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Human rights

Making respect for human rights a competitive advantage

They say that whatever gets measured, gets managed—and now one group is trying to apply that principle to businesses’ treatment of human rights issues.

Starting this week, a band of investor groups, human rights organizations, and ESG research agencies have published the methodology for the Corporate Human Rights Benchmark, and will now be piloting it over the next several months.

The CHRB, as it is called, will measure the human rights efforts of 100 large companies worldwide; and then rank those businesses in order, with the goal of pushing them (and eventually hundreds more) to follow through on pledges to avoid human trafficking, forced labor, and a range of human rights risks relevant to each industry covered. The pilot Benchmark will be published this November.

Key Industry Risks for the 2016 Pilot Benchmark

More broadly, the CHRB is only the latest note in a tune global corporations have heard from regulators and investors for a while now: improve oversight of your business partners. The CHRB may drive home that point specifically on forced labor and other impacts via the supply chain, but the fundamental message is little different from the U.S. Justice Department telling companies to crack down on bribes paid by overseas business partners, or from banking regulators everywhere telling financial firms to scrutinize their customers for links to terrorism or money laundering.

“This is something here to stay, but it needs better understanding,” says Warrick Beaver, managing director of the reputational risk practice at Thomson Reuters. The global business community already has some tools to bring better, more continuous oversight of third parties—audits, media surveillance, questionnaires, country risk profiles, and so forth—and “we’re all feverishly trying to solve this.”

The CHRB will work by collecting the disclosures those 100 companies make about human rights issues, including their responses to serious allegations, and compare those statements against several dozen criteria: for example, whether the company reviews the human rights performance of its business partners, or has a formal policy to respect the safety of workers. Each answer gets a score of 0, 1, or 2 points. Companies that do more for human rights will score more points and achieve higher rankings; those that do less will score lower and fall to the bottom.

The thinking is that investor groups and the public will be able to use the benchmark as a tool to have more pointed, specific conversations with large businesses about human rights issues. By “normalizing” human rights effort across multiple companies and multiple industries, and over multiple years in time, people will be able to vote with their wallets and investment dollars in favor of companies that are visibly improving their human rights performance.

“My interest is in seeing how you can start turning human rights into something that others outside human rights can become much more conversant with,” says  Margaret Wachenfeld, head of research and legal affairs at the Institute for Human Rights and Business, and member of the CHRB Steering Committee.

“We need various tools,” says Phil Bloomer, executive director of the Business & Human Rights Resource Centre, which is also a member of the CHRB steering committee.

“For me, the ranking is a proven method to provide reputation reward for leaders in each sector where there’s high risk of human rights abuse.”

To put it another way: if the CHRB can help investors and civil society (read: non-governmental groups and government regulators) engage in more precise conversations with companies about human rights, that should prod companies to address human rights before problems emerge—not after, when a company might be scrambling amid bad press, regulatory enforcement, or civil lawsuits. Not to mention, those punitive actions after the fact rarely bring much solace to the humans whose rights have already been abused.

In this first year, the CHRB will target the apparel, extractives, and agriculture products sectors, since all three have had had plenty of encounters with corruption and human rights abuses over the years. The selected companies (and CHRB did select companies, rather than ask for volunteers) range from food businesses such as General Mills and Nestle, to “extractives” such as Anadarko Petroleum and Glencore, to clothing businesses Inditex and Heilan Home. The targets hail from all six populated continents and more than 20 countries.

Eventually the CHRB organizers hope to scale up the benchmark to the 500 largest publicly traded companies in the world, across many more business sectors.

Having difficult conversations

If the CHRB is meant to be a catalyst that sparks more discussion about human rights, plenty of other forces are hovering around global corporations eager to start that chain reaction. Investment funds, for example, increasingly want to factor human rights and other sustainability issues into their investment decisions. (Aviva Investors, with $383 billion under management, is one member of the CHRB steering committee; Calvert Investments, a socially responsible fund in Maryland with $13.4 billion under management, is another.)

“The information generally is getting a lot better… It’s significantly better than it was 10 years ago,” says Steve Waygood, chief responsible investment officer at Aviva Investors. Waygood has worked in responsible investing since the 1990s, and says Aviva routinely purchases sustainability data on specific companies from research firms that specialize in such information.

The drawback: purchased information often can’t help investors compare one company to the next. Different research firms might rate companies in different ways, or might change research methodology from one year to the next.

“We don’t have anything like consistent, comparable data on the global level that could help an investor narrow his choices. If you have $100 million to invest, how do you compare the human rights efforts of a Chinese mining company versus a Brazilian agribusiness?” Waygood says.

Waygood and his fellow travelers in socially responsible investing (SRI) do have reason to want that knowledge. Numerous studies have shown that socially responsible investments can outperform the market. Last year, for example, Morgan Stanley estimated that its index of 400 companies with high sustainability standards outperformed the S&P 500 index by 45 basis points from 1990 through 2014. The study also found that businesses with a high commitment to sustainability tended to have less volatility in their stock price and lower costs of capital.

Benefits like that are exactly what Bloomer wants the CHRB to bring about. “The ranking will provide real reputation reward… and significant reputation risk for those who are walking around with one eye closed,” he says.

And yes, Waygood says, Aviva would use the CHRB to measure a company’s progress on human rights over time, and then exert pressure on companies that lag near the bottom. Aviva might, for example, withhold its support for some candidates for a company’s board of directors.

What Aviva and others hope, however, is that CHRB and its many criteria will help them to spell out how they want a company to improve its human rights efforts. For example, a company might adopt a bundle of new policies, but delay fixes to due diligence programs. In that case, the company might improve its ranking slightly, but still have much work to do. Investor groups or activists could then use the CHRB criteria to tell the company what improvements they expect to see the following year.

“The messages can be quite precise and specific, and the more precise the benchmark, the more specific the messages can be,” Waygood says.

Where human rights benchmarks come from

Architects of the CHRB strived to avoid one likely criticism of their effort: that the benchmark would be yet another disclosure effort placed upon corporations—which, in fairness, have plenty of disclosures to make already. To head off complaints like that, the CHRB based its criteria on the U.N. Guiding Principles on Business and Human Rights, adopted in 2011. The criteria also dovetail with other efforts to set sustainability standards, such as the Global Reporting Initiative, and sector-specific standards, like the Voluntary Principles on Security and Human Rights.

Wachenfeld says the plan was always to work off those pre-existing standards; the CHRB measures what companies are achieving against those, rather than create any new standards itself.

The mining and apparel sectors, for example, have already been dealing with sustainability standards and the UN Guiding Principles for years. And in another nod to the business community, the CHRB steering committee cut roughly one-third of the criteria from its first draft proposed last summer to its final criteria announced this week, so companies can focus their efforts more effectively.

“That’s the message we’ve been sending to companies: that all of this is grounded in what they’re already doing,” Wachenfeld says. “For many companies it’s not a question of, ‘What is all this?’ It’s a question of, ‘How does that fit with what we do?’”

The CHRB criteria are organized into six “themes,” representing the broad categories of performance it measures. The single most important theme is due diligence: weighted to 25 percent of total score, compared to policies (10 percent) or remedies and grievance mechanisms (15 percent). Above all, Wachenfeld says, the benchmark was intended to measure and credit actual work—especially due diligence, with its aim to identify trouble early.

Measurement Themes for the 2016 Pilot Benchmark

“If companies can tell you what systematic steps they are taking in their due diligence—that’s what the UNGPs are driving toward, where companies are active and systematic about it,” Wachenfeld says. “Because far too often it’s reactive, sometimes after something terrible has happened.”

And Waygood is quick to stress: it’s OK for a large company to admit that it may have forced labor somewhere in its supply chain, so long as the business is forthright and tries to solve the problem. Nestle made such an admission last fall after a long investigation into the sourcing of its seafood products. Waygood declined to comment on Nestle specifically, but does say, “An honest and open response that recognizes a problem is infinitely better than a denial response.”

Enter the regulators

The CHRB is playing to another audience, too: government regulators, who recently have made “human rights due diligence” a new front in their battles against corporate misconduct.

Unlike other laws against using forced labour (which have been on the books for decades or more), a new crop of laws is using corporate disclosure as a means to pressure companies away from certain business practices.

In the United States, that idea cracked onto the scene in 2010 with the Dodd-Frank Act and its Conflict Minerals Rule. The rule requires manufacturers to disclose whether any of their products use four minerals (gold, tin, tantalum, and wolframite) that might originate from mines in Central Africa operated by warlords. Many companies at first recoiled from the compliance burden, but several leaders in the field—Intel particularly—took the burden as a challenge to elevate its good business practices.

In Britain, meanwhile, the Modern Slavery Act went into effect last October. That law requires any companies doing business in Britain with more than £36 million in annual revenue (read: every large company in the world) to disclose what it is trying to do to eradicate forced labor from its supply chain. A similar law exists in California, the Transparency in Supply Chains Act. Another federal law pending in the United States would allow goods made with forced labor to be impounded.

The Modern Slavery Act, for example, “was more written with an aspiration in mind, which is for businesses and society to bring transparency to the supply chain and remediating their deficiencies,” says Beaver of Thomson Reuters. “It has a very different tone than previous regulations.”

The crucial factor is that these laws only require disclosure; other parties (such as the CHRB, investors, and non-governmental organizations) then use that disclosed information to create a competitive environment for respecting human rights. And with today’s social media saturation, a company disclosing that it doesn’t do much about human rights abuses can leave itself exposed to some pretty painful discussions.

“Control of brand will become more democratized,” Beaver says. “It compels organizations to know, real time, what is going on in their eco-system, and then in real time to address those issues.”

With more focus from governments, consumers and  other stakeholders on due diligence processes  it is important that companies not only put the appropriate level of due diligence into their internal and supply chain processes but that they are also willing to stand proud behind their full disclosure.

“Public transparency and company rankings can encourage positive market competition to drive a race to the top,” Beaver says. “Companies who fail to disclose may get left behind or find they suffer an increase in reputational challenges.”

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