Description
In June 2011, John Ruggie, United Nations Special Representative on Business and Human Rights, presented to the UN Human Rights Council his Guiding Principles on Business and Human Rights: Implementing the United Nations "Protect, Respect and Remedy" Framework, the result of his six-year study on business and human rights. Building on his "Protect, Respect and Remedy" Framework, released in 2008, the Principles outline the state's duty to protect human rights, the corporation's responsibility to respect human rights, and the need for access to remedy.
Rai si ng the Bar on Human Ri ghts
Da a n Sc ho e mak e r
Augus t 2 01 1
What the Ruggi e Pri nci pl es Mean for Responsibl e Investors
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 2
Tabl e of Contents
Executive Summary .............................................................. 3
Introduction ........................................................................ 5
1. Background on the Work of John Ruggie ............................. 5
2. The Guiding Principles ...................................................... 6
2.1 States and Human Rights: The State’s Duty to Protect .............................. 7
2.2 Business and Human Rights: The Corporate Responsibility to Respect ...... 7
2.3 The Right to Remedy .............................................................................. 9
3. Human Rights and Business Risk ........................................ 9
4. The Impact of Ruggie: Additional Risks for Investors .......... 11
5. Opportunites: A Framework for Antcipatng & Managing Risk ....14
5.1 Anticipating and Managing Human Rights Risks ..................................... 14
5.2 Ruggie-Based Portfolio Assessment: Incorporating Human Rights into
Decision Making .................................................................................. 18
5.3 Active Ownership: Engagement on Human Rights .................................. 19
6. Looking Forward: Ruggie in the Years to Come .................. 21
About the Author ............................................................... 22
About Sustainalytics ........................................................... 22
Endnotes ........................................................................... 23
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 3
Raising the Bar on Human Rights
EXECUTIVE SUMMARY
In June 2011, John Ruggie, United Nations Special Representative on Business and
Human Rights, presented to the UN Human Rights Council his Guiding Principles
on Business and Human Rights: Implementing the United Nations “Protect,
Respect and Remedy” Framework,
1
the result of his six-year study on business
and human rights. Building on his “Protect, Respect and Remedy” Framework,
released in 2008, the Principles outline the state’s duty to protect human rights,
the corporation’s responsibility to respect human rights, and the need for access
to remedy. On June 16, in an unprecedented step, the UN Human Rights Council
unanimously endorsed the Principles.
Investors stand to benefit from the Principles, which can be used to support
the implementation of responsible investment (RI) strategies, including active
ownership and various forms of ESG integration. More specifically:
They provide a robust, authoritative framework upon which
to build RI investment policies and due diligence management
systems that address human rights;
They provide a framework for assessing the human rights policies,
management systems and performance of individual companies
in an investment universe;
They provide practical guidance for active ownership, through
engagement and proxy voting, on human rights issues.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 4
The Principles can serve as a tool for risk management, providing an early-warning
system to assess high-risk companies or operations, and as an approach to dealing
with human rights dilemmas when they emerge. Implementing Ruggie’s Principles
can therefore help to prevent or mitigate the operational, legal, and reputational
risks that institutional investors may face due to human rights issues.
The Framework and the Principles have provided much needed clarity regarding
the respective roles of the state and business in protecting and respecting human
rights. Ruggie’s work illustrates the inconsistencies that exists in many countries
between human rights policies and policies that directly govern business
practices, resulting in an accountability gap. The Principles call on states to fill
that gap.
With respect to business, the Principles counter the traditional view of many
in the corporate world that human rights are a concern of the state and not
of business. They suggest a new level of responsibility for companies and they
emphasize a pro-active due diligence approach that puts the onus on companies
to adopt policies and implement management systems that will enable the
effective management of human rights issues. A great benefit of the Principles is
that they provide practical recommendations as to how companies and investors
can do so.
Any new regulations emerging in response to Ruggie’s call might be construed by
some businesses as a new source of compliance costs as well as risk. However,
in Sustainalytics’ view, the effect of regulations in line with the Principles will
be to reduce risk. It is in every company’s interest to protect human rights and
to effectively manage human rights risk, and sound national-level policies and
regulations will assist companies in doing so. As Ruggie notes, the Principles are
“an inter-related and dynamic system of preventative and remedial measures”;
they have the potential to mutually reinforce the human rights-related initiatives
of both states and corporations in a manner that is advantageous to all.
It is critical to note that, like any set of principles, Ruggie’s work will be effective
in practice only to the degree that the key actors – states and businesses –
implement the principles. As concerned non-governmental organizations (NGOs)
rightly point out, the Principles are of a voluntary nature with no enforcement
mechanisms ensuring their implementation. Companies should therefore be
encouraged to strengthen their own policies and management systems and not
to wait for states to implement stronger policies and regulations. Investors have
a critical role to play in encouraging companies to do so.
Effective implementation of the Guiding Principles is a learning exercise. There
will surely be many human rights dilemmas to be solved, requiring further
elaboration and fine tuning of the Principles. Nonetheless, the bottom line is
that these Principles, and their acceptance by the UN Human Rights Council and
other international agencies, are good news for business and for investors. They
should be commended for bringing about greater conceptual clarity and practical
guidance, and for highlighting that both states and business must play their own
part in achieving a common goal. By raising the bar on all fronts, the Principles
will help both companies and investors to mitigate risk and, most importantly, to
contribute to the protection and advancement of human rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 5
Introducti on
John Ruggie’s Guiding Principles on Business and Human Rights represent
a significant step forward in the way in which many decision-makers in
government, business and elsewhere think about business and human rights.
They also present an opportunity for companies and investors to enhance their
management of human rights risks.
In this paper Sustainalytics outlines Ruggie’s Guiding Principles and presents a
set of recommendations for institutional investors, based on the Principles, that
will help establish or enhance the implementation of responsible investment
(RI) policies and strategies, from the integration of environmental, social and
governance (ESG) issues to active ownership.
Specifically, this paper will:
Provide a brief overview of the Principles;
Detail the risks that companies and their investors face with
respect to human rights issues;
Provide an analysis of how such risks may be impacted by Ruggie’s
framework;
Describe how to anticipate these risks and the potential
opportunities and benefits the Principles offer to institutional
investors;
Lastly, it will look at the future impact of the Principles.
1. Background on the Work of John Ruggi e
Many companies have traditionally argued that human rights are the purview
of the state. Various initiatives in the last decade have sought to change this
view. In 2003, the United Nations Sub-Commission on the Promotion and
Protection of Human Rights adopted the Draft Norms on Business and Human
Rights, a treaty-like document outlining the duties that companies have with
regard to human rights. The initiative faced strong opposition from the business
community, which felt that businesses could not be burdened with what they
believed to be an obligation of the state: protecting human rights. State support
for the initiative also dwindled. It seemed that the Norms were ahead of their
time, attempting to take a quantum leap where small steps might have been
more successful.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 6
UN Special Rapporteur John Ruggie was appointed to take such steps. In a report
released in 2008, Ruggie outlined his well known “Protect, Respect and Remedy”
Framework. Based on three years of extensive consultations, the framework
clarified the responsibilities that states and businesses have with regard to
human and labour rights and argued for the need for access to remedy. Ruggie
later produced the Guiding Principles, which specify what the implementation of
the framework means in practice.
In June 2011 the UN Human Rights Council, in an unprecedented move,
unanimously adopted the Guiding Principles. It was decided that these Principles
should serve as the framework for further policy development and standard-
setting on businesses and human rights. A new UN Working Group will be
established and will work toward the further implementation of the Principles.
Ruggie’s work has become the main international authority on the topic of
business and human rights. In addition to being adopted by the Human Rights
Council, the Framework and the Principles have been drawn upon or incorporated
into the principles, guidelines and/or regulations of numerous governments,
international organizations, business associations, as well as civil society, labour
organizations, human rights, and investor organizations. For example:
In May 2011, the Organization for Economic Cooperation’s
Guidelines for Multinational Enterprises were revised to
incorporate the Ruggie Principles;
2
A current review of International Finance Corporation (IFC)
Performance Standards on Social and Environmental Sustainability
aims to strengthen the Standards’ approach to human rights
based on the Ruggie Framework;
3
In November 2010, the International Standards Association
released its ISO 26000 standard on corporate social responsibility,
which contains a human rights section that clearly reflects the
Ruggie framework.
4
2. The Gui di ng Pri nci pl es
The Guiding Principles are grouped according to the three pillars of Ruggie’s
“Protect, Respect and Remedy” Framework:
1) The state’s duty to protect human rights;
2) The corporate responsibility to respect human rights; and
3) Access to remedy.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 7
2.1 STATES AND HUMAN RIGHTS: THE STATE’S DUTY TO PROTECT
The first section of the framework outlines the duty of states, which are bound
to protect human rights in accordance with any treaties or conventions of
which they are signatories.
5
This duty includes the protection of citizens from
human rights violations committed by non-state actors, including businesses. In
defining the duty of states, this section of the Principles provides institutional
investors with general and conceptual clarity on the human rights responsibilities
of businesses. It also defines where this responsibility ends, which allows
an institutional investor to respond to stakeholder demands related to
responsibilities that fall clearly in the domain of the state. However, as Ruggie
acknowledges, there is a gap between what can be expected from the state and
current prevailing practice. He exposes serious weaknesses in states’ human
rights protection mechanisms, including their unwillingness or inability to hold
companies to account when they become linked to human rights violations. For
example, in most nations there is a striking inconsistencies between government
human rights policies and policies that directly govern business practices. The
resulting accountability gap contributes to the possibility of human rights
violations. To address this gap, in Ruggie’s view, states need to explicitly broaden
human rights protection policies and legislation to include violations resulting
from business activities. Such changes would have implications for businesses
and for investors, as discussed in Section 4 below.
2.2 BUSINESS AND HUMAN RIGHTS: THE CORPORATE RESPONSIBILITY
TO RESPECT
The second pillar of the Ruggie Framework defines the relationship between
business and human rights. Ruggie uses the term “responsibility,” rather than
“obligation,” when referring to a business’ role in protecting human rights, as
international human rights law currently does not impose obligations directly
on companies. The principles in this section of the Framework will, to the extent
that they are taken up by business, bring about a major step forward in how the
relationship between business and human rights is generally viewed.
Ruggie provides several strong moral, legal and business-related arguments as
to why businesses should be concerned about human rights. He also discusses
specific human rights-related risks, and presents two primary means of mitigating
these risks: legal compliance and a due diligence approach.
LEGAL COMPLIANCE
When it comes to ethical matters, a company’s first reference point is usually
the law. The identification of these human rights-related laws, ranging from
labour laws to laws dealing with indigenous communities, should be a standard
exercise in compliance-related risk management. Yet in many countries, the
absence of strong laws, or the lack of enforcement of existing laws, creates a
legal grey area with little guidance. Companies should therefore adopt a due
diligence approach.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 8
DUE DILIGENCE
A due diligence approach aims to understand and manage human rights exposure
and mitigate any potential human rights impacts. Such an approach is proactive
at all levels and ensures that the company is aware of and able to respond to any
human rights risks associated with its operations. Proper due diligence includes
human rights risk assessments, the establishment of mechanisms to address
risks, ongoing monitoring, and transparency. As will be discussed further in
Section 5 below, Sustainalytics finds this to be the core element of the Ruggie
Framework that has the most relevance and provides the greatest benefit to
investors.
Due Di l i gence i n t he Tel ecommuni cat i ons Sector
In recent years, a number of telecommunications and Internet companies have faced major exposure to
human rights issues and, in some cases, allegations of complicity in human rights violations. Examples
include Yahoo in China, Alcatel-Lucent in Burma and, more recently, Vodafone in Egypt. Often the allegations
relate to demands for restrictions on freedom of expression, especially during times of civil unrest or strife.
In February, Vodafone came under fire for abiding by Egyptian demands to shut down mobile services and send
out pro-government text messages to its clients with the aim of curbing anti-government demonstrations.
6
Vodafone clearly chose to support a government that was under fire for its shady track record on human
rights and corruption. The company responded by stating that, legally, it had to abide by the government’s
requests stemming from Egypt’s emergency laws. Ruggie’s Guiding Principles suggest that this perspective
should not be taken for granted. A due diligence approach in such a scenario could have entailed a range of
preventive and responsive steps, such as:
Implementing a human rights policy that referred specifically to the risk of restrictions on freedom of
expression.
Undertaking human rights risk assessments that would have led to a list of countries with a poor track
record. This likely would have included Egypt.
Joining a multi-stakeholder initiative on human rights-related issues, such as the Global Network
Initiative
(http://globalnetworkinitiative.org), which provides guidance on how to respond to such state
demands.
Asking that state authorities provide a written request, including legal arguments, in relation to the
above-mentioned text messages or other state demands. This would have allowed the company to
similarly obtain legal advice from respected UN bodies.
Having certain contractual obligations in place dealing with the risk of restrictions on freedom of
expression.
Although Vodafone has a brief, general human rights policy statement in place, there is no evidence that it
has taken any of the due diligence steps above. Had it done so, the company would have been significantly
better positioned to respond to the Egyptian government’s request.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 9
2.3 THE RIGHT TO REMEDY
Ruggie’s third pillar addresses remedy mechanisms that can be established by a
state or by a company. At the company level, remedy mechanisms may address the
violation of employee rights, or communities affected by a company’s operations.
Effective remedy mechanisms play an important role in risk management. By
addressing any concerns and grievances at an early stage, remedy mechanisms
may prevent lengthy court cases or media exposure. The relative importance for
each company of such mechanisms varies depending on the industry, location,
and other specific characteristics that influence its human rights exposure.
For example, remedy mechanisms are far more important for a global mining
company than for an IT company operating in Europe. The relevance of such
mechanisms to investors is described in Section 5 below.
3. Human Rights and Business Risk
Human rights create considerable and increasing risks to companies and their
shareholders. From a company and investor perspective, a primary reason for
attending to human rights issues is to manage exposure to such risks. Before
discussing the importance of Ruggie’s Guiding Principles to the management of
these risks, it is useful to provide an overview, based on Sustainalytics’ analysis,
of what these risks entail. Key areas of risk include operational and physical
risks, regulatory risks and reputational risks.
OPERATIONAL AND PHYSICAL RISKS
Human rights issues can generate numerous operational and physical risks
for businesses, including project delays or cancellation caused by the denial
or withdrawal of necessary operating permits; the loss of a social licence to
operate; problematic relations with local labour markets; higher insurance,
financing or security costs; lower production outputs; costs associated with
challenging community consultation processes; damage to property; or costly
lawsuits initiated by impacted stakeholders and others. All of these risks can
have a material impact on financial outcomes for investors.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 10
There are numerous examples of how human rights issues can generate operational risk:
In June 2011, in an effort to halt weeks of unrest and violence caused by community opposition, the Peruvian
government revoked the license of Canadian mining company Bear Creek Mining to develop a mining project
in Southern Peru. The violence had resulted in five deaths and more than 30 injuries. The company will be
able to proceed only after obtaining approval from local indigenous people. It has threatened to sue the
Peruvian government over the loss of its license.
7
Southern Copper Corporation, a U.S.-listed mining company operating in Mexico, has a history of conflicts
with trade unions over labour rights and safety-related concerns. Between 2006 and the end of 2010, the
company experienced a lengthy closure of its mining operation, lengthy court cases and damage to company
property caused by striking workers.
8
In 2010 a group of responsible investors engaged with Talisman Energy on the subject of indigenous people
and the concept of Free, Prior and Informed Consent (FPIC). In part as a result of this engagement the
company commissioned an independent report on the feasibility of a strong policy on indigenous people.
The report concluded that being the first company to adopt an FPIC policy would give Talisman a competitive
advantage. Talisman’s adoption of such a policy was widely applauded by investors.
9
Human Ri ght s and Operat i onal Ri sk
i n t he Ext ract i ve I ndust r i es
LEGAL AND REGULATORY RISKS
International human rights treaties may be translated into domestic legislation,
where they may have a direct impact on companies. For example national
legislation on the protection of labour rights, such as anti-discrimination
legislation, or laws upholding freedom of association, is largely based on the
work of the International Labour Organization (ILO). Some states may also require
that a company obtain the consent of indigenous people before proceeding with
a project that will affect them. The violation of such laws may lead to costly fines
or lawsuits that could negatively affect a company’s bottom line, especially if
these incidents are recurrent. The stakes are raised when there is clear evidence
of a company’s direct complicity in human rights violations. In October 2009
the UK High Court froze £5 million of the assets of Monterrico, a subsidiary of
Zijing Mining, setting aside what Monterrico may have to pay in legal costs and
damages if it loses a lawsuit related to human rights violations at its mining
operation in Peru.
10
As described in Section 4 below, the potential increase in regulatory risks and
compliance costs faced by investors depends on the extent to which states take
up Ruggie’s call to make legislative changes in line with the Guiding Principles.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 11
REPUTATIONAL RISKS
Reputational risks may accompany all of the risks described above. Allegations of
complicity in human rights violations often result in negative publicity, campaigns
by NGOs and other initiatives that may damage a company’s brand. In recent
years some NGOs and even some media sources have shifted their focus from
companies facing allegations of complicity to major investors in such companies.
Institutional investors in numerous countries have been exposed to strong
media criticism, shareholder action and, in some cases, even street protests
over their financing of companies involved in controversial operations such as
the construction of settlements in the Palestinian territories or the sourcing
of minerals from conflict zones in Africa. Negative reactions may result merely
from perceived or alleged human rights violations, regardless of whether or not
the allegations are well grounded. As Ruggie’s work gains broader acceptance
and momentum, it is likely that NGOs will leverage the Principles to put more
pressure on companies, appealing to them as an authoritative framework and
benchmark.
Ruggie recommends that states adopt new policies and regulations governing
human rights, including laws that allow them to hold companies accountable in
cases of negative human rights impacts. What might this mean for companies
and investors?
A number of states have already passed legislation or regulations consistent
with Ruggie’s recommendations, including the integration of human rights
considerations into export credit agency policies, procurement policies or
bilateral investment treaties. Export Development Canada, for example, has
made strong statements in support of Ruggie’s work and reports that it aims
to integrate the Principles into its policies.
11
Elsewhere, such as in the UK,
governments are assessing the areas in which new legislative changes are
needed.
12
4. The Impact of Ruggie: Additional Risks for Investors?
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 12
Sustainalytics has identified the following areas in which possible regulatory
changes will have the greatest effect on companies and investors:
Criminal accountability: This area relates to the risk of complicity
in human rights violations committed by other actors. If a company
is alleged to have contributed to, exacerbated or facilitated some of
the most serious human rights violations, such as torture, war crimes,
or crimes against humanity, it (or its employees) may be liable under
national criminal laws. Such instances are more likely to occur in high-
risk countries already known for their serious human rights violations,
such as Sudan, Burma, Iran or countries experiencing internal conflicts.
This risk may increase due to Ruggie’s call for the adoption of extra-
territorial jurisdiction, which enables a state to exercise jurisdiction
over human rights abuses, including business-related abuses that occur
outside its own territory. Such laws broaden the scope and possibility of
corporate liability. For example, Chiquita Brands is now embroiled in a
lengthy court case for allegedly violating U.S.-based extra-territorial laws
by contributing to human rights violations in Colombia.
13
This legislative
development may result in more high-profile lawsuits against companies,
some of which may lead to costly and lengthy trials or possibly even
the imprisonment of company staff. Although these lawsuits are most
likely to be directed at the companies directly operating in human rights
sensitive regions, they may eventually turn their focus to institutional
investors as well.
New national laws: Ruggie recommends that states broaden their
human rights protection by adopting new policies, laws or regulations
to protect people against abuses from non-state actors including
businesses. In doing so they should adopt stricter laws on issues such
as child labour, indigenous peoples’ rights or other human rights issues.
Companies need to be aware of these laws in order to avoid fines, legal
repercussions or the withdrawal of operating permits. In June 2010, an
amendment to the U.S. Dodd–Frank Consumer Protection Act requires
companies that utilize “conflict minerals” to conduct due diligence and
provide evidence that their products are not contributing to conflict in
the Democratic Republic of the Congo. Companies must disclose their
due diligence efforts in sourcing these minerals to the Securities and
Exchange Commission on an annual basis and may risk breaching the
law if they cannot provide sufficient evidence. Yet another amendment
to the act requires companies in the extractive industries to report
their payments to foreign governments, a practice that is important
to human rights protection in the case of countries with poor human
rights records. The aim of this amendment is to identify, and ultimately
minimize, the human rights and corruption related impacts of certain
business activities in controversial countries.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 13
States may also adopt specific legislation aimed at preventing certain
controversial products from entering their markets. The EU is currently
debating new legislation that would forbid member states from importing
goods produced by child labour. This legislation may particularly (although
indirectly) impact investors who continue to invest in companies found to
be in breach of this legislation or whose market access is blocked. In recent
years a number of countries have adopted legislation directly aimed at
investors. For instance, Belgium, New Zealand, Luxembourg and Ireland
have all adopted laws that prohibit institutional investors from investing
in cluster munitions. States may adopt similar legislation in other human
rights-related areas although this process is likely to be limited to certain
key issues and will require considerable national debate first.
The establishment of remedy and complaint mechanisms: By law,
state-level grievance mechanisms may be established for individuals
or communities whose human rights have been impacted by business
activities. Through such mechanisms the victims of human rights
violations are able to file a complaint against a company. An example may
be complaint mechanisms within national human rights institutions or
an ombudsman. This is still relatively new territory and although it may
lead to complaints directed at financial institutions, it is not expected
that institutional investors will experience significant impacts once these
mechanisms are adopted.
Beyond legal implications, as mentioned above, the Ruggie Principles have already
found their way into non-binding guidelines and standards such as the OECD
Guidelines for Multinational Enterprises, the IFC’s Performance Standards and
ISO 26000. Each of these initiatives may affect institutional investors, although
probably to a limited degree. For example new human rights requirements in
the OECD Guidelines for Multinational Enterprises provide new avenues for
complaints. In the past, financial institutions have been exposed to OECD
complaints and, although of a non-binding nature, these complaints can create
reputational risks to investors.
14
To conclude, the Ruggie Guiding Principles strongly call for new national policies
and regulations some of which, once adopted, will lead to increasing (criminal)
accountability of companies. These developments will be rather ad-hoc, strongly
dependent on political will, and are likely to occur over a longer period of
time. Nonetheless, such new regulations are likely to entail new human rights
obligations for companies. For companies that do not manage human rights issues
adequately, this may result in additional lawsuits, fines or other human rights-
related risks. The institutional investors that manage human rights issues well will
be best positioned to adapt to any legal changes resulting from Ruggie’s work.
“
“
The i nst i t ut i onal i nvest or s t hat manage human r i ght s
i ssues wel l wi l l be best posi t i one d t o adapt t o any l e gal
changes r esul t i ng f r om Ruggi e’s wor k.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 14
5. Opportunities: A Framework for Anticipating &
Managing Risks
Due to the likelihood of new government regulations, Ruggie’s work can be
viewed, as described above, as a new source of regulatory risk for companies
and, more indirectly, for investors. However, in Sustainalytics’ view, by clarifying
the respective responsibility of states and corporations, and by providing
practical guidance aimed at understanding and mitigating human rights-related
risk, the Principles, when implemented, will have the effect of reducing risk.
Thus they offer an opportunity to all companies, and their investors, to manage
risk more effectively.
In Sustainalytics’ view, the Guiding Principles offer three major benefits to investors:
The manner in which responsible investors can put the Guiding Principles into
practice is outlined below.
5.1 ANTICIPATING AND MANAGING HUMAN RIGHTS RISKS
The primary benefit of Ruggie’s Guiding Principles to both companies and
institutional investors, in Sustainalytics’ opinion, is its recommendations
regarding human rights policies and due diligence management systems.
The Principles are applicable to all types of companies and investors.
However, as Figures 1 and 2 illustrate, companies in certain industries
could do more to adopt the Principles and implement human right policies.
Below is Sustainalytics’ view of how the Principles can be implemented by
institutional investors.
They provide a robust, authoritative framework upon which
to build RI investment policies and due diligence management
systems that address human rights;
They provide a framework for assessing the human rights policies,
management systems and performance of individual companies
in an investment universe;
They provide practical guidance for active ownership, through
engagement and proxy voting, on human rights issues.
Human Ri ghts Pol i cy
No or Li mi ted
Human Ri ghts Pol i cy
MSCI Developed Market
Oil Companies
21%
Human Ri ghts Pol i cy
No or Li mi ted
Human Ri ghts Pol i cy
MSCI Developed Market
Mining Companies
23% Figure 1
Figure 2
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 15
ADOPT A POLICY ON HUMAN RIGHTS (PRINCIPLE 16)
The starting point for the management of human rights issues is the creation
of a policy. The Guiding Principles provide general recommendations that may
form the basis of either a brief policy statement or a detailed policy that can be
used to integrate human rights considerations into elements of an RI strategy
ranging from ESG integration to active ownership. Sustainalytics considers
the following policy elements, which are in line with Guiding Principles, to be
important to a best practice human rights policy for institutional investors and
financial institutions:
Reference to international human rights standards such
as the nine core human rights treaties as well as relevant
labour standards.
15, 16
The integration of human rights considerations into all
financial activities ranging from investments, loans and
fixed income to project finance activities.
References to stakeholders, including an institutional
investor’s own employees, customers, affected
communities, and others.
Reference to specific human rights themes that are
frequently known to have an impact on companies and
investors, such as the rights of indigenous peoples, labour
rights or the right to freedom of expression.
A commitment to establish formal mechanisms for dialogue
with all relevant stakeholders, including civil society and
governmental bodies, on human rights matters.
Commitment to a full due diligence process including risk
assessments, transparency, the adoption of implementation
programs and mechanisms, and monitoring and reporting
(as outlined below).
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 16
Human Ri ght s Pol i ci es at Fi nanci al I nst i t ut i ons
A growing number of financial institutions are creating policies that explicitly address human rights concerns.
Examples include:
Barclays Group has adopted an extensive policy statement on human rights that includes references
to the Ruggie Framework. Barclays’ policy affirms the need to ensure that human rights impact
assessments are taking place for all of its activities. It also commits to a structural dialogue
regarding human rights with concerned stakeholders. Of particular interest is the fact that the Bank
acknowledges the different human rights impacts that may accompany various financial services
ranging from project finance to providing loans to states, and it highlights the need for identifying
these risks. The Bank also explicitly applies its human rights requirements to its subsidiaries.
ASN Bank adopted a detailed human rights policy that explicitly addresses specific human rights
themes, including labour rights and security issues. In its policy ASN has defined a separate category
for what it calls the most serious human rights violations, which include genocide, torture, crimes
against humanity and war crimes. This distinction, which is based on international law, allows the
bank to separate more common and lower-risk human rights controversies from major ones. With
regard to legal compliance, particularly noteworthy is ASN’s statement that “if there is conflict
between standards (national vs. international), the bank applies the standard that gives the most
protection to the individual.” This implies that ASN Bank is not merely using domestic law as its
reference point for assessing human rights matters, especially when these laws fail to offer sufficient
human rights protection.
IMPLEMENTING DUE DILIGENCE
The principle of due diligence is at the heart of Ruggie’s recommended approach
to managing exposure to human rights issues, and it underlies a number of
the specific Guiding Principles for corporations. The following due diligence
principles are of particular importance to institutional investors:
ENSURE HUMAN RIGHTS RISK IDENTIFICATION AND ASSESSMENT (PRINCIPLES 17, 18)
The human rights exposure of financial institutions and institutional investors is
largely through lending and investment activities. The nature and degree of the
exposure varies significantly depending on the nature of the financing activity.
For example, project finance activities may generate human rights risks related to
the impacts of a project on local communities, while investors with involvement
in the extractive industries in countries such as the Democratic Republic of the
Congo or Burma may face allegations of complicity in human rights abuses that
may end up being debated at their AGMs. Companies from the IT sector that
have not been associated with human rights violations may suddenly face new
risk when operating in countries known for severe restrictions on freedom of
expression, such as China, Iran or North Korea.
Responsible investors should have a clear process to identify, assess and monitor
all human rights-related risks for all of their lending and investment activities.
To realize this investors should ensure that there is a human rights mandate
and expertise within internal risk management bodies. One method of risk
assessment entails regular and systematic portfolio analysis using human rights
criteria that aim to identify the most high-risk companies.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 17
I dent i f yi ng and Assessi ng Human Ri ght s- rel ated Ri sk
PGGM Vermogensbeheer, an investment manager in the Netherlands, has established a high-level ESG expert group
that includes human right experts from inside and outside the company and that functions as an independent
advisory group on human rights-related dilemmas. They identify potential risks related to certain human rights
themes, or companies that are under scrutiny. They also advise PGGM on sensitive decisions related to companies
under assessment for human rights issues.
ENSURE THAT MECHANISMS ARE IN PLACE TO INTEGRATE AND RESPOND TO HUMAN
RIGHTS IMPACTS (GUIDING PRINCIPLE 19)
Investors need to ensure that information on human rights impacts is integrated
into relevant internal functions and processes in order to ensure appropriate
action in the management and mitigation of any human rights issues that have
been identified. In other words, they need to ensure that their human rights policy
commitments are embedded in the processes of all relevant business functions.
For responsible investors, this implies the application of different responsible
investment instruments ranging from investment decision-making to engagement
and/or exclusion. Ensuring appropriate action generally requires support from,
and the oversight of, high-level management and the board. The strategies for
addressing these human right concerns should also be included in policy budgets.
Another ingredient in the management and mitigation of human rights issues may
be to establish a formal dialogue program with concerned stakeholders such as NGOs
and community representatives to discuss specific human rights impacts.
MONITORING AND TRACKING (GUIDING PRINCIPLE 20)
Monitoring and tracking is used to ensure that human rights policies and programs
are effective. They are also used to measure progress that institutional investors can
report to the public. Monitoring should be structured and conducted by assigned
company staff or by an independent third-party auditor. Although it is not easy to
study the effects of a human rights policy, stakeholder dialogue is an effective way to
gather anecdotal evidence. One means of monitoring the effects of a human rights
policy is to conduct regular portfolio assessments to determine the number and
nature of controversial companies within the investment portfolio over time. This
allows the investor to see if its overall RI policies, ranging from ESG integration to
engagement activities, have proven to be effective in mitigating risk.
REPORTING (GUIDING PRINCIPLE 21)
Currently, human rights issues are underrepresented in corporate social responsibility
(CSR) reports compared to environmental or governance issues. Nonetheless,
companies, including many financial institutions and institutional investors, have
significantly increased their public disclosure on human rights issues along with other
ESG-related matters over time. Annual and CSR reports may include a description of
both the human rights risks as well as the relevant steps the company has taken to
address them. As a best practice, investors could also report on challenges that arise
during the implementation of their human rights policies. Such disclosure may create
some vulnerability, but it demonstrates sincerity and honesty in a company’s due
diligence approach. Investors may also consider publishing ESG-related allegations
from concerned stakeholders, such as NGOs, on their own websites, accompanied by
a company response to the allegations.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 18
Repor t i ng on Human Ri ght s Pol i cy I mpl ementat i on
The Government Pension Fund of Norway discloses information on all of the companies that are excluded from
the fund’s portfolio based on human rights criteria. It provides a detailed public document that outlines the
concerns that the Fund has with specific companies, along with engagement results, and links these to the
Fund’s exclusionary criteria. This disclosure enables concerned stakeholders to understand, and respond to, the
decisions of the pension fund. This best practice is accompanied by a certain level of vulnerability: new questions
from stakeholders, such as questions regarding similar companies that have not been excluded, may arise.
ACCESS TO REMEDY
The third pillar of Ruggie’s framework is ensuring access to grievance mechanisms
that will allow victims of human rights violations to make complaints and seek
remedies. This section of Ruggie’s Guiding Principles is of most relevance to
states and to companies directly associated with human rights violations.
Ruggie asserts that companies, or coalitions of companies, can work together
within a sensitive human rights context and should strive to adopt grievance
mechanisms. Such mechanisms can provide a channel through which affected
stakeholders can voice concerns at an early stage and help to mitigate risk for
companies. These Guiding Principles are of less relevance to investors. Although
a financial institution may certainly ensure that its internal complaint and/or
whistleblower mechanisms are a channel to address certain types of human
rights concerns, institutional investors are not likely to be confronted with the
responsibility to provide remedies to the victims of human rights violations.
The Guiding Principles in this section are, however, of use to investors from an
engagement perspective, as discussed below.
5.2 RUGGIE-BASED PORTFOLIO ASSESSMENT: INCORPORATING
HUMAN RIGHTS INTO INVESTMENT DECISION MAKING
Responsible investors should strive to be fully aware of any human rights risks
faced by companies in their portfolios in order to make sound investment decisions
based on ESG considerations. To date, human rights assessments of investment
portfolios focus primarily on human rights controversies, and frequently these
relate to companies operating in high-risk sectors and/or countries. Investors
may subsequently struggle with whether to exclude or engage with companies
deemed to be high-risk based on the sector or country in which the company
operates. Responsible investors should consider the company’s management
of its human rights risks, which can be an indicator of the likelihood of risks
escalating or being resolved. Assessing how companies are integrating the
Ruggie due diligence framework is an additional filter that enables investors to
understand the extent to which a company can be trusted to manage its human
rights risks.
In sum, investors may consider carrying out human rights assessments that
combine the risks stemming from certain countries or sectors with the extent
to which a company implements a due diligence approach, and base their
investment decision on this outcome. Such an assessment may also be used to
define the best-in-class companies with regard to human rights performance,
including in relation to specific issues such as indigenous people’s rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 19
5.3 ACTIVE OWNERSHIP: ENGAGEMENT ON HUMAN RIGHTS
While Ruggie’s work does not answer every question about how to address
specific human rights issues, the Principles, especially those related to a due
diligence approach, can be translated into a concrete agenda and set of goals
for engagement with companies. Although engagement goals may be fine-tuned
to specific companies and company operations, Sustainalytics summarizes the
general goals as follows:
These Principles can be either implemented at the company level or in relation
to specific controversial operations. Each recommendation offers opportunities
for more detailed discussions and exchange of best practices. Investors should
demand specific examples of the implementation for each of the above elements.
Importantly, by framing their engagement agenda in terms of the Guiding
Principles, investors will be able to appeal to an authoritative international
standard, increasing the chances of successful outcomes.
Can a company manage all of its human rights risks all of the time? This is a key
question that investors will face and to which the Ruggie does not provide a
reply. Take, for example, a company operating in a country associated with the
worst type of human rights violations and that is obliged to closely collaborate
with these authorities. In such a scenario the company may well implement
due diligence, undertake risk assessments and adopt programs to counters any
risk. Yet, in the end it may simply not be able to avoid getting entangled in
these violations. Simply said, there may be instances in which the human rights
risks are so pervasive that it is extremely difficult, if not impossible, to mitigate
them adequately. Investors will then have to make an investment decision based
on these ongoing risks. However, only by means of implementing the Guiding
Principles will we understand its effects and any possible limits still to be
addressed.
Companies should adopt a best practice policy on human rights
based on the Ruggie Framework and address additional specific
human rights issues relevant to their operations. (See also 5.1 for
detailed policy recommendations.)
Companies should ensure that they adopt a due diligence
approach that includes:
Human rights risk identification and assessment;
Mechanisms to ensure that human rights information is
effectively integrated into business functions in order to
ensure that appropriate action is taken to manage and/or
mitigate risk;
Systems to track and monitor human rights performance; and
Public disclosure of policies, management systems, and
performance outcomes.
Companies should establish remedy mechanisms in line with the
recommendations provided by Ruggie.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 20
ENGAGEMENT WITH STATES
Another important engagement goal, addressed only briefly in Ruggie’s report
but worthy of elaboration from an RI perspective, concerns engagement with
state bodies. While businesses engage with states on a broad range of issues,
including economic and environmental matters, they rarely engage on the
topic of human rights. This reluctance may result from an unfounded fear of
“becoming political,” although it appears to be subsiding as more businesses
are directly discussing human rights-related matters with local and national
government bodies. Examples of such business-state discussion include Total
SA’s past pleas for the release of Aung San Suu Kyi in Burma, and Yahoo’s request
to the U.S. government to help in the release of a Chinese human rights activist
who had been arrested as a result of information that the company had supplied
to Chinese authorities.
Investors are similarly developing initiatives related to engaging with states.
In November 2009 Dutch pension fund APG Pension Group Asset Management
published an article in a Dutch newspaper entitled To be a shareholder and
diplomat, which called upon investors to engage more actively with state
authorities. APG stated that “the dialogue on human rights is no longer state-
business only.”
17
Engaging with states on matters such as human rights is new territory for most
investors and it raises questions about how to approach such engagement.
The Ruggie report does not address this area in detail. Nevertheless the
entire first pillar of the Ruggie Framework, which addresses the state’s duty to
protect, provides a solid agenda, concepts and language for conversations with
government.
Engagement with states may be smartly linked to high priority RI themes as well
as to some of the specific financial services provided. Examples might include:
An investor, or a coalition of investors, with large stakes in retail
companies operating in a country known for child labour issues
could encourage local regulatory bodies to ensure that relevant
ILO labour standards are implemented. It could request oversight
by state institutions or strive to establish a public-private
partnership to address the issue.
Investors, intending to invest in a new mining project, could
request that the local government ensure that an independent
human rights impact assessment is undertaken.
Investors, with stakes in a company involved in trade union
conflicts, could ask the central government for the release of
activists arrested because of their trade union activities.
Investors, financing an energy project in a conflict zone, may call
for independent investigations into allegations of police violence;
or they may raise concerns about a lack of human rights standards
for security troops.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 21
6. Looking Forward: Ruggie in the Years to Come
To conclude:
States should bridge the accountability gap that Ruggie has
exposed. The Guiding Principles, although currently of a non-
binding nature, foresee changes in how companies will be held
accountable for their human rights impacts. New laws and policies
will impact investors by means of their effects on companies
within their investment portfolio. However some new laws or
policies may be directly aimed at institutional investors.
While such laws may generate some new regulatory risk, the
Guiding Principles’ overall effect will be to reduce risk for investors,
as they will encourage companies towards more responsible
human rights policies and performance.
Companies should not wait for states to act. From a risk
management perspective, and to anticipate future legislation,
companies should adopt their own due diligence policies. For
institutional investors this means using the Guiding Principles
throughout their RI policies and activities, including due diligence-
based investment decision making and active ownership.
A number of the Principles can be translated into practical
recommendations for investors, including guidance on how to
implement a due diligence approach that avoids human rights
risks associated with various lending and investment activities.
What are the next steps now that Ruggie’s specifc mandate has ended? A new UN-
working group will further the implementaton of the Principles, although at this stage
the end result is unclear. It is fair to say that the implementaton of the Guiding Principles
will be strongly dependent on the politcal will of both state and non-state actors alike to
take further steps. An increasing number of companies and states will however adopt new
policies and practces based on the Guiding Principles. NGOs, some of them concerned
about the voluntary nature and stll general character of the Guiding Principles, will
increasingly push for the adopton of legislaton at the state-level which allow them to
hold companies to account. Similarly they will use the Ruggie framework as a reference
tool in their assessment of companies.
It should indeed be noted that Ruggie’s Framework is stll of a general nature and does not
provide detail on specifc human rights issues or countries. Therefore the extent to which
its applicaton at the operatonal level will be efectve is stll to be determined, and this
surely will be a learning process. However, new guidelines, toolkits and other programs
are being developed around the world that will provide more guidance on specifc regions,
business sectors and human rights themes.
18
Through the ongoing development and
sharing of best practces, companies and investors have an opportunity to put Ruggie’s
Guiding Principles into practce and to raise the bar on the protecton and advancement
of human rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 22
Daan Schoemaker, Product Manager
Daan is the product manager of Sustainalytics’ UN Global Compact Compliance
Service which involves managing the research of companies’ adherence to a
leading international corporate social responsibility standard. He also coordinates
several engagement activities, including in-depth company dialogues. Daan
specializes in human rights, labour rights, arms trade, legal issues and UN
standard setting related to corporate social responsibility. Prior to joining
Sustainalytics Daan worked at the Dutch Ministry of Foreign Affairs as a senior
policy officer on human rights. He also worked as an advocacy coordinator at
Amnesty International for six years and with a non-governmental organization
on issues related to peacebuilding. Daan is currently the vice-president of the
Dutch branch of the International Commission of Jurists. He graduated with
a degree in Anthropology specializing in environmental issues and completed
a Master’s degree in Development Studies. He also holds several degrees in
International Law. Daan speaks fluent Dutch and English, and intermediate
Spanish and French.
Daan Schoemaker
Product Manager
[email protected]
(31) 20 205 0005
Sustainalytics is a leading global provider of environmental, social and
governance (ESG) research and analysis for investors and financial institutions.
We provide a global perspective, underpinned by nearly 20 years of local
experience and expertise in the responsible investment market. Sustainalytics
strives to continuously provide high-quality solutions and commits to remain
responsive to the current and future needs of our clients. Recently, Sustainalytics
was voted Best ESG Research House by IPE/TBLI. Sustainalytics is headquartered
in Amsterdam and has offices in Boston, Frankfurt, Madrid, Paris, Timisoara and
Toronto; and representatives in Brussels and Copenhagen.
The information herein has been obtained from sources that Sustainalytics believes to
be reliable. However, Sustainalytics does not guarantee its accuracy or completeness.
Copyright © 2011 Sustainalytics. All rights reserved. No portion of this material may be
reproduced in any form without the expressed written permission of Sustainalytics.
About the Author
About Sust ai nalyti cs
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 23
1
For the full text of the Principles see htp://www.business-humanrights.org/media/documents/ruggie/ruggie-guiding-principles-21-mar-2011.pdf.
2
OECD website: htp://www.oecd.org/document/36/0,3746,en_2649_34889_46078244_1_1_1_1,00.html.
3
IFC website: htp://www.ifc.org/ifcext/policyreview.nsf/AtachmentsByTitle/PhaseI_Progress_Report1-11-10.pdf/$FILE/PhaseI_Progress_Report1-11-10.pdf.
4
Insttute for Business and Human Rights: htp://www.ihrb.org/commentary/guest/iso_26000_a_new_standard_for_human_rights.html.
5
States may also have human rights obligatons irrespectve of the treates they have ratfed. Some human rights obligatons result from customary law, a
set of principles derived from generally accepted custom.
6
Juliete Garside. “Vodafone under fre for bowing to Egyptan pressure.” guardian.co.uk htp://www.guardian.co.uk/business/2011/jul/26/vodafone-
access-egypt-shutdown (accessed July 26, 2011).
7
Terry
Wade. “Bear Creek fles suit in Peru over mine,” news.yahoo.com
htp://news.yahoo.com/bear-creek-fles-suit-peru-over-mine-021155455.html
(accessed July 13, 2011).
8
See: htp://fndartcles.com/p/artcles/mi_hb5976/is_200803/ai_n32281821/.
9
Talisman: http://www.talisman-energy.com/upload/editor/File/10417493%20-%20GLOBAL%20COMMUNITY%20RELATIONS%20POLICY%20-%20
DECEMBER%209%202010%20-%201%20-%20TLMPRD.pdf.
10
See htp://www.oxfamamerica.org/artcles/britsh-high-court-freezes-mine-company-assets.
11
Export Development Canada (EDC) is Canada’s export credit agency. It ofers fnancing, insurance and risk management services with the aim of helping
Canadian exporters and investors expand their internatonal business. See htp://www.edc.ca/publicatons/2010/csr/english/PDF/csr_report_e.pdf.
12
An overview of initatves is available at htp://www.business-humanrights.org/media/documents/applicatons-of-framework-jun-2011.pdf.
13
Kevin Gray. “Chiquita fails to stop Colombian lawsuit, ” Reuters.com
htp://www.reuters.com/artcle/2011/06/03/chiquita-colombia-lawsuit-
idUKN0315364920110603 (accessed June 3, 2011).
14
For example Dexia and KBC were exposed to OECD complaints for providing project fnance to a controversial BTC Pipeline in Azerbaijan, Turkey and Georgia.
15
For a complete overview see: htp://www2.ohchr.org/english/law/index.htm.
16
For a complete overview see: htp://www.ilo.org/ilolex/english/subjectE.htm.
17
www.citysite.nl/link/1/nieuws/2400973/419Beleggen+en+mensenrechten+Wees+tegelijk+diplomaat+en+aandeelhouder.html.
18
Examples of detailed human rights-related recommendatons can be found in the UN’s Guidance on Responsible Business in Confict-Afected and High-
Risk Areas (htp://www.unglobalcompact.org/docs/issues_doc/Peace_and_Business/Guidance_RB.pdf) and a publicaton by the UN Global Compact
Network enttled How to do Business with Respect for Human Rights (htp://www.unglobalcompact.org/docs/issues_doc/human_rights/Resources/
how_to_business_with_respect_for_human_rights_gcn_netherlands_june2010.pdf).
Endnotes
doc_647412041.pdf
In June 2011, John Ruggie, United Nations Special Representative on Business and Human Rights, presented to the UN Human Rights Council his Guiding Principles on Business and Human Rights: Implementing the United Nations "Protect, Respect and Remedy" Framework, the result of his six-year study on business and human rights. Building on his "Protect, Respect and Remedy" Framework, released in 2008, the Principles outline the state's duty to protect human rights, the corporation's responsibility to respect human rights, and the need for access to remedy.
Rai si ng the Bar on Human Ri ghts
Da a n Sc ho e mak e r
Augus t 2 01 1
What the Ruggi e Pri nci pl es Mean for Responsibl e Investors
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 2
Tabl e of Contents
Executive Summary .............................................................. 3
Introduction ........................................................................ 5
1. Background on the Work of John Ruggie ............................. 5
2. The Guiding Principles ...................................................... 6
2.1 States and Human Rights: The State’s Duty to Protect .............................. 7
2.2 Business and Human Rights: The Corporate Responsibility to Respect ...... 7
2.3 The Right to Remedy .............................................................................. 9
3. Human Rights and Business Risk ........................................ 9
4. The Impact of Ruggie: Additional Risks for Investors .......... 11
5. Opportunites: A Framework for Antcipatng & Managing Risk ....14
5.1 Anticipating and Managing Human Rights Risks ..................................... 14
5.2 Ruggie-Based Portfolio Assessment: Incorporating Human Rights into
Decision Making .................................................................................. 18
5.3 Active Ownership: Engagement on Human Rights .................................. 19
6. Looking Forward: Ruggie in the Years to Come .................. 21
About the Author ............................................................... 22
About Sustainalytics ........................................................... 22
Endnotes ........................................................................... 23
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 3
Raising the Bar on Human Rights
EXECUTIVE SUMMARY
In June 2011, John Ruggie, United Nations Special Representative on Business and
Human Rights, presented to the UN Human Rights Council his Guiding Principles
on Business and Human Rights: Implementing the United Nations “Protect,
Respect and Remedy” Framework,
1
the result of his six-year study on business
and human rights. Building on his “Protect, Respect and Remedy” Framework,
released in 2008, the Principles outline the state’s duty to protect human rights,
the corporation’s responsibility to respect human rights, and the need for access
to remedy. On June 16, in an unprecedented step, the UN Human Rights Council
unanimously endorsed the Principles.
Investors stand to benefit from the Principles, which can be used to support
the implementation of responsible investment (RI) strategies, including active
ownership and various forms of ESG integration. More specifically:
They provide a robust, authoritative framework upon which
to build RI investment policies and due diligence management
systems that address human rights;
They provide a framework for assessing the human rights policies,
management systems and performance of individual companies
in an investment universe;
They provide practical guidance for active ownership, through
engagement and proxy voting, on human rights issues.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 4
The Principles can serve as a tool for risk management, providing an early-warning
system to assess high-risk companies or operations, and as an approach to dealing
with human rights dilemmas when they emerge. Implementing Ruggie’s Principles
can therefore help to prevent or mitigate the operational, legal, and reputational
risks that institutional investors may face due to human rights issues.
The Framework and the Principles have provided much needed clarity regarding
the respective roles of the state and business in protecting and respecting human
rights. Ruggie’s work illustrates the inconsistencies that exists in many countries
between human rights policies and policies that directly govern business
practices, resulting in an accountability gap. The Principles call on states to fill
that gap.
With respect to business, the Principles counter the traditional view of many
in the corporate world that human rights are a concern of the state and not
of business. They suggest a new level of responsibility for companies and they
emphasize a pro-active due diligence approach that puts the onus on companies
to adopt policies and implement management systems that will enable the
effective management of human rights issues. A great benefit of the Principles is
that they provide practical recommendations as to how companies and investors
can do so.
Any new regulations emerging in response to Ruggie’s call might be construed by
some businesses as a new source of compliance costs as well as risk. However,
in Sustainalytics’ view, the effect of regulations in line with the Principles will
be to reduce risk. It is in every company’s interest to protect human rights and
to effectively manage human rights risk, and sound national-level policies and
regulations will assist companies in doing so. As Ruggie notes, the Principles are
“an inter-related and dynamic system of preventative and remedial measures”;
they have the potential to mutually reinforce the human rights-related initiatives
of both states and corporations in a manner that is advantageous to all.
It is critical to note that, like any set of principles, Ruggie’s work will be effective
in practice only to the degree that the key actors – states and businesses –
implement the principles. As concerned non-governmental organizations (NGOs)
rightly point out, the Principles are of a voluntary nature with no enforcement
mechanisms ensuring their implementation. Companies should therefore be
encouraged to strengthen their own policies and management systems and not
to wait for states to implement stronger policies and regulations. Investors have
a critical role to play in encouraging companies to do so.
Effective implementation of the Guiding Principles is a learning exercise. There
will surely be many human rights dilemmas to be solved, requiring further
elaboration and fine tuning of the Principles. Nonetheless, the bottom line is
that these Principles, and their acceptance by the UN Human Rights Council and
other international agencies, are good news for business and for investors. They
should be commended for bringing about greater conceptual clarity and practical
guidance, and for highlighting that both states and business must play their own
part in achieving a common goal. By raising the bar on all fronts, the Principles
will help both companies and investors to mitigate risk and, most importantly, to
contribute to the protection and advancement of human rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 5
Introducti on
John Ruggie’s Guiding Principles on Business and Human Rights represent
a significant step forward in the way in which many decision-makers in
government, business and elsewhere think about business and human rights.
They also present an opportunity for companies and investors to enhance their
management of human rights risks.
In this paper Sustainalytics outlines Ruggie’s Guiding Principles and presents a
set of recommendations for institutional investors, based on the Principles, that
will help establish or enhance the implementation of responsible investment
(RI) policies and strategies, from the integration of environmental, social and
governance (ESG) issues to active ownership.
Specifically, this paper will:
Provide a brief overview of the Principles;
Detail the risks that companies and their investors face with
respect to human rights issues;
Provide an analysis of how such risks may be impacted by Ruggie’s
framework;
Describe how to anticipate these risks and the potential
opportunities and benefits the Principles offer to institutional
investors;
Lastly, it will look at the future impact of the Principles.
1. Background on the Work of John Ruggi e
Many companies have traditionally argued that human rights are the purview
of the state. Various initiatives in the last decade have sought to change this
view. In 2003, the United Nations Sub-Commission on the Promotion and
Protection of Human Rights adopted the Draft Norms on Business and Human
Rights, a treaty-like document outlining the duties that companies have with
regard to human rights. The initiative faced strong opposition from the business
community, which felt that businesses could not be burdened with what they
believed to be an obligation of the state: protecting human rights. State support
for the initiative also dwindled. It seemed that the Norms were ahead of their
time, attempting to take a quantum leap where small steps might have been
more successful.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 6
UN Special Rapporteur John Ruggie was appointed to take such steps. In a report
released in 2008, Ruggie outlined his well known “Protect, Respect and Remedy”
Framework. Based on three years of extensive consultations, the framework
clarified the responsibilities that states and businesses have with regard to
human and labour rights and argued for the need for access to remedy. Ruggie
later produced the Guiding Principles, which specify what the implementation of
the framework means in practice.
In June 2011 the UN Human Rights Council, in an unprecedented move,
unanimously adopted the Guiding Principles. It was decided that these Principles
should serve as the framework for further policy development and standard-
setting on businesses and human rights. A new UN Working Group will be
established and will work toward the further implementation of the Principles.
Ruggie’s work has become the main international authority on the topic of
business and human rights. In addition to being adopted by the Human Rights
Council, the Framework and the Principles have been drawn upon or incorporated
into the principles, guidelines and/or regulations of numerous governments,
international organizations, business associations, as well as civil society, labour
organizations, human rights, and investor organizations. For example:
In May 2011, the Organization for Economic Cooperation’s
Guidelines for Multinational Enterprises were revised to
incorporate the Ruggie Principles;
2
A current review of International Finance Corporation (IFC)
Performance Standards on Social and Environmental Sustainability
aims to strengthen the Standards’ approach to human rights
based on the Ruggie Framework;
3
In November 2010, the International Standards Association
released its ISO 26000 standard on corporate social responsibility,
which contains a human rights section that clearly reflects the
Ruggie framework.
4
2. The Gui di ng Pri nci pl es
The Guiding Principles are grouped according to the three pillars of Ruggie’s
“Protect, Respect and Remedy” Framework:
1) The state’s duty to protect human rights;
2) The corporate responsibility to respect human rights; and
3) Access to remedy.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 7
2.1 STATES AND HUMAN RIGHTS: THE STATE’S DUTY TO PROTECT
The first section of the framework outlines the duty of states, which are bound
to protect human rights in accordance with any treaties or conventions of
which they are signatories.
5
This duty includes the protection of citizens from
human rights violations committed by non-state actors, including businesses. In
defining the duty of states, this section of the Principles provides institutional
investors with general and conceptual clarity on the human rights responsibilities
of businesses. It also defines where this responsibility ends, which allows
an institutional investor to respond to stakeholder demands related to
responsibilities that fall clearly in the domain of the state. However, as Ruggie
acknowledges, there is a gap between what can be expected from the state and
current prevailing practice. He exposes serious weaknesses in states’ human
rights protection mechanisms, including their unwillingness or inability to hold
companies to account when they become linked to human rights violations. For
example, in most nations there is a striking inconsistencies between government
human rights policies and policies that directly govern business practices. The
resulting accountability gap contributes to the possibility of human rights
violations. To address this gap, in Ruggie’s view, states need to explicitly broaden
human rights protection policies and legislation to include violations resulting
from business activities. Such changes would have implications for businesses
and for investors, as discussed in Section 4 below.
2.2 BUSINESS AND HUMAN RIGHTS: THE CORPORATE RESPONSIBILITY
TO RESPECT
The second pillar of the Ruggie Framework defines the relationship between
business and human rights. Ruggie uses the term “responsibility,” rather than
“obligation,” when referring to a business’ role in protecting human rights, as
international human rights law currently does not impose obligations directly
on companies. The principles in this section of the Framework will, to the extent
that they are taken up by business, bring about a major step forward in how the
relationship between business and human rights is generally viewed.
Ruggie provides several strong moral, legal and business-related arguments as
to why businesses should be concerned about human rights. He also discusses
specific human rights-related risks, and presents two primary means of mitigating
these risks: legal compliance and a due diligence approach.
LEGAL COMPLIANCE
When it comes to ethical matters, a company’s first reference point is usually
the law. The identification of these human rights-related laws, ranging from
labour laws to laws dealing with indigenous communities, should be a standard
exercise in compliance-related risk management. Yet in many countries, the
absence of strong laws, or the lack of enforcement of existing laws, creates a
legal grey area with little guidance. Companies should therefore adopt a due
diligence approach.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 8
DUE DILIGENCE
A due diligence approach aims to understand and manage human rights exposure
and mitigate any potential human rights impacts. Such an approach is proactive
at all levels and ensures that the company is aware of and able to respond to any
human rights risks associated with its operations. Proper due diligence includes
human rights risk assessments, the establishment of mechanisms to address
risks, ongoing monitoring, and transparency. As will be discussed further in
Section 5 below, Sustainalytics finds this to be the core element of the Ruggie
Framework that has the most relevance and provides the greatest benefit to
investors.
Due Di l i gence i n t he Tel ecommuni cat i ons Sector
In recent years, a number of telecommunications and Internet companies have faced major exposure to
human rights issues and, in some cases, allegations of complicity in human rights violations. Examples
include Yahoo in China, Alcatel-Lucent in Burma and, more recently, Vodafone in Egypt. Often the allegations
relate to demands for restrictions on freedom of expression, especially during times of civil unrest or strife.
In February, Vodafone came under fire for abiding by Egyptian demands to shut down mobile services and send
out pro-government text messages to its clients with the aim of curbing anti-government demonstrations.
6
Vodafone clearly chose to support a government that was under fire for its shady track record on human
rights and corruption. The company responded by stating that, legally, it had to abide by the government’s
requests stemming from Egypt’s emergency laws. Ruggie’s Guiding Principles suggest that this perspective
should not be taken for granted. A due diligence approach in such a scenario could have entailed a range of
preventive and responsive steps, such as:
Implementing a human rights policy that referred specifically to the risk of restrictions on freedom of
expression.
Undertaking human rights risk assessments that would have led to a list of countries with a poor track
record. This likely would have included Egypt.
Joining a multi-stakeholder initiative on human rights-related issues, such as the Global Network
Initiative
(http://globalnetworkinitiative.org), which provides guidance on how to respond to such state
demands.
Asking that state authorities provide a written request, including legal arguments, in relation to the
above-mentioned text messages or other state demands. This would have allowed the company to
similarly obtain legal advice from respected UN bodies.
Having certain contractual obligations in place dealing with the risk of restrictions on freedom of
expression.
Although Vodafone has a brief, general human rights policy statement in place, there is no evidence that it
has taken any of the due diligence steps above. Had it done so, the company would have been significantly
better positioned to respond to the Egyptian government’s request.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 9
2.3 THE RIGHT TO REMEDY
Ruggie’s third pillar addresses remedy mechanisms that can be established by a
state or by a company. At the company level, remedy mechanisms may address the
violation of employee rights, or communities affected by a company’s operations.
Effective remedy mechanisms play an important role in risk management. By
addressing any concerns and grievances at an early stage, remedy mechanisms
may prevent lengthy court cases or media exposure. The relative importance for
each company of such mechanisms varies depending on the industry, location,
and other specific characteristics that influence its human rights exposure.
For example, remedy mechanisms are far more important for a global mining
company than for an IT company operating in Europe. The relevance of such
mechanisms to investors is described in Section 5 below.
3. Human Rights and Business Risk
Human rights create considerable and increasing risks to companies and their
shareholders. From a company and investor perspective, a primary reason for
attending to human rights issues is to manage exposure to such risks. Before
discussing the importance of Ruggie’s Guiding Principles to the management of
these risks, it is useful to provide an overview, based on Sustainalytics’ analysis,
of what these risks entail. Key areas of risk include operational and physical
risks, regulatory risks and reputational risks.
OPERATIONAL AND PHYSICAL RISKS
Human rights issues can generate numerous operational and physical risks
for businesses, including project delays or cancellation caused by the denial
or withdrawal of necessary operating permits; the loss of a social licence to
operate; problematic relations with local labour markets; higher insurance,
financing or security costs; lower production outputs; costs associated with
challenging community consultation processes; damage to property; or costly
lawsuits initiated by impacted stakeholders and others. All of these risks can
have a material impact on financial outcomes for investors.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 10
There are numerous examples of how human rights issues can generate operational risk:
In June 2011, in an effort to halt weeks of unrest and violence caused by community opposition, the Peruvian
government revoked the license of Canadian mining company Bear Creek Mining to develop a mining project
in Southern Peru. The violence had resulted in five deaths and more than 30 injuries. The company will be
able to proceed only after obtaining approval from local indigenous people. It has threatened to sue the
Peruvian government over the loss of its license.
7
Southern Copper Corporation, a U.S.-listed mining company operating in Mexico, has a history of conflicts
with trade unions over labour rights and safety-related concerns. Between 2006 and the end of 2010, the
company experienced a lengthy closure of its mining operation, lengthy court cases and damage to company
property caused by striking workers.
8
In 2010 a group of responsible investors engaged with Talisman Energy on the subject of indigenous people
and the concept of Free, Prior and Informed Consent (FPIC). In part as a result of this engagement the
company commissioned an independent report on the feasibility of a strong policy on indigenous people.
The report concluded that being the first company to adopt an FPIC policy would give Talisman a competitive
advantage. Talisman’s adoption of such a policy was widely applauded by investors.
9
Human Ri ght s and Operat i onal Ri sk
i n t he Ext ract i ve I ndust r i es
LEGAL AND REGULATORY RISKS
International human rights treaties may be translated into domestic legislation,
where they may have a direct impact on companies. For example national
legislation on the protection of labour rights, such as anti-discrimination
legislation, or laws upholding freedom of association, is largely based on the
work of the International Labour Organization (ILO). Some states may also require
that a company obtain the consent of indigenous people before proceeding with
a project that will affect them. The violation of such laws may lead to costly fines
or lawsuits that could negatively affect a company’s bottom line, especially if
these incidents are recurrent. The stakes are raised when there is clear evidence
of a company’s direct complicity in human rights violations. In October 2009
the UK High Court froze £5 million of the assets of Monterrico, a subsidiary of
Zijing Mining, setting aside what Monterrico may have to pay in legal costs and
damages if it loses a lawsuit related to human rights violations at its mining
operation in Peru.
10
As described in Section 4 below, the potential increase in regulatory risks and
compliance costs faced by investors depends on the extent to which states take
up Ruggie’s call to make legislative changes in line with the Guiding Principles.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 11
REPUTATIONAL RISKS
Reputational risks may accompany all of the risks described above. Allegations of
complicity in human rights violations often result in negative publicity, campaigns
by NGOs and other initiatives that may damage a company’s brand. In recent
years some NGOs and even some media sources have shifted their focus from
companies facing allegations of complicity to major investors in such companies.
Institutional investors in numerous countries have been exposed to strong
media criticism, shareholder action and, in some cases, even street protests
over their financing of companies involved in controversial operations such as
the construction of settlements in the Palestinian territories or the sourcing
of minerals from conflict zones in Africa. Negative reactions may result merely
from perceived or alleged human rights violations, regardless of whether or not
the allegations are well grounded. As Ruggie’s work gains broader acceptance
and momentum, it is likely that NGOs will leverage the Principles to put more
pressure on companies, appealing to them as an authoritative framework and
benchmark.
Ruggie recommends that states adopt new policies and regulations governing
human rights, including laws that allow them to hold companies accountable in
cases of negative human rights impacts. What might this mean for companies
and investors?
A number of states have already passed legislation or regulations consistent
with Ruggie’s recommendations, including the integration of human rights
considerations into export credit agency policies, procurement policies or
bilateral investment treaties. Export Development Canada, for example, has
made strong statements in support of Ruggie’s work and reports that it aims
to integrate the Principles into its policies.
11
Elsewhere, such as in the UK,
governments are assessing the areas in which new legislative changes are
needed.
12
4. The Impact of Ruggie: Additional Risks for Investors?
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 12
Sustainalytics has identified the following areas in which possible regulatory
changes will have the greatest effect on companies and investors:
Criminal accountability: This area relates to the risk of complicity
in human rights violations committed by other actors. If a company
is alleged to have contributed to, exacerbated or facilitated some of
the most serious human rights violations, such as torture, war crimes,
or crimes against humanity, it (or its employees) may be liable under
national criminal laws. Such instances are more likely to occur in high-
risk countries already known for their serious human rights violations,
such as Sudan, Burma, Iran or countries experiencing internal conflicts.
This risk may increase due to Ruggie’s call for the adoption of extra-
territorial jurisdiction, which enables a state to exercise jurisdiction
over human rights abuses, including business-related abuses that occur
outside its own territory. Such laws broaden the scope and possibility of
corporate liability. For example, Chiquita Brands is now embroiled in a
lengthy court case for allegedly violating U.S.-based extra-territorial laws
by contributing to human rights violations in Colombia.
13
This legislative
development may result in more high-profile lawsuits against companies,
some of which may lead to costly and lengthy trials or possibly even
the imprisonment of company staff. Although these lawsuits are most
likely to be directed at the companies directly operating in human rights
sensitive regions, they may eventually turn their focus to institutional
investors as well.
New national laws: Ruggie recommends that states broaden their
human rights protection by adopting new policies, laws or regulations
to protect people against abuses from non-state actors including
businesses. In doing so they should adopt stricter laws on issues such
as child labour, indigenous peoples’ rights or other human rights issues.
Companies need to be aware of these laws in order to avoid fines, legal
repercussions or the withdrawal of operating permits. In June 2010, an
amendment to the U.S. Dodd–Frank Consumer Protection Act requires
companies that utilize “conflict minerals” to conduct due diligence and
provide evidence that their products are not contributing to conflict in
the Democratic Republic of the Congo. Companies must disclose their
due diligence efforts in sourcing these minerals to the Securities and
Exchange Commission on an annual basis and may risk breaching the
law if they cannot provide sufficient evidence. Yet another amendment
to the act requires companies in the extractive industries to report
their payments to foreign governments, a practice that is important
to human rights protection in the case of countries with poor human
rights records. The aim of this amendment is to identify, and ultimately
minimize, the human rights and corruption related impacts of certain
business activities in controversial countries.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 13
States may also adopt specific legislation aimed at preventing certain
controversial products from entering their markets. The EU is currently
debating new legislation that would forbid member states from importing
goods produced by child labour. This legislation may particularly (although
indirectly) impact investors who continue to invest in companies found to
be in breach of this legislation or whose market access is blocked. In recent
years a number of countries have adopted legislation directly aimed at
investors. For instance, Belgium, New Zealand, Luxembourg and Ireland
have all adopted laws that prohibit institutional investors from investing
in cluster munitions. States may adopt similar legislation in other human
rights-related areas although this process is likely to be limited to certain
key issues and will require considerable national debate first.
The establishment of remedy and complaint mechanisms: By law,
state-level grievance mechanisms may be established for individuals
or communities whose human rights have been impacted by business
activities. Through such mechanisms the victims of human rights
violations are able to file a complaint against a company. An example may
be complaint mechanisms within national human rights institutions or
an ombudsman. This is still relatively new territory and although it may
lead to complaints directed at financial institutions, it is not expected
that institutional investors will experience significant impacts once these
mechanisms are adopted.
Beyond legal implications, as mentioned above, the Ruggie Principles have already
found their way into non-binding guidelines and standards such as the OECD
Guidelines for Multinational Enterprises, the IFC’s Performance Standards and
ISO 26000. Each of these initiatives may affect institutional investors, although
probably to a limited degree. For example new human rights requirements in
the OECD Guidelines for Multinational Enterprises provide new avenues for
complaints. In the past, financial institutions have been exposed to OECD
complaints and, although of a non-binding nature, these complaints can create
reputational risks to investors.
14
To conclude, the Ruggie Guiding Principles strongly call for new national policies
and regulations some of which, once adopted, will lead to increasing (criminal)
accountability of companies. These developments will be rather ad-hoc, strongly
dependent on political will, and are likely to occur over a longer period of
time. Nonetheless, such new regulations are likely to entail new human rights
obligations for companies. For companies that do not manage human rights issues
adequately, this may result in additional lawsuits, fines or other human rights-
related risks. The institutional investors that manage human rights issues well will
be best positioned to adapt to any legal changes resulting from Ruggie’s work.
“
“
The i nst i t ut i onal i nvest or s t hat manage human r i ght s
i ssues wel l wi l l be best posi t i one d t o adapt t o any l e gal
changes r esul t i ng f r om Ruggi e’s wor k.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 14
5. Opportunities: A Framework for Anticipating &
Managing Risks
Due to the likelihood of new government regulations, Ruggie’s work can be
viewed, as described above, as a new source of regulatory risk for companies
and, more indirectly, for investors. However, in Sustainalytics’ view, by clarifying
the respective responsibility of states and corporations, and by providing
practical guidance aimed at understanding and mitigating human rights-related
risk, the Principles, when implemented, will have the effect of reducing risk.
Thus they offer an opportunity to all companies, and their investors, to manage
risk more effectively.
In Sustainalytics’ view, the Guiding Principles offer three major benefits to investors:
The manner in which responsible investors can put the Guiding Principles into
practice is outlined below.
5.1 ANTICIPATING AND MANAGING HUMAN RIGHTS RISKS
The primary benefit of Ruggie’s Guiding Principles to both companies and
institutional investors, in Sustainalytics’ opinion, is its recommendations
regarding human rights policies and due diligence management systems.
The Principles are applicable to all types of companies and investors.
However, as Figures 1 and 2 illustrate, companies in certain industries
could do more to adopt the Principles and implement human right policies.
Below is Sustainalytics’ view of how the Principles can be implemented by
institutional investors.
They provide a robust, authoritative framework upon which
to build RI investment policies and due diligence management
systems that address human rights;
They provide a framework for assessing the human rights policies,
management systems and performance of individual companies
in an investment universe;
They provide practical guidance for active ownership, through
engagement and proxy voting, on human rights issues.
Human Ri ghts Pol i cy
No or Li mi ted
Human Ri ghts Pol i cy
MSCI Developed Market
Oil Companies
21%
Human Ri ghts Pol i cy
No or Li mi ted
Human Ri ghts Pol i cy
MSCI Developed Market
Mining Companies
23% Figure 1
Figure 2
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 15
ADOPT A POLICY ON HUMAN RIGHTS (PRINCIPLE 16)
The starting point for the management of human rights issues is the creation
of a policy. The Guiding Principles provide general recommendations that may
form the basis of either a brief policy statement or a detailed policy that can be
used to integrate human rights considerations into elements of an RI strategy
ranging from ESG integration to active ownership. Sustainalytics considers
the following policy elements, which are in line with Guiding Principles, to be
important to a best practice human rights policy for institutional investors and
financial institutions:
Reference to international human rights standards such
as the nine core human rights treaties as well as relevant
labour standards.
15, 16
The integration of human rights considerations into all
financial activities ranging from investments, loans and
fixed income to project finance activities.
References to stakeholders, including an institutional
investor’s own employees, customers, affected
communities, and others.
Reference to specific human rights themes that are
frequently known to have an impact on companies and
investors, such as the rights of indigenous peoples, labour
rights or the right to freedom of expression.
A commitment to establish formal mechanisms for dialogue
with all relevant stakeholders, including civil society and
governmental bodies, on human rights matters.
Commitment to a full due diligence process including risk
assessments, transparency, the adoption of implementation
programs and mechanisms, and monitoring and reporting
(as outlined below).
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 16
Human Ri ght s Pol i ci es at Fi nanci al I nst i t ut i ons
A growing number of financial institutions are creating policies that explicitly address human rights concerns.
Examples include:
Barclays Group has adopted an extensive policy statement on human rights that includes references
to the Ruggie Framework. Barclays’ policy affirms the need to ensure that human rights impact
assessments are taking place for all of its activities. It also commits to a structural dialogue
regarding human rights with concerned stakeholders. Of particular interest is the fact that the Bank
acknowledges the different human rights impacts that may accompany various financial services
ranging from project finance to providing loans to states, and it highlights the need for identifying
these risks. The Bank also explicitly applies its human rights requirements to its subsidiaries.
ASN Bank adopted a detailed human rights policy that explicitly addresses specific human rights
themes, including labour rights and security issues. In its policy ASN has defined a separate category
for what it calls the most serious human rights violations, which include genocide, torture, crimes
against humanity and war crimes. This distinction, which is based on international law, allows the
bank to separate more common and lower-risk human rights controversies from major ones. With
regard to legal compliance, particularly noteworthy is ASN’s statement that “if there is conflict
between standards (national vs. international), the bank applies the standard that gives the most
protection to the individual.” This implies that ASN Bank is not merely using domestic law as its
reference point for assessing human rights matters, especially when these laws fail to offer sufficient
human rights protection.
IMPLEMENTING DUE DILIGENCE
The principle of due diligence is at the heart of Ruggie’s recommended approach
to managing exposure to human rights issues, and it underlies a number of
the specific Guiding Principles for corporations. The following due diligence
principles are of particular importance to institutional investors:
ENSURE HUMAN RIGHTS RISK IDENTIFICATION AND ASSESSMENT (PRINCIPLES 17, 18)
The human rights exposure of financial institutions and institutional investors is
largely through lending and investment activities. The nature and degree of the
exposure varies significantly depending on the nature of the financing activity.
For example, project finance activities may generate human rights risks related to
the impacts of a project on local communities, while investors with involvement
in the extractive industries in countries such as the Democratic Republic of the
Congo or Burma may face allegations of complicity in human rights abuses that
may end up being debated at their AGMs. Companies from the IT sector that
have not been associated with human rights violations may suddenly face new
risk when operating in countries known for severe restrictions on freedom of
expression, such as China, Iran or North Korea.
Responsible investors should have a clear process to identify, assess and monitor
all human rights-related risks for all of their lending and investment activities.
To realize this investors should ensure that there is a human rights mandate
and expertise within internal risk management bodies. One method of risk
assessment entails regular and systematic portfolio analysis using human rights
criteria that aim to identify the most high-risk companies.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 17
I dent i f yi ng and Assessi ng Human Ri ght s- rel ated Ri sk
PGGM Vermogensbeheer, an investment manager in the Netherlands, has established a high-level ESG expert group
that includes human right experts from inside and outside the company and that functions as an independent
advisory group on human rights-related dilemmas. They identify potential risks related to certain human rights
themes, or companies that are under scrutiny. They also advise PGGM on sensitive decisions related to companies
under assessment for human rights issues.
ENSURE THAT MECHANISMS ARE IN PLACE TO INTEGRATE AND RESPOND TO HUMAN
RIGHTS IMPACTS (GUIDING PRINCIPLE 19)
Investors need to ensure that information on human rights impacts is integrated
into relevant internal functions and processes in order to ensure appropriate
action in the management and mitigation of any human rights issues that have
been identified. In other words, they need to ensure that their human rights policy
commitments are embedded in the processes of all relevant business functions.
For responsible investors, this implies the application of different responsible
investment instruments ranging from investment decision-making to engagement
and/or exclusion. Ensuring appropriate action generally requires support from,
and the oversight of, high-level management and the board. The strategies for
addressing these human right concerns should also be included in policy budgets.
Another ingredient in the management and mitigation of human rights issues may
be to establish a formal dialogue program with concerned stakeholders such as NGOs
and community representatives to discuss specific human rights impacts.
MONITORING AND TRACKING (GUIDING PRINCIPLE 20)
Monitoring and tracking is used to ensure that human rights policies and programs
are effective. They are also used to measure progress that institutional investors can
report to the public. Monitoring should be structured and conducted by assigned
company staff or by an independent third-party auditor. Although it is not easy to
study the effects of a human rights policy, stakeholder dialogue is an effective way to
gather anecdotal evidence. One means of monitoring the effects of a human rights
policy is to conduct regular portfolio assessments to determine the number and
nature of controversial companies within the investment portfolio over time. This
allows the investor to see if its overall RI policies, ranging from ESG integration to
engagement activities, have proven to be effective in mitigating risk.
REPORTING (GUIDING PRINCIPLE 21)
Currently, human rights issues are underrepresented in corporate social responsibility
(CSR) reports compared to environmental or governance issues. Nonetheless,
companies, including many financial institutions and institutional investors, have
significantly increased their public disclosure on human rights issues along with other
ESG-related matters over time. Annual and CSR reports may include a description of
both the human rights risks as well as the relevant steps the company has taken to
address them. As a best practice, investors could also report on challenges that arise
during the implementation of their human rights policies. Such disclosure may create
some vulnerability, but it demonstrates sincerity and honesty in a company’s due
diligence approach. Investors may also consider publishing ESG-related allegations
from concerned stakeholders, such as NGOs, on their own websites, accompanied by
a company response to the allegations.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 18
Repor t i ng on Human Ri ght s Pol i cy I mpl ementat i on
The Government Pension Fund of Norway discloses information on all of the companies that are excluded from
the fund’s portfolio based on human rights criteria. It provides a detailed public document that outlines the
concerns that the Fund has with specific companies, along with engagement results, and links these to the
Fund’s exclusionary criteria. This disclosure enables concerned stakeholders to understand, and respond to, the
decisions of the pension fund. This best practice is accompanied by a certain level of vulnerability: new questions
from stakeholders, such as questions regarding similar companies that have not been excluded, may arise.
ACCESS TO REMEDY
The third pillar of Ruggie’s framework is ensuring access to grievance mechanisms
that will allow victims of human rights violations to make complaints and seek
remedies. This section of Ruggie’s Guiding Principles is of most relevance to
states and to companies directly associated with human rights violations.
Ruggie asserts that companies, or coalitions of companies, can work together
within a sensitive human rights context and should strive to adopt grievance
mechanisms. Such mechanisms can provide a channel through which affected
stakeholders can voice concerns at an early stage and help to mitigate risk for
companies. These Guiding Principles are of less relevance to investors. Although
a financial institution may certainly ensure that its internal complaint and/or
whistleblower mechanisms are a channel to address certain types of human
rights concerns, institutional investors are not likely to be confronted with the
responsibility to provide remedies to the victims of human rights violations.
The Guiding Principles in this section are, however, of use to investors from an
engagement perspective, as discussed below.
5.2 RUGGIE-BASED PORTFOLIO ASSESSMENT: INCORPORATING
HUMAN RIGHTS INTO INVESTMENT DECISION MAKING
Responsible investors should strive to be fully aware of any human rights risks
faced by companies in their portfolios in order to make sound investment decisions
based on ESG considerations. To date, human rights assessments of investment
portfolios focus primarily on human rights controversies, and frequently these
relate to companies operating in high-risk sectors and/or countries. Investors
may subsequently struggle with whether to exclude or engage with companies
deemed to be high-risk based on the sector or country in which the company
operates. Responsible investors should consider the company’s management
of its human rights risks, which can be an indicator of the likelihood of risks
escalating or being resolved. Assessing how companies are integrating the
Ruggie due diligence framework is an additional filter that enables investors to
understand the extent to which a company can be trusted to manage its human
rights risks.
In sum, investors may consider carrying out human rights assessments that
combine the risks stemming from certain countries or sectors with the extent
to which a company implements a due diligence approach, and base their
investment decision on this outcome. Such an assessment may also be used to
define the best-in-class companies with regard to human rights performance,
including in relation to specific issues such as indigenous people’s rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 19
5.3 ACTIVE OWNERSHIP: ENGAGEMENT ON HUMAN RIGHTS
While Ruggie’s work does not answer every question about how to address
specific human rights issues, the Principles, especially those related to a due
diligence approach, can be translated into a concrete agenda and set of goals
for engagement with companies. Although engagement goals may be fine-tuned
to specific companies and company operations, Sustainalytics summarizes the
general goals as follows:
These Principles can be either implemented at the company level or in relation
to specific controversial operations. Each recommendation offers opportunities
for more detailed discussions and exchange of best practices. Investors should
demand specific examples of the implementation for each of the above elements.
Importantly, by framing their engagement agenda in terms of the Guiding
Principles, investors will be able to appeal to an authoritative international
standard, increasing the chances of successful outcomes.
Can a company manage all of its human rights risks all of the time? This is a key
question that investors will face and to which the Ruggie does not provide a
reply. Take, for example, a company operating in a country associated with the
worst type of human rights violations and that is obliged to closely collaborate
with these authorities. In such a scenario the company may well implement
due diligence, undertake risk assessments and adopt programs to counters any
risk. Yet, in the end it may simply not be able to avoid getting entangled in
these violations. Simply said, there may be instances in which the human rights
risks are so pervasive that it is extremely difficult, if not impossible, to mitigate
them adequately. Investors will then have to make an investment decision based
on these ongoing risks. However, only by means of implementing the Guiding
Principles will we understand its effects and any possible limits still to be
addressed.
Companies should adopt a best practice policy on human rights
based on the Ruggie Framework and address additional specific
human rights issues relevant to their operations. (See also 5.1 for
detailed policy recommendations.)
Companies should ensure that they adopt a due diligence
approach that includes:
Human rights risk identification and assessment;
Mechanisms to ensure that human rights information is
effectively integrated into business functions in order to
ensure that appropriate action is taken to manage and/or
mitigate risk;
Systems to track and monitor human rights performance; and
Public disclosure of policies, management systems, and
performance outcomes.
Companies should establish remedy mechanisms in line with the
recommendations provided by Ruggie.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 20
ENGAGEMENT WITH STATES
Another important engagement goal, addressed only briefly in Ruggie’s report
but worthy of elaboration from an RI perspective, concerns engagement with
state bodies. While businesses engage with states on a broad range of issues,
including economic and environmental matters, they rarely engage on the
topic of human rights. This reluctance may result from an unfounded fear of
“becoming political,” although it appears to be subsiding as more businesses
are directly discussing human rights-related matters with local and national
government bodies. Examples of such business-state discussion include Total
SA’s past pleas for the release of Aung San Suu Kyi in Burma, and Yahoo’s request
to the U.S. government to help in the release of a Chinese human rights activist
who had been arrested as a result of information that the company had supplied
to Chinese authorities.
Investors are similarly developing initiatives related to engaging with states.
In November 2009 Dutch pension fund APG Pension Group Asset Management
published an article in a Dutch newspaper entitled To be a shareholder and
diplomat, which called upon investors to engage more actively with state
authorities. APG stated that “the dialogue on human rights is no longer state-
business only.”
17
Engaging with states on matters such as human rights is new territory for most
investors and it raises questions about how to approach such engagement.
The Ruggie report does not address this area in detail. Nevertheless the
entire first pillar of the Ruggie Framework, which addresses the state’s duty to
protect, provides a solid agenda, concepts and language for conversations with
government.
Engagement with states may be smartly linked to high priority RI themes as well
as to some of the specific financial services provided. Examples might include:
An investor, or a coalition of investors, with large stakes in retail
companies operating in a country known for child labour issues
could encourage local regulatory bodies to ensure that relevant
ILO labour standards are implemented. It could request oversight
by state institutions or strive to establish a public-private
partnership to address the issue.
Investors, intending to invest in a new mining project, could
request that the local government ensure that an independent
human rights impact assessment is undertaken.
Investors, with stakes in a company involved in trade union
conflicts, could ask the central government for the release of
activists arrested because of their trade union activities.
Investors, financing an energy project in a conflict zone, may call
for independent investigations into allegations of police violence;
or they may raise concerns about a lack of human rights standards
for security troops.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 21
6. Looking Forward: Ruggie in the Years to Come
To conclude:
States should bridge the accountability gap that Ruggie has
exposed. The Guiding Principles, although currently of a non-
binding nature, foresee changes in how companies will be held
accountable for their human rights impacts. New laws and policies
will impact investors by means of their effects on companies
within their investment portfolio. However some new laws or
policies may be directly aimed at institutional investors.
While such laws may generate some new regulatory risk, the
Guiding Principles’ overall effect will be to reduce risk for investors,
as they will encourage companies towards more responsible
human rights policies and performance.
Companies should not wait for states to act. From a risk
management perspective, and to anticipate future legislation,
companies should adopt their own due diligence policies. For
institutional investors this means using the Guiding Principles
throughout their RI policies and activities, including due diligence-
based investment decision making and active ownership.
A number of the Principles can be translated into practical
recommendations for investors, including guidance on how to
implement a due diligence approach that avoids human rights
risks associated with various lending and investment activities.
What are the next steps now that Ruggie’s specifc mandate has ended? A new UN-
working group will further the implementaton of the Principles, although at this stage
the end result is unclear. It is fair to say that the implementaton of the Guiding Principles
will be strongly dependent on the politcal will of both state and non-state actors alike to
take further steps. An increasing number of companies and states will however adopt new
policies and practces based on the Guiding Principles. NGOs, some of them concerned
about the voluntary nature and stll general character of the Guiding Principles, will
increasingly push for the adopton of legislaton at the state-level which allow them to
hold companies to account. Similarly they will use the Ruggie framework as a reference
tool in their assessment of companies.
It should indeed be noted that Ruggie’s Framework is stll of a general nature and does not
provide detail on specifc human rights issues or countries. Therefore the extent to which
its applicaton at the operatonal level will be efectve is stll to be determined, and this
surely will be a learning process. However, new guidelines, toolkits and other programs
are being developed around the world that will provide more guidance on specifc regions,
business sectors and human rights themes.
18
Through the ongoing development and
sharing of best practces, companies and investors have an opportunity to put Ruggie’s
Guiding Principles into practce and to raise the bar on the protecton and advancement
of human rights.
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 22
Daan Schoemaker, Product Manager
Daan is the product manager of Sustainalytics’ UN Global Compact Compliance
Service which involves managing the research of companies’ adherence to a
leading international corporate social responsibility standard. He also coordinates
several engagement activities, including in-depth company dialogues. Daan
specializes in human rights, labour rights, arms trade, legal issues and UN
standard setting related to corporate social responsibility. Prior to joining
Sustainalytics Daan worked at the Dutch Ministry of Foreign Affairs as a senior
policy officer on human rights. He also worked as an advocacy coordinator at
Amnesty International for six years and with a non-governmental organization
on issues related to peacebuilding. Daan is currently the vice-president of the
Dutch branch of the International Commission of Jurists. He graduated with
a degree in Anthropology specializing in environmental issues and completed
a Master’s degree in Development Studies. He also holds several degrees in
International Law. Daan speaks fluent Dutch and English, and intermediate
Spanish and French.
Daan Schoemaker
Product Manager
[email protected]
(31) 20 205 0005
Sustainalytics is a leading global provider of environmental, social and
governance (ESG) research and analysis for investors and financial institutions.
We provide a global perspective, underpinned by nearly 20 years of local
experience and expertise in the responsible investment market. Sustainalytics
strives to continuously provide high-quality solutions and commits to remain
responsive to the current and future needs of our clients. Recently, Sustainalytics
was voted Best ESG Research House by IPE/TBLI. Sustainalytics is headquartered
in Amsterdam and has offices in Boston, Frankfurt, Madrid, Paris, Timisoara and
Toronto; and representatives in Brussels and Copenhagen.
The information herein has been obtained from sources that Sustainalytics believes to
be reliable. However, Sustainalytics does not guarantee its accuracy or completeness.
Copyright © 2011 Sustainalytics. All rights reserved. No portion of this material may be
reproduced in any form without the expressed written permission of Sustainalytics.
About the Author
About Sust ai nalyti cs
Rai si ng the Bar on Human Ri ghts - The Ruggi e Pri nci pl es - August 2011 23
1
For the full text of the Principles see htp://www.business-humanrights.org/media/documents/ruggie/ruggie-guiding-principles-21-mar-2011.pdf.
2
OECD website: htp://www.oecd.org/document/36/0,3746,en_2649_34889_46078244_1_1_1_1,00.html.
3
IFC website: htp://www.ifc.org/ifcext/policyreview.nsf/AtachmentsByTitle/PhaseI_Progress_Report1-11-10.pdf/$FILE/PhaseI_Progress_Report1-11-10.pdf.
4
Insttute for Business and Human Rights: htp://www.ihrb.org/commentary/guest/iso_26000_a_new_standard_for_human_rights.html.
5
States may also have human rights obligatons irrespectve of the treates they have ratfed. Some human rights obligatons result from customary law, a
set of principles derived from generally accepted custom.
6
Juliete Garside. “Vodafone under fre for bowing to Egyptan pressure.” guardian.co.uk htp://www.guardian.co.uk/business/2011/jul/26/vodafone-
access-egypt-shutdown (accessed July 26, 2011).
7
Terry
Wade. “Bear Creek fles suit in Peru over mine,” news.yahoo.com
htp://news.yahoo.com/bear-creek-fles-suit-peru-over-mine-021155455.html
(accessed July 13, 2011).
8
See: htp://fndartcles.com/p/artcles/mi_hb5976/is_200803/ai_n32281821/.
9
Talisman: http://www.talisman-energy.com/upload/editor/File/10417493%20-%20GLOBAL%20COMMUNITY%20RELATIONS%20POLICY%20-%20
DECEMBER%209%202010%20-%201%20-%20TLMPRD.pdf.
10
See htp://www.oxfamamerica.org/artcles/britsh-high-court-freezes-mine-company-assets.
11
Export Development Canada (EDC) is Canada’s export credit agency. It ofers fnancing, insurance and risk management services with the aim of helping
Canadian exporters and investors expand their internatonal business. See htp://www.edc.ca/publicatons/2010/csr/english/PDF/csr_report_e.pdf.
12
An overview of initatves is available at htp://www.business-humanrights.org/media/documents/applicatons-of-framework-jun-2011.pdf.
13
Kevin Gray. “Chiquita fails to stop Colombian lawsuit, ” Reuters.com
htp://www.reuters.com/artcle/2011/06/03/chiquita-colombia-lawsuit-
idUKN0315364920110603 (accessed June 3, 2011).
14
For example Dexia and KBC were exposed to OECD complaints for providing project fnance to a controversial BTC Pipeline in Azerbaijan, Turkey and Georgia.
15
For a complete overview see: htp://www2.ohchr.org/english/law/index.htm.
16
For a complete overview see: htp://www.ilo.org/ilolex/english/subjectE.htm.
17
www.citysite.nl/link/1/nieuws/2400973/419Beleggen+en+mensenrechten+Wees+tegelijk+diplomaat+en+aandeelhouder.html.
18
Examples of detailed human rights-related recommendatons can be found in the UN’s Guidance on Responsible Business in Confict-Afected and High-
Risk Areas (htp://www.unglobalcompact.org/docs/issues_doc/Peace_and_Business/Guidance_RB.pdf) and a publicaton by the UN Global Compact
Network enttled How to do Business with Respect for Human Rights (htp://www.unglobalcompact.org/docs/issues_doc/human_rights/Resources/
how_to_business_with_respect_for_human_rights_gcn_netherlands_june2010.pdf).
Endnotes
doc_647412041.pdf