Tackling the ESG data gap for Corporate Human Rights

By Edmund Bourne, Research Lead, SI Research

• Increasing Pressure: With changing regulatory and investor expectations, companies are already facing pressure to enhance their management of human rights issues. 

• Investor focus: Human rights is a growing focus area for investors, who are increasingly required to understand and disclose human rights risks within their portfolios. 

• Data Gaps: investors still have relatively few tools at their disposal to separate human rights leaders from laggards, with the lack of consistent corporate reported data remaining a key blocker to managing human rights risks across investments.

Human Rights have long been the poor relation among ESG issues, but 75 years on from the adoption of the Universal Declaration of Human Rights,^[1] a combination of new regulatory requirements in advanced economies and investor initiatives are pushing the issue up the agenda. 

In Europe, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will require 50,000 companies to disclose a wide range of Human Rights-related information from next year;^[2] and national legislation mandating human rights due diligence has been adopted in France, Germany, and Norway, and is under discussion in the Netherlands. ^[3] 

Meanwhile, Japan issued new guidelines on human rights last year, which require companies to have a policy to respect human rights, conduct human rights due diligence, and remedy any human rights impacts. ^[4] In the U.S., there has been less regulation, but the imposition of import bans in 2021 and 2022 on products from Xinjiang^[5] and those allegedly produced under forced labour[6] has forced greater attention on human rights and labour rights due diligence across complex supply chains. The OECD will add to the momentum when it issues an update its 2011 Guidelines for Multinational Enterprises this summer.^[7] 

Investors in the spotlight

Thus far most regulations have focused on corporates’ own reporting, but investors are also increasingly required to understand and disclose the human rights risks at investee companies. Article 18 of the EU Taxonomy incorporates the requirements for minimum standards on human rights for any investments labelled as ‘Taxonomy aligned’ as part of its ‘Minimum Social Safeguards’,[8] whilst criteria for Article 8 and 9 funds under the EU Sustainable Finance Disclosure Regulation (SFDR) require disclosure on human rights performance as part of so-called Principal Adverse Impact indicators.[9]

Investors are taking note with nearly three-quarters of asset owners indicating that social themes were a priority in FTSE Russell’s 2022 survey (up from 60% of respondents in 2021).^[10] Emerging momentum on Human Rights is also evidenced by a number of collaborative investor initiatives (see figure 1).

The Human Rights ‘data gap’

Investors still have relatively few tools at their disposal to separate human rights leaders from laggards, with the lack of consistent data – particularly robust quantitative metrics - remaining a key blocker to managing human rights risks across portfolios. As a recent paper from the UN Principles of Responsible Investment (UN PRI) highlighted investors face ‘gaps in terms of available information and reliable sources – and where this information is available, it can be difficult to access and process at scale.’^[11] Despite the emergence of a number of benchmarking initiatives, their efforts tend to be sectorally focused or targeted at a small number of companies.^[12] 

Since 2019, FTSE Russell’s human rights framework (see figure 2) has assessed over 5,000 companies on their management of human rights risks, reviewing company disclosures against 16 key criteria drawn from international standards.

Studying these assessments reveals that few companies are demonstrating basic awareness of the importance of Human Rights issues to their business. Around half (49%) of large and medium sized companies in developed and emerging markets make no meaningful human rights disclosures.^[13] 

Regional differences in corporate practices are stark (see figure 3). Companies from advanced economies in Europe have by far the most comprehensive disclosures across policy, governance, and quantitative reporting. Over three-quarters of corporates in the region have a commitment to Human Rights, while a fifth demonstrate evidence of board oversight of tax policy, and around a third proactively assess Human Rights impacts.

By contrast, far fewer companies in other regions have similar Human Rights policies, processes or governance in place. For example, there are Human Rights commitments in place for only around half of North and Latin American companies, around 35% of MEA companies and c. 5% of Chinese companies.

 On aggregate, we find limited signs of systematic improvement in company practices (see figure 4).  Despite an increase in companies publishing commitments between 2019 and 2022 - to nearly half from about a third - progress is far slower in other areas. Over the same time period, there have been marginal increases in the proportion of companies: a) introducing board level oversight of human rights (+6% pts); b) identifying salient human rights issues (+3% pts); c) communicating Human Rights expectations to stakeholders (+2% pts); and d) proactively assessing human rights impacts (+1% pts).

Taken together, these trends show that there are still considerable data gaps across all key human rights criteria. Improving the management of human rights risks in investor portfolios requires robust data, but corporate disclosures on human rights practices remain limited. As regulatory and investor expectations change, pressure looks set to mount on companies to fill these gaps.

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^{[1] Human Rights Day | United Nations. The 75th anniversary of the adoption of the Universal Declaration of Human Rights will be marked on 10th December 2023.}

^{[2] Corporate sustainability reporting (europa.eu)}

^{[3] 2017, Corporate Duty of Vigilance Law; 2023 German Supply Chain Due Diligence Act; 2021 Norway Transparency Act; the Netherlands Bill on Responsible and Sustainable International Business Conduct.}

^{[4] 2022 Japan Guidelines on Corporate Human Rights Due Diligence. In September 2022, the Ministry of Economy, Trade and Industry (METI) issued Guidelines on Respecting Human Rights in Responsible Supply Chains.}

^{[5] US bans imports from China’s Xinjiang region, citing Uyghur forced labor (cnbc.com)}

^{[6] US lifts import ban on Malaysia’s Top Glove over alleged forced labour | Financial Times; US bans imports of disposable gloves from Ansell supplier in Malaysia over allegations of forced labour | Business | The Guardian}

^{[7] guidingprinciplesbusinesshr_en.pdf (ohchr.org); Guidelines for multinational enterprises - OECD}

^{[8] These minimum standards include being aligned with the UNGPs, the OECD Guidelines and certain core international human rights laws.}

^{[9] Sustainability-related disclosure in the financial services sector (europa.eu)}

^{[10] {44ada6ce-03c3-40ac-a005-763b479409e4}_Sustainable_Investment_2022_Global_Survey_Findings_from_Asset_Owners.pdf (lseg.com)}

^{[11] download (unpri.org)}

^{[12] See for example, the UN PRI’s review of Human Rights benchmarks for investors (Human rights benchmarks for investors: an overview | Article | PRI (unpri.org)}

^{[13] These companies meet none of the 16 indicators in our framework. Sample includes a subset of constituents in FTSE All World Index (3,116/4,164), representing 83% of index weight as at 1st June 2023. Analysis based on FY 2021/22 disclosures.}