This Briefing Note aims to provide fund managers with a practical introduction to human rights issues that may be relevant to their investments. It gives fund managers:
This Briefing Note provides an overview of human rights issues and gives general guidance. It is not intended to be a detailed or comprehensive technical guidance document. Further support can be found in the ‘Further Resources’ section, and in the accompanying Terms of Reference Template for Enhanced Assessment of Human Rights Risks and Impacts included in the Downloads & Reference Materials section of this Toolkit. Fund managers may need to engage appropriate external expertise to assist in assessing and/or addressing companies’ exposure to, and management of, human rights risks and opportunities. The Terms of Reference Template provides further guidance for Fund managers when engaging such external expertise.
This note seeks to be clear, practical and relevant, by highlighting the most important points of connection and divergence between traditional E&S due diligence and managing human rights impacts effectively. It presumes a foundation of effective E&S due diligence, aligned with international good practice, as a basis for understanding what is different about assessing and addressing human rights risks and impacts as part of broader E&S due diligence.
Human rights are defined in a series of UN conventions and agreements, including the International Bill of Human Rights and in the International Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work. Human Rights aim to secure dignity and equality for all.
Human rights risks and impacts are not a separate class of E&S risks or impacts, entirely distinct from the more familiar types of E&S impacts fund managers already include in their due diligence. Rather, E&S impacts can become human rights impacts when their impact on individuals or groups reaches a level that negatively affects the ability of those individuals or groups to enjoy their basic human rights, as defined by internationally accepted standards. The UN Guiding Principles Reporting Framework website provides a list of internationally recognised human rights, offers a brief explanation of each, and provides examples of how a business might be connected to negative impacts on these rights.
Examples of how business might be involved with an impact on the right
|Human Right||Description||Example of how business might be involved with an impact on the right|
|Right to life||Right not to be unlawfully or arbitrarily deprived of life. The right to have one’s life protected, for example from physical attacks or health and safety risks.||
|Right to health||Right to highest attainable standard of physical and mental health, including control over one’s health and body, and freedom from interference.||
|Right to freedom of movement||Individuals who are lawfully in a country have the right to move freely throughout it, to choose where to live, and to leave.||
When these human rights impacts are particularly severe for the affected individual or group, they become the highest priority for a fund or company to address. These kinds of impacts are increasingly called ‘salient human rights issues’. The concept of salience is a relative one, meaning that each company’s salient human rights issues will be determined by identifying the most severe impacts on people with which the business may be involved, either through its own activities or via its business relationships. The concept of severity is discussed further in section 4 below. The diagram below shows the relationship between E&S impacts, human rights impacts, and salient human rights issues.
Examples of E&S impacts that can increase in severity to become human rights impacts include:
*Graphic credited to UNGP Reporting Framework (www.ungpreporting.org)
In principle, robust implementation of the International Finance Corporation (IFC) Performance Standards should address many human rights issues, as described in the UN Guiding Principles Reporting Framework website, through implementation of PS1 on management systems. However, three common challenges arise in practice:
Common practice challenges when assessing and managing human rights issues
By way of illustration, one common example that is increasingly relevant across industries relates to privacy-related impacts. While such impacts may be relevant for all companies in all contexts, in that companies hold an increasing amount of personal data on employees or consumers, the misuse of which could harm those individuals’ human rights, they may be particularly relevant for companies in the information and communications technology (ICT) sector or for companies operating in contexts in which regulatory authorities might demand this data in order to use it to harm individuals (for example, by harassing or detaining individuals opposing a project or who are HIV+).
International standards for managing business and human rights impacts
The UN Guiding Principles on Business and Human Rights (UNGPs) are the authoritative global framework on how to prevent and address impacts by business on people. The UNGPs are based on the UN ‘Protect, Respect and Remedy’ framework and are structured around the three pillars of that framework. Importantly, this structure recognises that both governments and businesses have essential but distinctive roles and responsibilities to prevent harm to people that could arise from business activities. The UNGPs identify specific steps that both states and businesses should take to meet those responsibilities.
The UNGPs have brought clarity to both the scope of responsibility for businesses in managing their human rights impacts (‘what’ human rights impacts to look for, and ‘where’ to look) and the practical steps companies should take to ensure that they are respecting human rights (‘how’ companies should assess and address these issues). Leading international frameworks, such as the IFC Performance Standards and the OECD Guidelines for Multinational Enterprises, have aligned their expectations of companies with those of the UNGPs. The UNGPs include the following core concepts:
There are a variety of positive and negative drivers that collectively establish a strong business case for companies and fund managers to incorporate human rights due diligence into their E&S practices. Many of these drivers also help to make the business case for traditional E&S due diligence. These include commercial risks and opportunities, reputational risks and opportunities, and regulatory and legal risks.
Drivers specific to the area of human rights include:
Heightened risk means heightened stakes
Human rights impacts are often the most severe forms of E&S impacts, meaning that the consequences of failing to manage these issues are often much greater than for other issues. For example, a project involving the construction of a shopping mall in a West African country might face significant operational delays due to ongoing conflict with stakeholders arising from a flawed government-led land acquisition process that negatively impacts their basic livelihoods. Operating in fragile and conflict states may pose challenges related to the actions of public security forces which companies may call upon.
Increasingly, the expectations of the UNGPs are being written into national legislation with transnational implications. In particular, companies are being required to disclose information that explains what they are doing to identify and address certain types of human rights risks in their own operations and in their supply chains. For example, the UK Modern Slavery Act, the California Supply Chain Transparency Act, and the US Federal Acquisition Regulations all require companies to explain the steps they have taken to ensure they are not connected to slavery or forced labour in their value chains. Regulators increasingly require non-financial reporting on social issues, and specifically on human rights (such as the EU Non-Financial Reporting Directive that comes into effect in 2016). Stock exchanges globally are also strengthening disclosure expectations on non-financial issues and some such as India and Malaysia, specifically on human rights. Voluntary initiatives such as the Equator Principles (EP) are also contributing to the growing expectation of human rights disclosure, through the EP III focus on consent-based disclosure and specific requirements to undertake human rights due diligence in certain high risk circumstances.
Driving due diligence through global value chains
Due in large part to the convergence of expectations around the UNGPs, multinational companies are increasingly being held to a higher level of accountability for the human rights actions of their business partners. Regulatory trends, stakeholder advocacy, and investor questions are driving the due diligence of global multinationals down through their value chains. While not all companies may be directly subject to these pressures, many occupy intermediate roles in global value chains, where they are increasingly subject to human rights due diligence expectations from their business customers.
Practical guidance that responds to reality
Leading fund managers and companies already recognise that risks from third-party business relationships can be material to their business (for example, when working with logistics or construction contractors). The approach to human rights due diligence outlined in this Briefing Note provides a framework for recognising and reflecting these realities by clarifying where to look (across a company’s own operations and business relationships) and what standards to use (internationally recognised human rights), but also enables funds and companies to prioritise the most severe impacts on people for attention, and sets reasonable expectations of the actions that a company should take when its operations are linked to impacts that are beyond its control to fully resolve.
In theory, robust E&S due diligence will identify and address the majority of relevant human rights risks and impacts in most transactions. However, as stated previously in this Briefing Note, practice demonstrates common challenges in the implementation of E&S due diligence, particularly when it comes to social impacts (including human rights), for instance, ensuring appropriate experience and competencies of those conducting the E&S due diligence. It is therefore important to ensure effective integration of a human rights lens into existing E&S due diligence, even in investments presumed to be low risk, in order to:
Considering the above, fund managers may wish to consult the UN Guiding Principles Reporting Framework website to ensure that their internal or contracted E&S due diligence capacity is employing a comprehensive approach to potential impacts on people that takes account of internationally recognised human rights standards.
Applying a human rights lens to E&S due diligence means testing the robustness of due diligence in three primary ways, which may in some cases be different from existing approaches:
a. Scope: Does the scope of the due diligence include the activities of other actors connected to the business’s operations (i.e. its business relationships) and does it rely on internationally recognised human rights standards?
Further guidance on scope
Incorporating human rights into E&S due diligence has two components: (1) considering risks and impacts arising from third parties connected to the business’ activities, and (2) assessing risks and impacts on the basis of internationally recognised standards. (The need to look at internationally recognised standards is discussed in Section 2 above; the following focuses on considering risks from third parties.)
Assessing risks and impacts arising from third parties requires E&S due diligence to look across all business relationships connected to the company’s operations, products or services. This means identifying risks and impacts connected to the business’s own operations, products, or services, as well as risks and impacts connected to the activities of third parties with which the business has a relationship (including suppliers, contractors, joint-venture partners, customers, and government entities).
E&S risks and impacts are no less significant when they occur many tiers removed in the supply chain, in parallel processes such as government-led land acquisition processes, through the actions of third parties, such as security providers, or by customers who might use a product in a way that infringes on human rights. These risks and impacts, caused by others but linked to a company’s operations through one or more business relationships, increasingly pose commercial, reputational and regulatory risks for companies – even where the company has not contributed to the impact and is not able to control the solution.
Therefore, it is important for companies and investors alike to assess such risks and impacts, even if their ability to address them is limited, so that they can make informed decisions.
One common question from fund managers is how far this inquiry should extend beyond the core activities of the investee company. There is no simple answer to this question. Some of the factors that might be relevant include:
This expanded scope of due diligence provides greater clarity about where to look for risks and impacts, but implementation is only feasible when coupled with the additional guidance on prioritisation and appropriate actions to address risks and impacts, as described below.
Examples of scope: Human rights due diligence should include assessing issues such as:
b. Prioritisation: Does the due diligence prioritise risks and impacts on the basis of risk to people, rather than risk to the business alone?
Further guidance on prioritisation
The expanded scope of looking across all business relationships as part of E&S due diligence means that businesses are likely to identify a greater number of risks and impacts that they might be connected to. They may therefore face legitimate resource constraints in addressing all of the risks to, and impacts on, people that are identified and may prioritise the E&S risks that will affect the company’s bottom line rather than severity on people. Incorporating human rights into E&S due diligence encourages fund managers and companies to take a more holistic risk-based approach to due diligence which avoids underestimating the importance and potential risks and impacts of, human rights. Taking this holistic approach to E&S due diligence allows businesses to prioritise which risks and impacts to address first. In fact, when businesses look more closely, they may see that human rights risks pose significant risks to the business.
While risks to people are increasingly recognised as material risks to the business, this is not always the case. For example:
The need to prioritise places even greater emphasis in the due diligence process on the role of stakeholder engagement, as stakeholder perspectives should inform a fund or company’s understanding of which impacts are perceived or experienced by stakeholders as most severe. It is difficult, or even impossible, for a business to make these decisions without input from those who are directly affected, their legitimate representatives, or credible proxies for their views where direct engagement is not feasible.
c. Appropriate action: Does the due diligence identify steps that a company should take to address risks and impacts it is connected to through its business relationships, but which it has not caused or contributed to directly through its own actions?
Further guidance on appropriate actions
The expanded scope of looking across all business relationships as part of E&S due diligence also means that there are different expectations for the actions a company should take to address identified risks or impacts. Where the company causes or contributes to an impact directly through its own actions, it should take steps to prevent the impact from occurring, continuing or recurring, and provide remedy for any harm that has been caused.
However, in looking across business relationships, companies may identify severe risks to, or impacts on, people that are caused by third parties over which the company may not be in full control or be able to address the risks or impacts. Actions by the parties that caused the impact will be necessary to cease, prevent, mitigate or provide remedy for the impact. The human rights lens to E&S due diligence therefore includes identifying actions a company can take to increase its leverage over such third parties, to encourage them to take appropriate actions to address impacts. This approach to using and increasing leverage recognises that a company’s efforts to address impacts linked to their operations may not be immediately effective, but nevertheless expects the company to think about and take credible steps to try to make the impact less likely or less severe.
In devising appropriate monitoring plans, it is important to consider how to track progress over time and to ensure the ability to recognise and respond to new issues as they arise. Ultimately, where an impact is severe and a company is unable to mitigate it, the company can either stay in the relationship and accept the consequences – legal, reputational, financial – or exit the relationship, after considering any additional negative human rights consequences of doing so.
The expectation of using and increasing leverage to prevent human rights impacts linked to a company’s operations, products or services applies not only to the companies a fund invests in, but equally to the fund itself. Where a negative impact is connected to the fund’s activities through its investments, the fund should focus on the most severe impacts, and seek to use or, where necessary, increase its leverage with clients to influence the company’s practices to mitigate the human rights risks.
Practical examples of using leverage:
Questions to test effective integration of a human rights lens into E&S due diligence are included in the Downloads & Reference Materials section of the Toolkit.
While robust E&S due diligence with a human rights lens will be appropriate for many transactions, certain transactions will pose heightened risk of severe human rights impacts. In such cases, fund managers may want to consider enhanced assessment of human rights risks and impacts. This may mean one of the following options:
For further guidance on the above, see the ‘Terms of Reference Template’ in the Downloads & Reference Materials section of this Toolkit.
Fund managers may wish to develop criteria to screen investments for enhanced human rights due diligence, building on traditional E&S categorisation systems.
Factors to be considered in the categorisation system could include:
Each of these factors, and their cumulative presence in a particular transaction or company’s business footprint, may point to higher-risk circumstances for human rights and an expectation of enhanced due diligence and scrutiny.
Refer to ‘Terms of Reference Template’ in the Downloads & Reference Materials section of this Toolkit for additional information on screening for high-risk circumstances, including a list of factors to consider.
Figure 2. Sources of Heightened Human Rights Risk
Expand the scope of due diligence
Companies should refer to internationally recognised human rights standards and look at their own operations and business relationships as they assess potential risks or actual impacts on people. This process can be aided by mapping the value chain of the business, including key goods and services that might be necessary for core business activities to take place. These might be certain commodities, inputs or parts of the supply chain; parallel services such as security, transportation or logistics providers; or enabling circumstances, such as land acquisition, that makes these business activities possible, but which run the risk of increasing human rights impacts.
Prioritise on the basis of severity
The practical reality is that every company presents some level of E&S risks, including impacts on human rights. While all negative human rights risks and impacts need to eventually be addressed, fund managers should to the greatest extent possible help companies to prioritise those issues that represent the most severe risks or impacts to people – in alignment with the criteria of scale, scope and remediability.
Identify opportunities to use and build leverage
In many instances, the most severe risks to or impacts on people may not be caused directly by the company, but by third parties (or business relationships) connected to the company’s operations, products or services. The risk or impact may be beyond the direct control of the company, and the company may therefore not be in a position to prevent or remediate the risk or impact. Nevertheless, if the risk involves a potentially severe impact on stakeholders, the company should use and build its leverage to encourage the third party to take appropriate actions to cease, prevent and remediate the harm. It will then be in a better position from which to report these risks and issues to investors.
Emphasise effective stakeholder engagement
Existing approaches to E&S due diligence emphasise the importance of meaningful stakeholder engagement as part of the due diligence process. However, this often poses challenges. In assessing human rights risks and impacts, the importance of meaningful stakeholder engagement increases substantially. This is particularly important in understanding the severity of a risk to, or impact on, an affected person or group, and therefore on any approach to prioritising which risks or impacts to address first. In practical terms, this means that in those high-risk circumstances where the risk of severe human rights impacts is greatest, fund managers should place added emphasis on both assessing the quality of a company’s stakeholder engagement processes (and those of its crucial business relationships), and using the fund’s leverage to ensure more robust processes for company-level stakeholder engagement where necessary.
Ensure that oversight of human rights risks and issues is ongoing
It is important to continually monitor the circumstances, risks and impacts as these can change over time. Severe human rights impacts often occur as the result of a failure to effectively manage more familiar E&S risks and impacts. Ongoing monitoring can help to ensure that existing systems are effectively identifying and addressing the types of E&S risks that can escalate into more serious issues if left unattended. For example, effective grievance mechanisms can provide a useful source of information about the types of actual impacts that are occurring, whether they are being effectively addressed, and whether systems and processes are being adapted to prevent continuation or recurrence of those impacts.
Further information and Guidance