Human Rights or Wrongs: What Company Leaders Should Ask Themselves
By Richard Howitt, Skytop Contributor / October 15th, 2024
Richard’s background celebrates three decades as a strategic thinker who integrates innovation into organizational practice. A 22-year member of the European Parliament Rapporteur on Corporate Social Responsibility, he led the EU’s Non-Financial Reporting Directive. This initiative, recognized as the world’s foremost legislation on Corporate Transparency, brought him to new challenges.
This includes his work as CEO of the International Integrated Reporting Council, the Task Force on Climate-Related Financial Disclosure, Advisor to the UN Global Compact, Member of the European Commission SDG Platform, and the UN Guiding Principles for Business and Human Rights Reporting Framework Eminent Persons’ Group.
Richard is recognized as a Sage Top 100 Global Business Influencer, Thomson Reuters ‘Top 30’ Influencer in Risk, Compliance and Regtech. He is a Member of the B20 International Business Leaders’ Group and its Climate and Resource Efficiency Task Force. He currently serves as Strategic Advisor on Corporate Responsibility and Sustainability, and Senior Associate at the law firm Frank Bold LLC.
For some amongst activists and commentators, the concept of the 'business case' for responsible business conduct is seen as being diametrically opposed to what is trying to be achieved.
If corporate action is only ever motivated by the promise of (albeit long-term) returns, is the argument that companies will always prioritize shareholder interests over stakeholder interests--and ultimately ignore the fundamental question of right or wrong?
This is a perfectly proper challenge, but one which itself ignores the opposite proposition.
If the prospect of more reliable supply chains, better reputation and greater resilience for the company are incentives to influence business practices in favor of human rights, surely there is no disgrace in harnessing this as a powerful lever for change?
Moreover, although there is substantial literature on the business case for corporate responsibility, very little is written on how this can be expressed specifically in relation to business and human rights.
With new European rules on corporate human rights ‘due diligence’ and this year's National Action Plan on Business and Human Rights published by the U.S. Government, this is an important moment in which to address this question.
FINANCIAL RISK
Why can respect for human rights be considered as not just ‘doing good’, but ‘good for business?
Although due diligence requires business to consider risks to people not just risks to the company, there is ample evidence that human rights risk is also a direct financial risk to business.
"Cracking the ESG Code", a report from one of Northern Europe's biggest investor and banking groups, Nordea, clearly shows that an ESG (environmental, social, governance) approach mitigates financial risk. Over 200 studies show that higher ESG performing companies outperform their competitors by as much as 40 per cent in financial results.
MSCI research shows that higher scoring ESG companies get more than a 10 per cent reduction on their cost of capital; research for McKinsey shows almost exactly the same.
Note that it was the U.S. Department of the Treasury and Finance Ministries of Governments worldwide, who endorsed the framework of the Task Force for climate-related financial disclosure, and which has endorsed the creation of the International Sustainability Standards Board--two landmarks as the world transitions towards sustainable finance. It is the U.S. Federal Reserve which is part of the network of central banks internationally, who are explicitly collaborating to green the financial system.
For all the political controversy around the requirements for corporate climate disclosure from the U.S. Securities and Exchange Commission, the principal justification remains one of more efficient and effective capital markets.
If the world's biggest financial actors consider this to be a financial issue, it is difficult for companies to argue otherwise.
SCREENING
Meanwhile ESG screening has rapidly become the norm within the mainstream investment industry and is simply being considered in exactly the same terms as any other risk - or opportunity - for the business.
This applies not simply to environmental sustainability, but directly to respect for human rights.
The Investor Alliance for Human Rights representing 176 investors and over $4.5 trillion in assets under management, directly warned companies about under-performance on human rights.
The Corporate Human Rights Benchmark was developed to enable investors and others to compare the human rights performance of business, has seen two-in-three of benchmarked companies in high-risk sectors achieving improvement on key human rights indicators.
For business in all sectors, discussion on human rights is rapidly becoming a regular part of engagement with investors and intrinsic to company finance.
At a company level, the business case is that this means better risk management, improved customer and employee loyalty and - critically - a lower cost and easier access to capital.
This is the realm of ‘opportunity’ and not just ‘threat’.
ACTUAL EXAMPLES
All fine in theory, but which are some actual company examples, where this can be said to be true?
The classic example is Nike, which proved that it is possible to admit and be seen to act on labor abuses, but at the same time to win public trust and strengthen market share.
Cosmetics company Revlon, which was always certain its products were safe, nevertheless faced questions about chemicals linked to cancer by the Breast Cancer Fund in the U.S Instead of just rebutting the argument, the company chose to engage with it, decided to make some small and cost-neutral changes to their ingredients. This led to the major health NGO - instead of accusing them - saying "they're definitely a leader."
After Asia Pulp and Paper was criticized for pulping natural forests and destroying forest communities in Indonesia, they changed their policy to one of protection, indeed to restoration of ecosystems. Today, the company is credited for starting what is now a sector-wide initiative by paper companies to act against deforestation.
Or Hewlett Packard, one of the first companies in the electronics industry to take human rights due diligence seriously, when it undertook its own research on forced labor in its supply chain from Asian factories. The company is now acknowledged as industry leader in restricting outsourcing to third party contractors, in global efforts to drive out the abuses.
One further example is the bank ABN AMRO, which stopped lending money to private security contractors operating in high-risk countries, unless they were fully signed up to the applicable International Code of Conduct Association standards. The bank has seen itself scored highly by sustainability indices and ratings agencies, as a result.
EXPOSURE
Moreover, there is widespread evidence that companies who adopt human rights policies and practices, do not fear exposure.
Complaints made to the leading global platform which records claims of corporate violations, the Business and Human Rights Resource Centre, received an 88 per cent positive response rate, from companies who are members of the UN Global Compact.
The Global Compact principles mean that these companies better understand human rights and do not shy away from difficult questions about their record.
Each of the companies named here has been prepared to be honest about where they were getting it wrong and responsive in being prepared to change.
All of these companies found that they won business benefits by doing so and are now regarded as leaders in the field.
When you start to address victims who are real people in real life situations, it is of course uncomfortable.
But as this becomes the norm, it can be viewed just as much everyday business as sales or cost control. Indeed, why shouldn’t we want to control human costs as any other cost of the business?
Indeed, active human rights due diligence is rapidly becoming the requisite for future business.
U.S. ACTION
The new National Action Plan (NAP) is a clear signpost that this is happening for U.S. business.
The NAP makes clear that human rights obligations are aimed at all sizes of company, must be embedded into risk management systems, part of actual decision-making and be supported from the highest levels of the business.
Companies are expected to have metrics to assess and address human rights risks--a grievance mechanism as part of the aim of improving access to remedy. There is a strengthening of the rules to prohibit companies from importing goods with forced labor from being able to apply for public contracts,
The NAP includes a commitment to reform the National Contact Point under the OECD Guidelines. This is key for addressing individual complaints. It establishes, for the first time a Responsible Business Conduct advisory committee for the U.S. Government.
Reporting requirements on responsible business conduct are only to be subject to a study by the State Department but, overall, Oxfam America has called the new National Action Plan a "huge improvement".
Meanwhile, new European rules for companies to undertake human rights as well as environmental due diligence on their supply chains, are due to be applied to global companies who have a substantial presence in Europe.
The rules involve companies identifying, mitigating and preventing specific human rights violations.
Although estimates of numbers of companies affected will depend on details as the rules are progressively introduced in the second half of this decade, it is believed that more than 1,000 non-EU companies will be covered, including perhaps 800 from the United States.
In any case, there is no doubt that big name U.S. companies including Google, McDonald’s, Amazon and Apple, will all be required to comply with the European regulation.
It is the 'stick' not the 'carrot', but companies understand the consequences of non-compliance on their financial 'bottom line'.
The expectation for action on business and human rights is now, more than ever.
CLOSER TO HOME
The economic case for companies to take this action has therefore stood up and shown itself unable to be knocked down.
However, for those who find this argument distasteful, it does not take the morality out of business decision-making.
Neither does it just have to be about the most egregious violations of human rights on the scale of slavery, child exploitation, torture or - most of all - inflicting loss of life.
It is also in companies being willing to address the distinct challenges which come closer to home, including discrimination or minimum social standards for their domestic workforce and contractors.
Companies cannot afford to ignore the consequences in terms of employee productivity, loyalty and engagement.
Whichever are the questions with which the company is wrestling, ultimately it remains about choosing between right and wrong.