ESG investors have a responsibility to respect human rights – here’s how to prevent ‘rightswashing’

Investors of all types are increasingly interested in environmental, social and governance approaches (ESG) to investment, as well as sustainable investment – two strategies that often overlap and are sometimes used interchangeably. Global ESG assets are expected to surpass $40 trillion by 2030, reaching more than a quarter of all assets under management.

It is an understandable expectation that ESG and sustainability investment approaches, because of their references to people and the planet, should inherently include human rights considerations. Respecting human rights is the responsibility of all businesses, including those in the financial sector. This responsibility is set out in the UN Guiding Principles on Business and Human Rights (UNGPs), adopted by the UN in 2011. The UNGPs and related documents, have since been applied in international, regional and national legislation, as well as other to regulations such as the recent European Corporate Sustainability Due Diligence Directive.

But a recent report by the UN Working Group on Business and Human Rights shows a need for significant improvement by most investors when it comes to respecting human rights. This report, which is based on global consultations and written submissions from investors and other stakeholders, focusses on institutional investors that are using ESG approaches in their roles as asset owners and managers.

It finds that ESG and sustainability approaches vary widely across different investors, investment strategies and asset classes. As a result, there are few uniform definitions and no specific global standards, which risks creating opportunities for green- and “rightswashing”. This is not helped by existing ESG rating methodologies, which lack transparency and consistency, and often do not include much detailed and reliable human rights data about the businesses they review.

Investors need data about the companies or organisations in which they are investing that indicates their approach to human rights across each of the E, S and G criteria (human rights are not limited to the “S” part of ESG). The report explains how the creation of consistent and robust standards for this data would help bridge silos between E, S and G criteria and ensure that human rights considerations are applied across all of them.

An investor’s connection to positive or negative impacts on people and the planet may generate financial opportunities or risk for the investor. So, a key issue for all investors is the extent to which the human rights impacts of their investments (including the effects of environmental and climate change damage) are material to them. Two main concepts of materiality can be applied to ESG/sustainability criteria.

Financial materiality, or single materiality, considers how sustainability criteria (both positive and negative) can present risks and opportunities for an investor, ultimately affecting the ability of the investor to create value or generate improved risk-adjusted returns. It is characterised by an “outside-in” view of sustainability criteria, that is it looks at how sustainability criteria affects the investee.

Impact materiality considers how an investee or investor can impact people and the planet. It is characterised by an “inside-out” view of sustainability criteria, meaning it looks at how a business affects sustainability criteria. Engagement with affected groups, such as indigenous peoples, local communities, trade unions, workers and other relevant stakeholders is central to the impact materiality approach.

Combining both concepts of materiality into a “double materiality” approach could ensure that adverse human rights impacts on people and the planet are identified, prevented, mitigated and accounted for, all in alignment with the UNGPs.

Investors can deliver on their responsibility to respect human rights in different ways, depending on the type of investor, the asset class, and the investment strategy. But all investors have this responsibility to respect human rights.

Investors must place identifying and acting on risks for people and the planet at the centre of their decision-making to fulfil their responsibility to respect human rights, according to the UN Working Group report. This could be done by, for example, embedding human rights into investment policies and strategies, undertaking ongoing human rights due diligence and remediating any adverse human rights impacts caused.

There are also steps that states can take to ensure human rights are incorporated into the investment decision-making process. States should create legislation and regulations that enable investors to increase alignment with the UNGPs in their ESG/sustainability approaches. These laws and rules should direct them to provide transparent information about this to stakeholders and to include double materiality requirements. They should include effective enforcement provisions and ensure effective access to remedies for rightsholders if any investment decisions adversely impact their human rights.

These actions could help to encourage investors to move away from a voluntary, piecemeal approach to human rights impacts, towards the use of a comply and explain approach, rather than a simple tick-box approach. The report also notes the need for collaboration between investors, investees, states and rightsholders to establish meaningful access to remedies and ensure appropriate stakeholder consultation. This could also contribute to more just and accountable frameworks that ensure the protection of and respect for human rights in relation to investment activities.

Of course, some existing state regulations already emphasize human rights considerations in investment practices, and some investors already have promising human rights practices within their ESG/sustainability approaches. But there is still a long way to go.

By taking these actions, investors – especially those specifically taking ESG or sustainability approaches – can ensure they uphold their responsibility to respect human rights in accordance with the UNGPs.