Human rights may well become the most prominent issue for the responsible investment community in the years to come. Deteriorating conditions in several countries, ongoing civil conflicts such as those in the Arab world, and increasing threats to labour rights as a result of the economic crisis are exposing companies to an ever-growing list of human rights risks. Recent scandals include: suicides and problematic working conditions in China (Foxconn), child labour allegations in the cocoa industry (Nestle, Hershey), violent union protests in Mexico (Grupo Mexico/Southern Copper), the sourcing of minerals from the Western Sahara (FMC Corporation, Potash Corp), and protests from indigenous people over the newly planned Belo Monte dam in the Amazon (Alstom, Ecopetrol). Increasingly, technology and telecom companies are exposed for providing services to authoritarian regimes and risk being complicit in human rights violations. During the Arab uprising in the spring of 2011, several companies allegedly abetted repressive government responses (e.g., Nokia in Bahrain and Vodafone in Egypt). Human rights issues are probably the most obvious risk for businesses and their shareholders, especially those operating in emerging markets. Sustainalytics’ research indicates that the greatest risk to companies in emerging markets is involvement in controversies related to social issues. A recent list of the companies most excluded by investors, released by Novethic, shows that eight of the top 10 companies are exposed to serious human rights controversies. If not addressed properly, these issues can pose considerable reputational and operational risks. One question that arises is whether companies face the same exposure to legal action for human rights violations as they do for environmental or governance issues.
Human rights risks are often the least addressed factor within the ESG-triangle, even among those companies with significant exposure to related risk. For example, inthe oil and gas and mining industries, only 21 per cent and 23 per cent, respectively, of the companies tracked by Sustainalytics have a human rights policy statement in effect. Almost none of these companies have a full-scale, human rights risk management system in place. It is impossible to discuss human rights and business without referring to the work of the former UN Special Representative on Business and Human Rights, John Ruggie. Ruggie’s three-pillared human rights framework, consisting of the state’s duty to protect, business’ responsibility to respect, and the right to remedy (to be provided by either state or business), garnered so much praise from states, businesses and civil society that it verged on hype. Major human rights non-governmental organizations (NGOs), however, were among the few that expressed criticism calling the implementation too ”voluntary.” The approach is likely the reason why Ruggie’s work is so broadly supported by companies, including those involved in serious human rights controversies such as Total, Rio Tinto or Barrick Gold. Businesses have a tendency to embrace voluntary social responsibility initiatives while lobbying against the same standards becoming law. In other words, companies are saying: “we support this goal, just don’t force it upon us.” However, what has been praised as an elective framework may slowly become binding as states begin to bridge the so-called accountability gap. What is the accountability gap? Ideally, states would sign binding human rights treaties requiring them to adopt national laws that protect human rights and hold violators, be they state or non-state actors, accountable. However, the state often does not have an adequate legislative framework in place to effectively deal with non-state actors, resulting in an accountability gap. Thus, businesses are left to operate in a legal vacuum with limited guidance and greater exposure to reputational or operational risks (blockades, violence, the withdrawal of
a license to operate, etc.) than to legal ones. This situation may change as companies face new legal risks due to new national laws, lawsuits filed by stakeholders, and the integration of human rights into existing international standards. It is likely that states will heed Ruggie’s call to bridge the accountability gap. Prior to the introduction of Ruggie’s framework, a number of countries, such as the U.K., Australia, and Belgium, attempted to adopt binding human rights legislation for companies. These proposed laws included obligatory reporting on human rights and requirements to meet certain human rights standards. Although the bills did not obtain sufficient support, new attempts to introduce human rights legislation for companies are likely thanks to Ruggie’s practical framework. The following are recent examples of human rights-based legislation:
• In August 2011, Peru’s new Congress passed a law requiring companies to seek consent from indigenous peoples prior to commencing development projects on their ancestral lands. This law will have a significant impact on extractive companies planning to operate in Peru. Since implementing this legislation the Peruvian government has withdrawn the operating license of Bear Creek Mining.
• In June 2010, an amendment to the U.S. Dodd–Frank Consumer Protection Act was adopted requiring companies that source minerals from the Democratic Republic of the Congo to conduct due diligence and provide evidence that they do not contribute to conflict.
• The European Union has recently been debating new legislation that would forbid member states from importing goods produced by child labour.
Some national human rights-based laws may also directly impact investors. Belgium, New Zealand, Luxembourg and Ireland have all adopted lawsthat prohibit institutional investors from investing in cluster munitions; these laws clearly stem from human rights concerns.
In an effort to better mitigate the impacts of companies operating in foreign countries with less oversight, governments may also enact extraterritorial legislation. These laws allow a government to hold local companies accountable when wrongful acts are committed; even when committed abroad. Extraterritorial control is rare and currently extends only to offences such as terrorism, sex crimes, and money laundering. NGOs are, however, pressing for other offences to be covered, including human rights violations. Some countries have already broadened the scope. For example, in the U.S. there is an ongoing lawsuit against Chiquita Brands International for allegedly contributing to human rights violations in Colombia. To date, the company has been fined USD 25 million.
Another legal risk for companies is the increasing number of lawsuits filed against them for human rights abuses. Recent lawsuits filed against French telecom company Amesys, allege that by providing surveillance equipment to the Gaddafi regime, the company was complicit in the human rights abuses committed in Libya. Negative environmental impacts such as large scale pollution often impacts the economic or social rights of local communities and may also lead to human rights-based lawsuits. This is yet another trend that will likely lead to increased legal risks. For instance, Shell is currently embroiled in a lengthy lawsuit in the Netherlands that deals with its impact on the livelihoods of local communities in Nigeria. In February 2011, an Ecuadorian court ordered Chevron to pay USD 9.46 billion in damages, including USD 860 million to an NGO representing local communities, due to the impact of the
company’s activities on the economic and social rights of these communities. To date, many human rights lawsuits have been resolved with settlements, which may have impacted shareholder value. Yet, as jurisprudence is developing quickly, we may also see an increasing number of convictions. Despite not formally invoking the notion of legal accountability, the Ruggie Principles do provide clarity on what companies should do to prevent human rights violations, and therefore, allow stakeholders to better assess the probability of a successful court case.
It is unlikely that we will see a binding international standard on business and human rights. Previous attempts by the UN have failed and it is not currently on the UN agenda. Yet, new human rights issues have managed to find their way into international treaties, including international trade agreements, bilateral investment treaties, and export credit laws. Also, the Ruggie principles are now reflected in the new ISO, IFC, and OECD standards for multinational companies. Although these are not binding international instruments, a failure to meet these standards can impact businesses and their shareholders, as they may cause reputational or material setbacks.In sum, beyond the reputational and operational risks, the legal risks of failing to address human rights should not be underestimated. For investors, the best way to prevent exposure to human rights risks is through the adoption of sound human rights risk management mechanisms. The Ruggie Guiding Principles provide a good overall framework for such a mechanism, and can easily be integrated into responsible investment policies through the following steps:
1) Adopt a human rights policy,
2) Identify and assess human rights-related risk within a portfolio,
3) Adopt mitigation programs to respond to these risks (e.g. adopting exclusion or engagement policies),
4) Monitor progress, and
5) Report on human rights (both on high risk companies and mitigation programs).