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Social 2022: Finally at the Forefront

Workers and human rights will be a focus for investors, with stewardship programmes playing a key role in reducing social harms.

The inequalities revealed and exacerbated by the pandemic are among several reasons why worker and human rights will be high on investor agendas in 2022.

Worsening gender discrimination, lower pay for informal workers, and the effects on incomes from climate change on vulnerable communities are issues likely to be even more salient this year. This could hugely affect investors as social inequalities cause more unstable societies as well as being bad for investee firms individually, especially if they don’t keep up with legislative changes.

Historically, asset owners have struggled to gain accurate data and reliable insights into company performance on social issues, even within their own operations let alone supply chains. Access to metrics is improving gradually, due to changes in mandatory disclosures, voluntary initiatives and commercial offerings.

But investors are also increasing oversight of social risks and impacts via increased engagement, individually and collectively.

In December 2021, the UN Principles of Responsible Investment (PRI) announced the launch of a new collaborative initiative for investors to address human rights and social issues through their stewardship activities.

“We designed this initiative to be a platform that can encompass a broad range of issues, which will allow investors to prioritise the most salient human rights risks within their stewardship activities,” said Nabylah Abo Dehman, PRI’s Head of Stewardship, Social issues and Human Rights, in a statement on the launch.

Hopes are high for the planned initiative despite several undecided elements – including the firms and sectors targeted for engagement.

Noura Hanna, Associate Director, Stewardship, at ESG ratings provider Sustainalytics, believes the pandemic has heightened existing inequalities and that stewardship programmes will be more valuable than ever in 2022 to address social themes.

“Some sectors of the economy are seeing improvements in human rights,” she says. “But the ones that were disproportionately affected by the pandemic [saw] an increase in inequalities between the lowest paid workers and the highest paid workers.”

This was felt particularly in the global south, where she says the problem will need more attention. “There is an acceleration in the highest paid workers’ incomes while there is a lowering of incomes in the lower paid sectors or poorer workers given fewer hours of work,” Hanna adds.

Populations are especially at risk in the informal sectors of poor countries, due to the lack of a safety net. “If you don’t work, you don’t eat,” says Hanna.

Addressing social harms

Collaborative initiatives such as the PRI’s can raise the profile of issues often considered voluntary by companies, according to Patricia Jurewicz, CEO of Responsible Sourcing Network, a US-based civil society organisation that works to end human rights abuses and forced labour associated with supply chains.

“Legislation has not kicked in everywhere, even though it has started to in some countries, and we need pressure on companies to address their human rights,” she says.

The PRI says the platform will be designed to support a range of activities, including investor engagement with companies, along with potential further escalation where needed. “The PRI will support investor engagement with policymakers to make progress on the overall goal,” it added.

“Having expectations from large investment networks like the PRI will encourage companies to start taking human rights more seriously,” says Jurewicz adding that more resources will be geared towards identifying and addressing the social harm that companies are directly or indirectly causing via their business practices.

Eszter Vitorino, Senior Responsible Investment Advisor at Kempen Capital Management, says participants in the project will need to overcome the “lack of maturity and lack of consensus” on social themes.

“The need to address human rights issues will be felt more keenly among the investor community in coming years,” said Stephanie Maier, Global Head of Sustainable and Impact Investment at GAM Investments. “Addressing social challenges plays a huge role in meeting sustainability objectives, and the initiative will catalyse the ability to make progress on human rights,” she adds.

Stewardship priorities

Globally, investors’ stewardship priorities differ, with social themes often playing second fiddle.

According to a 2021 Harvard University / ISS ESG study of 133 investors around the world, climate was the most common engagement priority, but second place varied. Engagement topics vary between investors, with the US, UK, and Canada in one group, and European countries and Australia in the other. “In the former group, governance, along with diversity and equality join climate as the most commonly identified important topics for engagement,” it said. “While for investors in continental Europe and Australia, human rights and labour rights considerations join climate at the top of the hot topic list for engagement.”

At Sustainalytics, Hanna has witnessed a rise in investor willingness to tackle social issues, notably in areas around human rights and occupational health and safety of workers.

Hanna says a key reason for greater investor focus is more transnational and international legislation and standards on human rights being implemented. “More reporting and disclosure is now expected,” she says.

Examples of legislation include the UK’s Modern Slavery Act 2015 and Australia’s Modern Slavery Act 2018, both of which were designed to increase oversight across supply chains.

But the European Commission (EC) has paused again its Due Diligence in Supply Chain legislation, which was designed to monitor and reduce human rights and environmental risks relating to products coming into the bloc.

In mid-December, eight organisations wrote an open letter addressed to EC officials that expressed concerns about the delay of the legislative proposal on sustainable corporate governance, as well as the lack of information explaining the postponement.

Even when passed, legislative initiatives can be slow to drive behavioural change, meaning investor engagement is critical to ensuring firms adapt their practices.

“Even among the topics that are covered by legislation, there is a high level of non-compliance in the supply chain, yet there wasn’t the same level of scrutiny and legislation five to ten years ago,” says Hanna.

The complicated state of the EC’s attempts at legislating the area is one reason that Kempen’s Vitorino supports more direct and practical investor action on specific pain points.

“The PRI brought practitioners together who will compare best practice and will then try to see what is already out there,” Vitorino continues. “For example, what are things that we can learn from one jurisdiction or one manager and then apply it elsewhere?”

Jakub Sobik, Communications Manager at The Modern Slavery and Human Rights Policy and Evidence Centre (the Modern Slavery PEC) told ESG Investor that the PRI initiative made it clear that investors have a role to play in addressing human rights and other social issues, including modern slavery.

The Modern Slavery PEC highlighted the challenges facing investors around human rights in its 2021 report, highlighting in particular access to data “Actionable information on investee companies’ exposure to and management of modern slavery risks is scarce and often presented in ways that are difficult to integrate into investment business processes.”

Valuing human capital

Sustainalytics’ Hanna is encouraged that social issues will be addressed by corporates due to a broad-based shift in attitudes. “On human rights, I also think there is the new generation coming in. The consumer is becoming much more aware and asking questions.”

Customers can find information on products and ascertain their human rights footprint for themselves, which means companies need to act more to safeguard brands and reputations. “Companies need be aware of the risks in the supply chain around human rights – how to prevent them and ways to remediate them,” Hanna argues.

Even so, it is likely that fully incorporating social factors into investment decision-making will remain a work-in-progress in 2022.

“Worldwide, we are in the early stages of building infrastructure to price companies’ people management impact, and board and employee diversity into security prices,” says Kimberly Stokes, VP and Corporate Engagement Strategist for Calvert, who expects a greater appreciation of the value of human capital in future.

“The pandemic highlighted the connection between human capital and company performance, and the need for a greater focus on effective human capital management, while also exposing gaps in current policies and approaches.”

Stokes says shareholder support for initiatives around human capital increased in 2020 and 2021 proxy seasons, which demonstrated interest in policies and disclosure that support racial and social justice and employee well-being. “Culture, as an outcome of human capital management, is correlated to a company’s long-term financial performance and thus is a topic of interest to investors. The presence of a strong company culture has implications for employee engagement and retention and has been shown to indicate companies likely to have better long-term financial performance.”

Jurewicz says she expects to see discussion of social themes reach a new level of maturity in 2022, given current legislation as well as investor expectations. She hopes that programmes like the PRI’s will help bring about change and reduce social harm. “The devastation of the pandemic, especially on workers in the supply chains, has called out how vulnerable those communities are. I think this woke up a lot of people to how vulnerable these workers are.”

As the open letter to the EC says, the consequence of inaction on this subject could risk objectives that aim to transform an unsustainable economic model towards a more just, equal and environmentally responsible system.

At GAM, Maier says that the onus is on investors to set clear milestones for the success of their engagements and make use of the benchmarks, similar to Climate Action 100+’s Net Zero Company Benchmark.

Stokes also says Just Transition needs to be emphasised as a key theme for 2022 highlighting the integration of concerns about workers and communities into decarbonisation-related planning and activities. “Investors could then use this information to assess how companies are preparing their workforces for a low-carbon energy transition,” she said. “We expect regulators and policymakers to intensify their focus on the workforce to achieve climate ambitions.”

Maier adds that in 2022 investors need to ensure plans around social stewardship are part of the transition to a sustainable economy. “With the EU taxonomy set to be in place, the pandemic, and climate pathways defined by COP26, investors will be operating within more tightly defined boundaries in 2022. It is an environment that makes stewardship more crucial than ever.”

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