We would rather not think about human rights issues when it comes to asset allocation.
In the developed world, we often treat human rights violations — modern-day slavery, child labour, etc. — as anachronisms, at least as far they concern us. Or we dismiss them as problems for someone else to deal with, whether activists, government regulators, or corporate boards.
But as with incorporating environmental, social, and governance (ESG) factors into mainstream investment management practice, there are compelling reasons to apply human rights and safe-labour criteria to our investment decisions.
So what are the risks and opportunities associated with integrating or failing to integrate human rights issues into asset allocation considerations?
Neglecting to take human rights factors into account carries the following varieties of risk:
- Operational Risk: This is a huge consideration, especially in the extractive sector. Much of the risk assumed when taking on a new mining project is nontechnical in nature but they can be avoided with some foresight and dialogue.
- Legal and Regulatory Risk: Such soft-law standards as the United Nations Principles for Responsible Investment (UNPRI) are often the precursors to hard laws.
Following the 2008 oil spills in the Niger Delta, Royal Dutch Shell agreed to pay $84 million to the Bodo community in compensation for the health, environmental, and economic damage. While the amount may seem trivial for so large a company, the idea that the public good has value is becoming increasingly accepted.
- Reputational Risk: There are significant reputational risks associated with human rights violations and the accompanying press coverage. This can be disastrous for companies that become associated with human rights abuses.
As a case in point: The Rana Plaza factory collapse in Bangladesh in 2013 generated a huge public outcry. The companies outsourcing garment production to the factory suffered when their names were exposed.
Investors and firms can certainly lose money if they ignore human rights issues. But how can they gain by factoring them in?
- Cost of Capital in the Equity Markets: Studies indicate that companies that pay attention to CSR and ESG factors have a lower level of stand-alone risk. In exchange for this, investors are willing take a lower return.
- Government Contracts and Trade Markets: Governments are often the largest buyers of goods and services and generally have purchasing guidelines to ensure that their supply chains are free of human rights infractions.
- Employee Motivation: Safe labour practices lead to higher retention rates, increased productivity, and better overall product quality.
- Market Share: Sales feed the bottom line. Customers are more loyal to companies whose values they share.
Many in the developed world feel powerless in the face of anti-globalisation efforts and antipathy towards immigration. For those who believe in the economic benefits of trade, it is imperative to effectively encourage free markets across borders. By strengthening ties to the developing world where many human rights violations occur, we make trade more integral to the global economy and thus can wield greater influence.
What better time to vote with our portfolios?
Special thanks to the UNPRI and KnowtheChain.org for their work on this subject.
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