IPE Views: Must institutional investors consider human rights?

IPE contributing editor Joseph Mariathasan asks whether, when it comes to human rights, institutional investors should have to worry

Next month marks the second anniversary of a tragedy in Bangladesh that has implications for institutional investors in Europe. On 23 April 2013, the eight-storey Rana Plaza in Dhaka, Bangladesh, housing five factories, collapsed, killing more than 1,100 people and injuring more than 2,500. At one level, the tragedy was a reflection of the very low levels of workplace safety tolerated in many emerging markets that would be completely unacceptable in the developed economies. But at another level, it was an indication of the lack of effort on the part of well-known brand names to ensure human rights are being supported in the supply chain for their goods.

Garment factories are producing goods for well-known brand names that constantly scour the globe to obtain the cheapest labour – garment manufacturing is one of the key industries any emerging country seeks to attract first, as it requires little investment beyond buildings, power supplies and sewing machines, together with a large supply of cheap labour. The pressure to reduce costs is immense to remain competitive against other, newer emerging countries, whether Cambodia or perhaps Myanmar in the future. As the Bangladesh experience showed, cutting corners to maximise production can be tragic. But how can shareholders respond to human rights issues, such as labour conditions, in the supply chain of companies they are supporting through their investments?   

For institutional investors, the issue may not be purely academic. The OECD produces guidelines for multinational enterprises that serve to emphasise that human rights need to be respected by corporations. But does that mean institutional investors can leave it to the companies they invest in to take the lead?

The answer appears to be no. In 2013, an international coalition of NGOs filed an OECD complaint against APG and the Norwegian Bank Investment Management, managers of Norway’s sovereign wealth fund, for having minority investments in the South Korean company Pohang Iron and Steel Company (POSCO). POSCO was planning to develop a large steel plant, mining operations and a port in the Indian state of Odisha, including roads and railroads. However, this had attracted controversy because of a range of alleged human rights violations including forced evictions. Whatever the rights or wrongs of POSCO’s actions, the issue institutional investors face is that of being publicly criticised for making ‘irresponsible’ investments.

Institutions cannot be expected to undertake due diligence on every activity by companies they invest in. Yet, at the same time, they can be understandably criticised if they appear to be doing nothing with respect to ensuring human rights are being taken into consideration. 

For institutions, the answer to this problem may lie in the new UN Guiding Principles for Business and Human Rights Reporting Framework, launched in February. It has already been adopted by companies including Unilever – the first adopter – Ericsson, H&M, Nestlé and Newmont. Boston Common Asset Management is one of the lead investor signatories to a statement of support for the Framework, alongside many well-known European asset management firms including Robeco, BNP Paribas Investment Partners, MN Services and Aviva Investors.

Lauren Compere, managing director at Boston Common, was very excited when I spoke to her about the impact the Framework is likely to have on the way human rights can be taken account of by institutional investors. As she points out, it is part of a broader push to encourage companies to take human rights into consideration. The EU’s own new non‐financial reporting Directive will require around 6,000 companies to report on their management of human rights risks. What the new UN Framework provides is a set of ‘smart’ questions that enable companies to begin reporting on their human rights performance, regardless of size or how far they have progressed in implementing their responsibility.

If institutions apply pressure on companies to take this seriously, it will incentivise them to improve over time. Institutional pressure on companies is unlikely to eliminate all future calamities such as the Rana collapse. But it may at least help to prevent some.

Joseph Mariathasan is a contributing editor at IPE