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The ESG Interview: Human Rights Risk is a Business Risk

Anita Dorett, Director of the Investor Alliance for Human Rights, predicts a further increase in awareness of human rights risks among asset owners.

When we think about human rights abuses related to business, we tend to think of concerning issues far along supply chains, such as reported use of forced labour in solar panel production in China. Over the past 12 months or so, asset owners have increasingly come to appreciate that problems can arise much closer to home.

Directors, managers or even investors who are sceptical about how human rights due diligence failings can disrupt business and damage reputation might consider the pandemic experience of US-based meat processing giant Tyson Foods.

Starting 2020 with a US$90 share price, the Arkansas-headquartered firm released strong fiscal Q1 results in February and an “optimistic” outlook for the year. As the Covid-19 pandemic’s economic impact unfolded, Tyson’s price tumbled, in line with many other large corporates, falling to US$52 by end-March.

But a tough situation was compounded by self-harm, with a lack of human rights due diligence at the heart of the problem. Tyson’s inadequate response to the pandemic, notably its treatment of workers, led to interruptions to production, negative publicity and legal and regulatory challenges, culminating in a shareholder revolt in its 2021 AGM, held 11 February.

Although meat processing suffered a high incidence of Covid-19 outbreaks globally, Tyson’s 12,275 case load outstripped US-based peers by three to four times, due to shortcomings in employee protection, including insufficient social distancing measures, access to testing, and quarantine time.

As well as costs from staff turnover and lost output, Tyson faces potentially expensive regulatory and legal action. In December, the New York City Comptroller called for an investigation into Tyson’s “misleading” disclosures to shareholders over its pandemic response, which could lead to a heavy fine.

This coincided with the sacking of seven managers for betting on employee infection totals at a plant, leading to a US$6 fall in Tyson’s share price over the month. The firm is also subject to lawsuits brought by the families of deceased employees, including at least one alleging racial discrimination.

Accountability through transparency

Citing weak health and safety protections to workers and the resultant material financial risks to investors, the American Baptist Home Mission Society and 22 co-filers lodged a shareholder proposal to request a report on Tyson’s human rights due diligence processes in company-owned operations and the supply chain, including “information about stakeholder consultation and how Tyson tracks the effectiveness of its due diligence efforts”.

No-one can say for certain that Tyson’s response to the pandemic would have been more effective had it already conducted regularly human rights-based risk assessments. But it is a fair assumption that the availability of relevant information would have improved visibility of any shortcomings to managers, directors and investors alike.

“At the end of the day, the board has to be accountable. And the way we can hold them accountable is for them to provide transparency into all these risks that impact us as long-term investors,” says Anita Dorett, Director of the Investor Alliance for Human Rights, a global collective action initiative run by the US-based Interfaith Center on Corporate Responsibility (ICCR).

Alliance members include asset managers, public pension funds, trade union funds, faith-based institutions, family funds and endowments, collectively representing more than US$5 trillion in assets under management (AUM).

All 22 co-filers to the Tyson proposal are members of the ICCR, which represents 300 investment institutions with a combined US$4 trillion AUM. ICCR members have been actively engaging with investee firms for 50 years, using dialogue, shareholder resolutions and policy advocacy to encourage responsible and sustainable business practices.

“As shareholders, one of the tools we have is putting forward proposals. We usually ask for the directors of the company to provide more information on what they are doing to address a variety of risks, which will enable investors to assess the risk that they’re exposed to in their own portfolio,” Dorett explains.

Know your risks

The Tyson filing cited corporate responsibilities under the UN Guidance Principles on Business and Human Rights (UNGPs), noting the impact of Tyson’s business activities on the rights to life, freedom from discrimination, safe working conditions, and freedom of association.

The proposal received 78.7% support from independent investors, including Tyson’s two biggest shareholders, Vanguard and BlackRock, as well as Norges Bank and CalSTRS. But this only translated into 18.4% overall support, due to Tyson’s dual-class share structure, which gives 71% of votes to the family-controlled Tyson Limited Partnership.

BlackRock, which also voted to reform Tyson’s capital structure, said the firm’s current disclosures gave shareholders limited understanding of its approach to human rights due diligence or its effectiveness. “We expect companies to implement monitoring processes to identify and mitigate potential adverse impacts, and provide grievance mechanisms to remediate any actual adverse impacts,” the asset manager said.

For Dorett, the reactions of the world’s largest asset manager are a positive indicator for the future. “They’ve using their proxy vote to convey their concerns by voting against the board, and they also made it very clear that they’re going to hold boards to disclosure requirements. And they’re looking at public disclosure, not confidential one-on-one dialogues,” she says.

Nevertheless, Tyson’s share price has steadily recovered this year, even outpacing broader market performance as the US economy opens up, reaching US$80 last week, on the back of quarterly earnings of US$1.30 per share, up from US$1.03. Has Tyson ridden out the storm? Dorett suggests the story is far from over.

“We’re advocating for investors and companies as businesses to adopt the UN Guiding Principles in terms of having that human rights risk management process. You have to know your human rights risk, and you have to show that you know it,” she says.

“We’re asking companies to include human rights risk management along with all the other risks they manage within their enterprise risk management framework.”

Enlightened self-interest

The defeated shareholder resolution also noted that Tyson had scored zero for all human rights due diligence indicators for the second year in a row, in the annual Corporate Human Rights Benchmark (CHRB) assessment conducted by the World Benchmarking Alliance.

This put Tyson on the receiving end of a warning letter, coordinated last week by the Investor Alliance for Human Rights on behalf of more than 200 global investors worth almost US$6 trillion, along with other large corporates with consistently poor human rights due diligence records.

The CHRB 2020 report assessed 230 large publicly traded companies in five high-risk sectors, agricultural products, apparel, extractives, ICT manufacturing and automotive manufacturing. The 106 firms that scored zero against all five human rights due diligence indicators (identifying, assessing, acting, tracking and reporting) were targeted for action by the Alliance. In light of the pandemic, firms were assessed on just 13 indicators across governance, due diligence and remedy mechanisms.

As well as Tyson, underperforming firms included PetroChina, Costco Wholesale, Starbucks, Yum! Brands, Target, General Motors, Honda and Tesla. On a sectoral basis, firms in the automotive sector performed worse, with firms recording an average score of 12%.

CHRB also published a shorter study earlier this year, which showed a correlation between low-quality human rights disclosures by companies and inadequate treatment of workers during the pandemic, with performance and due diligence often worst further along the supply chain. Anecdotally, Dorett notes that failure to honour orders or payment terms due to cashflow concerns as further examples of damage to supply chains and reputations under pandemic conditions.

Specifically, the Alliance’s letter demanded disclosure of public commitments on human rights from the firms, explanations of their human rights due diligence processes and transparent mechanisms for remediation.

The investors made it clear that they believe respect for human rights is not only good for workers but for all stakeholders, arguing that their requests would “ameliorate risks to business, including operational delays, reputational harm, financial loss, and legal liabilities”.

Dorett suggests investors are acting at least partly out of enlightened self-interest. Under the UNGPs, companies are expected to provide information about their relationship to human rights violations, in terms of cause, or contribution or any other link.

“And in that context, investors, as owners of companies, are directly linked to the human rights harms or risks that companies have. So, it’s not just for the companies to take action to address this risk, it’s also for investors. Investors have a responsibility to address that risk, using the same human rights due diligence model.”

From soft to hard law

The 31-point UNGPs were formulated and adopted 10 years ago by the UN Human Rights Council and are focused on themes of ‘protect, respect, and remedy’. Already influential on legislation, the UNGPs’ profile is set to increase. Their 10-year anniversary will be marked next month with the unveiling of an “ambitious vision and roadmap” for scaling up adoption of the UNGPs over the next decade, coordinated by the UN Working Group on Business and Human Rights.

The ‘Business and Human Rights: Toward a Decade of Implementation’ (UNGPs10+) project will boost efforts to prevent and address business-related human rights abuses, with particular attention to mandatory regulatory drivers and the “role and leverage” of financial actors. Its ten priorities include further embedding human rights due diligence into normal business processes.

The UNGPs remain a ‘soft law’ voluntary framework, despite attempts to establish a legally-binding treaty, which have been resisted to date for reasons including doubts over enforceability. A recent paper, co-authored John Ruggie, who originally drafted the UNGPs in his role as UN Special Representative, suggests they will continue to inform legislation.

The UK and Australian modern slavery acts both drew on the UNGPs, as have France’s 2017 Corporate Duty of Vigilance Law and 2019 legislation passed in the Netherlands requiring due diligence on child labour risks. The OECD has aligned its Guidelines for Multinational Enterprises with the UNGPs and, in 2018, published a practical advice on implementing its guidelines.

Dorett backs the moves to use the UNGPs as the basis for mandatory requirements on corporates and investors. “You need to put ‘hard’ law in place because anything that is voluntary doesn’t quite work,” she says.

Towards integrated reporting

Perhaps the UNGPs’ most profound influence can be found in the European Union’s legislative programme relating to sustainable investing. The Sustainable Finance Disclosure Regulation requires asset managers and other financial market participants to explain the due diligence used to identify sustainability risks, while the recent Corporate Sustainability Reporting Directive expects companies to report on principle adverse impacts with the reference to international human rights standards.

Further, the European Commission is expected to table a sustainable corporate governance directive in June, which will oblige firms to conduct rigorous due diligence checks on human rights and environmental issues across their supply chains. As Ruggie and colleagues point out, both the European Green Deal and related EU sustainable finance commitments invoke not only the concept but the steps outlined in the due diligence provisions of the UNGP.

For Dorett, Europe’s lead indicates the broader future direction of travel, whereby information about ESG risks, including human rights risks, are more firmly integrated into financial reporting and decision-making.

“The fact is that ESG risk does impact your financial risks. A lot of companies don’t report as much on the environmental and social risks which have a financial impact. In that sense, they are failing in their own by fiduciary duties to provide this information to asset owners and asset managers,” she says.

“When, as a result of a company not addressing the human rights risks, their financial performance and their shares dip, investors suffer. But investors are also being held to account. The EU regulations are making that very clear.”

Market forces

In parallel with regulatory developments, investors’ focus on human rights due diligence continues to rise.

“This year we’ve seen a record number of resolutions with a human rights focus,” says Dorett, noting that 37 of the 244 resolutions supported by ICCR members in the 2021 proxy voting season addressed human rights themes, placing the topic third behind diversity and climate change in terms of investor priorities.

Dorett traces a link to the wider acceptance of the need for companies to recognise responsibilities to a wide range of stakeholders, not just shareholders. “It’s starting to see fruition. The push is not just in regulation but by the marketplace,” she says. But there is still a need for industry-level initiatives to help investors to identify and close the gaps between leaders and laggards.

Last year, the Principles for Responsible Investment (PRI) issued guidance for investors on holding companies to account for their human rights records. The PRI is also incorporating human rights questions into its reporting framework on a voluntary basis from 2022, with a view to requiring mandatory disclosures, as well as making human rights a key focus in its their latest three-year strategy.

The Investor Alliance for Human Rights has also launched an Investor Toolkit on Human Rights, aimed at helping asset owners and managers to identify and address risks within their portfolios.

“We’re focused on really enabling investors to understand their obligations using the UN Guiding Principles, translating what they mean to investors in terms of due diligence. We try to address support the investment community as best we can,” says Dorett.

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