Influential human rights academic John Ruggie says investors have little expertise, or even interest, in human rights.
The ‘S’ in Environmental, Social and Governance (ESG) investing is “by far the weakest” element and should use the UN Guiding Principles on Business and Human Rights as a foundation, says Professor Ruggie in a new co-authored Harvard Kennedy School paper.
The paper, Money, Millennials and Human Rights: Sustaining Sustainable Investing charts the rise in interest towards ESG investing driven by asset owners and managers, and millennials.
But the paper warns the challenge facing ESG investing is the lack of standardisation and the mixed quality of information of all three domains, especially the S.
It recommends that the United Nations Guiding Principles (UNGPs) on Business and Human Rights, which Ruggie shaped, inform what analysts, raters and investors measure when it comes to ‘S’.
‘E’, the environmental domain, lends itself more readily to quantitative indicators such as carbon intensity and the ‘G’, which is governance, has national standards such as corporate governance codes, says the paper.
However, “the weakness of the S [social] begins with the fact that the elements and indicators are likely to be largely homemade in the kitchens of different data providers, where the chefs mix various ingredients they believe might work and then test them with some clients”.
The paper says comparison of S scores in ESG ratings yield the lowest correlations across different raters. It also cites an NYU study that gained access to 1,700 S indicators across 12 different reporting frameworks and found that only 12% of ‘social’ ratings products target investors as primary audience, versus 97% of E and 80% of G ratings.The same study finds that only 8% of S ratings measure the impact of company practice, while 92% measure internal factors such as company policies. The paper says it is “ measuring what’s easy to measure, not what matters”.
The paper also says the way in which human rights elements are conceptualized differently in the S domain also plays into poor performance. There is inconsistency and therefore a lack of comparability. Also, well-established human rights standards are often ignored or applied haphazardly.
These standards have international consensus and should inform what analysts measure and care about when it comes to the ‘S’, says the paper. It adds:
“Our best guess about why this has not happened yet is that there is little expertise or, frankly, interest in human rights in the investment community, coupled with some interest but little expertise about investment issues in the human rights community.”
It recommends incorporating the UNGPs into ESG investing to strengthen the S element.
The UNGPs Reporting Framework is supported by a coalition of nearly 90 institutional investors with over $5.3trn in assets under management including Aviva, BNP Paribas and Hermes.
It is a guideline for companies to report on human rights issues with relevant and meaningful information.
The framework was co-developed by NGO Shift and auditors Mazars. Recently, Shift employed manual coding of publicly available information to develop qualitative assessments around human rights. Now an effort is underway to automate the analysis through a combination of artificial intelligence and big data.
Ruggie wrote the paper with recent master’s graduate Emily Middleton.