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We would rather not think about human rights issues when it comes to asset allocation.
In the developed world, we often treat human rights violations — modern-day slavery, child labor, aboriginal land rights abuses, etc. — as anachronisms, at least as far they concern us. Or we dismiss them as problems for someone else to deal with, whether activists, government regulators, or corporate boards.
But as with incorporating environmental, social, and governance (ESG) factors into mainstream investment management practice, there are compelling reasons to apply human rights and safe-labor criteria to our investment decisions. More to the point, there is a perfectly sound financial basis for a thoughtful consideration of the business of treating people humanely.
Human rights risks vary across industries, with some sectors — the extractive, clothing, and food industries, for example — carrying particular perils.
So what are the risks and opportunities associated with integrating or failing to integrate human rights issues into asset allocation considerations?
Neglecting to take human rights factors into account carries the following varieties of risk:
- Operational Risk: This is a huge consideration, especially in the extractive sector. For example, much of the risk assumed when taking on a new mining project is nontechnical in nature. What does that mean? Potential boycotts, plant shutdowns, or community relations issues are among the most likely reasons a project will be delayed or derailed. Considering the large capital outlays required at the outset, to survey the land or transport heavy machinery, these are financially disastrous scenarios. But they can be avoided with some foresight and dialogue.
- Legal and Regulatory Risk: Such soft-law standards as the United Nations Principles for Responsible Investment (UNPRI) are often the precursors to hard laws. Although there are few strictly enforced and binding legal statutes related to human rights, the UK Modern Slavery Act 2015 and the California Transparency in Supply Chains Act may well pave the way for future regulations.
Following the 2008 oil spills in the Niger Delta, Royal Dutch Shell agreed to pay $84 million to the Bodo community in compensation for the health, environmental, and economic damage. While the amount may seem trivial for so large a company, the idea that the public good has value is becoming increasingly accepted. Courts are affirming that those who depend on these natural resources should be compensated if their lives and livelihoods are threatened by man-made disasters.
- Reputational Risk: In additions to fines and lawsuits, there are significant reputational risks associated with human rights violations and the accompanying press coverage. Thanks to social media, nongovernmental organizations (NGOs) and the press can disseminate information about violations more quickly and widely than ever before. This can be disastrous for companies that become associated with human rights abuses.
As a case in point: The Rana Plaza factory collapse in Bangladesh in 2013 generated a huge public outcry. The companies outsourcing garment production to the factory suffered when their names were exposed. Many thought twice about shopping at certain retailers after their labels were found in the rubble.
Investors and firms can certainly lose money if they ignore human rights issues. But how can they gain by factoring them in?
- Cost of Capital in the Equity Markets: Studies indicate that companies that pay attention to corporate social responsibility (CSR) and ESG factors have a lower level of stand-alone risk. In exchange for this, investors are willing take a lower return. This also suggests that these human rights risks are recognized by the markets and are priced in accordingly.
- Government Contracts and Trade Markets: Governments are often the largest buyers of goods and services and generally have purchasing guidelines to ensure that their supply chains are free of human rights infractions. Similarly, trade zones, such as the European Union, reject products suspected of being produced with slave labor.
- Employee Motivation: Safe labor practices lead to higher retention rates, increased productivity, and better overall product quality.
- Market Share: This may be the most important but often overlooked benefit of incorporating sustainable practices into an investment strategy. Sales feed the bottom line. Customers are more loyal to companies whose values they share. They are even willing to pay a premium — often a substantial one — for products they feel good about buying, whether fair trade coffee or Tom’s shoes.
Human rights issues are in the supply chain.
In this day and age, the $8 t-shirt we purchase probably has exploitation involved somewhere in its production, distribution, or both. Some are choosing to avoid buying disposable fashion altogether. As consumers, we should understand the concept of voting with our wallets.
Investors own more than half of everything. This represents a huge opportunity. Collectively we can bring about change, whether our motives are based on financial or ethical considerations.
Many in the developed world feel powerless in the face of anti-globalization efforts and antipathy towards immigration. For those who believe in the economic benefits of trade, it is imperative to effectively encourage free markets across borders. By strengthening ties to the developing world where many human rights violations occur, we make trade more integral to the global economy and thus can wield greater influence.
What better time to vote with our portfolios?
Special thanks to the UNPRI and KnowtheChain.org for their work on this subject.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images/Liuser
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