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Investors need to understand that integrating environmental and human rights due diligence into their investment processes is no longer a question of personal preference or values. As Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct, recently wrote, “businesses have a responsibility to avoid and address the adverse impacts of their operations.”
The regulatory expectations that investors face have always changed over time. That investors must now broaden due diligence is just one more example of how societal concerns and evolving attitudes shape regulation. Ignoring these expectations will ultimately expose investors to financial and reputational risk.
Importantly, due diligence should not just focus on the risk for the investor. Today, both UN and OECD standards expect private-sector companies to go one step further: Investors must first assess whether or not human rights infringements are linked to their investments — regardless of whether or not those investments amount to a business risk. In a second step, they must then address any infringements appropriately.
The president of the Centre for Human Rights Studies at the University of Zurich, Professor Christine Kaufmann, agrees that “investors can be linked to human rights violations through their investments. It is the states that have a legal obligation to protect human rights, but companies are responsible for respecting human rights. There is no reason why financial institutions should be excluded from such responsibilities. Instead, their distinctive features need to be taken into account when defining the appropriate due diligence requirements.”
In this context, two international standards are particularly important for asset owners and investment managers: the UN Guiding Principles on Business and Human Rights (UN Guiding Principles) and the OECD Guidelines for Multinational Enterprises (OECD Guidelines). The first, although not legally binding, is considered a global reference point in questions of business and human rights. The 2011 update of the OECD Guidelines explicitly refers to the UN Guiding Principles. The importance of the latter was reinforced in the summer of 2015, when the G7 leaders expressed their strong commitment to the UN framework and urged the private sector to implement human rights due diligence.
Note that the OECD Guidelines are supported by a unique implementation mechanism: National Contact Points (NCPs), which are agencies established by the 45 adhering governments. The purpose of the NCPs is to promote and implement the OECD Guidelines. Should any organization believe that a company — and that includes financial institutions — is breaching the OECD Guidelines, it can raise a complaint with the NCP of the country in which the accused company is headquartered. The NCP will then initiate a mediation and examination process.
Our analysis of the work done by the NCPs emphasizes the need for investors to conduct environmental and human rights due diligence. For example, in a case related to an equity investment in the Korean steel producer POSCO,1 the Norwegian NCP stated in 2013 that the OECD Guidelines and the UN Guiding Principles “apply to the financial sector, as they do to all sectors. They do not make any exception for sub-groups of investors, nor do they exempt minority shareholders.” This view was recently confirmed by the Norwegian NCP and is also shared by other NCPs, such as those in the Netherlands and the UK.
The idea that these standards also apply to minority investors is what makes them pertinent to all asset owners and investment managers. Margaret Wachenfeld, director of Research and Legal Affairs at the Institute of Human Rights and Business, explains: “Any investor is linked to the human rights harms created by the companies they invest in. There can be no more direct linkage between one organization and another than through ownership, even minority ownership.”
There is broad consensus about this view. In the context of the POSCO case introduced above, the United Nations’ Office of the High Commissioner for Human Rights (OHCHR) was asked by the parties concerned whether, in its opinion, the Guiding Principles would also apply to investors who held only a minority stake in a company. The OHCHR replied that “there is nothing in the text of the Guiding Principles to indicate that their scope of application is limited to situations where institutional investors hold majority shareholdings. This may be relevant when considering the means through which a business enterprise meets its responsibility to respect human rights (…), but is not relevant to the question of the existence of the responsibility.”
Generally speaking, the same interpretation is shared by leading financial institutions. In its initial discussion paper, the Thun Group of Banks — an informal circle of several international banks, including global players such as Barclays, Credit Suisse, and UBS — recommends implementing due diligence in asset management, and sets out how it may be linked to human rights violations when:
- investing “in companies (share, bonds) with a challenging human rights track record or investing in countries (bonds) with a challenging human rights situation”
- establishing and managing financial products that include such investments, and/or
- establishing and managing financial products “around a topic that could be viewed critically from a human rights perspective.”
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We conclude that asset owners and investment managers must expand due diligence to assess whether or not their investments are related to violations of international standards. They must then decide how to respond appropriately to the identified violation. This applies to both equity and debt holdings, and to both private- and public-sector issuers. As the very first step, we recommend that an investor make a strategic assessment of where in the investment portfolio the greatest potential for adverse environmental and human rights impacts lies. The investor should then decide whether exclusion or engagement is the strategy that fits best with its institutional culture. By prioritizing investments that have the largest potential for adverse impacts, the investor will be able to gain experience and then further improve the chosen approach over time.
It is no coincidence that important investors such as the Norwegian Government Pension Fund and the Swiss National Bank have already broadened their due diligence processes to include environmental and human rights criteria. They have done so to ensure compliance with OECD standards and with international law. Other investors will want to follow their lead. Indeed, any financial institution that does not take comparable action may find themselves regarded as being in breach of OECD standards.
1. A very brief description of this NCP case can be found here: https://sloanreview.mit.edu/article/human-rights-the-next-frontier/. For details, see the final statement of the Norwegian NCP: http://www.responsiblebusiness.no/files/2013/12/nbim_final.pdf