRS impact-materiality assessments, which focus on external impacts. It is also vital to inform sustainability materiality assessments under ISSB, which require an understanding of company impacts and dependencies on the resources (including human and social capital) and relationships (with people) throughout the value chain.
Due diligence is a material disclosure. As such, if a company is not disclosing how it identifies and manages the risks to and impacts on the people in its value chain (human rights due diligence), then the materiality process is flawed, which will undermine subsequent sustainability disclosures.
Reporting on PAIs is currently very challenging
Mandatory disclosures under SFDR require disclosure of violations of global norms (UN Global Compact and OECD Guidelines) and on processes and mechanisms to monitor compliance with those global norms.
At the moment, the presence of norms breaches – which are typically derived from controversy data – are frequently used as a poor proxy for the absence of due diligence mechanisms. But the presence of a norms breach does not equate to the absence of due diligence and the presence of a due diligence process does not preclude a norms breach.
Additionally, data providers disagree on what constitutes a norms breach (a review of norms breaches by the Church Commissioners across multiple data providers found almost no agreement for the same universe of companies).
The absence of corporate due diligence data presents significant challenges to meaningful reporting on PAIs.
No data IS data
Some data providers are reluctant to apply indicators to sectors where there is very little data available. But we think the human rights fundamentals should cover all investable companies.
In addition, the absence of a policy commitment or a process – or if in existence, then lack of disclosures on how it is implemented – may be the key bit of data we are looking for.
Aviva Investors and the Church Commissioners have voted at AGMs on the absence of due diligence. Many other investors, including Scottish Widows, factor human rights performance into their voting approach, particularly on shareholder resolutions.
Increasingly, investors are also filing shareholder resolutions on human rights due diligence, precisely because they want these data gaps to be filled. Identifying where the gaps lie is an important first step in incentivising companies to fill them.
As international standards and regulations converge, the incentives to focus on human rights and social issues more broadly is only set to increase.
As we approach the EU’s final decision on the CSDDD later this year, with the potential for financial institutions to be in scope, investors will need access to better-quality data, at scale, in order to assess company exposure to emerging legislative risks, as well as to enable them to meet their regulatory obligations and growing scrutiny.
We are a long way from this reality.
While it is too early to suggest we have had success in “disaggregating the confusion” on human rights data, we see a meaningful willingness from providers to engage and be increasingly transparent about their methodologies.
With further effort, we can aim to enable voting agencies to integrate human rights due diligence considerations into their voting policies in the same way as for climate issues.
Our aim as investors committed to the topic of human rights is to expand the granularity and scale of human rights data available to the broader market.
But better data isn’t the end point. We want investors to be able to integrate that data into their decision-making, meet their own responsibilities to respect human rights, respond to expanding regulatory expectations and – ultimately – create the conditions where the market can reward or penalise companies based on their success or failures to respect human rights.
Dan Neale is responsible investment social themes lead at Church Commissioners for England; Shipra Gupta is investments stewardship lead, responsible investment strategy and execution at Scottish Widows; Vaidehee Sachdev is social pillar lead at Aviva Investors