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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Esther Whieldon: For decades, human rights was an issue that was mainly talked about by organizations such as the United Nations and Amnesty International. But increasingly, it has become a focus of corporate and financial stakeholders as well.

Lindsey Hall: That's right. We're seeing a growing corporate focus on curbing human rights abuses. Companies are paying more attention to human rights, in part because their supply chains are exposed to a range of problems. And that's everything from child labor and unfair wages to unsafe working conditions. And these kinds of human rights issues can also have knock-on reputational and financial impacts for companies.

So as a result, we're seeing investors, asset managers and banks, likewise paying attention to human rights, which could impact their portfolio companies or their clients.

Esther Whieldon: Back in 2011, the UN took the significant step of bringing the subject to the attention of corporate boards by publishing its Guiding Principles on Business and Human Rights. These principles are a set of standards that companies can apply to prevent and remedy human rights abuses in their business practices. The UN principles persuaded many companies to act on unresolved challenges such as child labor and forced labor.

Lindsey Hall: Now in this episode, we're going to explore not just how human rights are moving up the ESG agenda, but also how the issue is evolving. One force behind this change is legislation focused on supply chain traceability and social risk management. In February 2022, for example, the European Commission adopted a proposal for a directive on corporate sustainability due diligence.

And that directive aims to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in company operations and corporate governance. We've also seen mandatory human rights due diligence legislation at the national level in EU member states like Germany, the Netherlands and France.

Esther Whieldon: There are other forces driving the increased focus on human rights, too. COVID-19, for example, forced companies to think more deeply about the health and safety of their workers and Russia's invasion of Ukraine prompted many companies to divest Russian assets.

Climate change at first blush may not seem like it's related to human rights at all. But as the physical impacts worsen, businesses will increasingly have to think about the potential disruption to workers in their far-flung supply chains. Meanwhile, social media and other tech companies face their own human rights issues, ranging from data privacy to hate speech.

Lindsey Hall: This episode was reported by Gautam Naik, a senior writer on the Thought Leadership Team at S&P Global Sustainable1. Gautam spoke to human rights experts from three organizations: Robeco, an asset manager, law firm Clifford Chance and nonprofit, the Business & Human Rights Resource Center. To start us off, Gautam, can you provide a bit of context. What does our data tell us about how companies are approaching the issue of human rights?

Gautam Naik: On paper Lindsey, they seem to take the issue very seriously. But when it comes to human rights, there's a big gap between corporate promises and corporate action. One potential game changer for human rights is the proposed European Commission directive published in February 2022 that will require companies to identify and fix human rights violations in their own operations and in their supply chains. Here is Rae Lindsay, a partner at U.K.-based law firm, Clifford Chance, who advises her clients on what to expect.

Rae Lindsay: For some time, we've increasingly seen businesses trying to establish the extent to which new and emerging due diligence requirements might impact their businesses, whether they're operating or have a presence within the specific jurisdiction or might be affected by it through their business relationships with companies that do. That already has been quite a big exercise for businesses to try and identify what the existing legal requirements are and then to see what's coming around the corner.

Because as you all know, in various jurisdictions, particularly within the EU, there are different pieces of legislation that have been proposed or may have been adopted even if they're not yet in effect. So -- and in France, for example, they've had a law -- Vigilance Law since 2017. And then other jurisdictions have begun to take measures through their legislative processes and those are coming into effect in stages.

So already businesses are trying to map out exactly what all these different requirements are and how they can approach them on a coherent basis through their internal governance and then through applying those provisions through their contractual relationships, et cetera. And I think the expectation is that the legislative process itself is likely to take maybe 12 to 24 months. And after that, there is a 2-year period for member states to then transpose the requirements of the directive into their own legislation.

For those companies that aren't already doing a lot of this, it would take a long time to be able to say, map out which of your established business relationships under the current definitions in the directive, you would have to do due diligence over and whether you have the governance in place and the policies that are expected by the directive to be able to carry it through, that would -- that would be a very extensive process that would require quite a lot of planning.

Gautam Naik: In its current form, the EU proposal will apply to a subset of large EU registered companies. Are some sectors or some types of companies more exposed in terms of liability than others?

Rae Lindsay: The consequence for some sectors who are -- might be considered higher risk for example, because they have long complex supply chains and the sourcing from countries where there might be endemic human rights abuses, systemic issues with respect to forced labor and the like … is the possibility for challenge as to whether their due diligence efforts have conformed with the requirements of the directive.

Gautam Naik: I also wanted to know whether in recent years, more companies had been sued over alleged human rights failures linked to their business activity.

Rae Lindsay: There certainly has been an increasing trend of human rights-related claims against businesses and in particular, with respect to overseas operations. So for example, claims against parent companies in the jurisdiction where they could be sued. But with respect to overseas operations of their subsidiaries or even claims against companies in relation to issues that have arisen in their supply chain.

So seeking to hold, say, the buying company liable for failings of a supplier. Historically, the United States had been seen as the most viable potential location to bring human rights-related litigation under the Alien Tort Statute. And in the sort of late 1990s, early thousands, in particular, there were many efforts to hold corporations liable for alleged involvement in violations of international law, including human rights law overseas.

The availability of that route was circumscribed over time by various Supreme Court decisions. And so the United States or the Alien Tort Statute is not used -- is not as available now as people once thought it may be for these kinds of claims. Although in the United States, certainly litigation continues at the state court level under Tort Law and other forms of actions have been used in the United States to sue companies for alleged involvement in human rights violations abroad. And that would include, for example, under consumer types of legislation where companies have been sued for failing to disclose, for example, that they -- their supply chains involved the use of child labor allegedly.

And then there's the Trafficking Victims Protection Act, which gives a statutory basis to claim where businesses are alleged to have profited, I believe, on a knowing basis from forced labor in their supply chains.

There are various mechanisms that are available in the United States. But I think one of the interesting features of the last decade has been this shift away from the United States as being seen as the most fertile jurisdiction for litigation in these areas towards the United Kingdom and certain jurisdictions in Continental Europe, where courts have been receptive to some new theories, which seek to expand basis for liability against companies based on common law in particular.

And certainly in relation to duty of care, where in the United Kingdom, for example, courts have accepted the possibility that a company may owe a direct duty of care to third parties who are affected by acts of subsidiaries or even potentially third parties where the parent company itself can be said to have a duty of care to those third parties by having assumed management or control over particular aspects of operations in that country with respect to issues such as, say, security.

And even though those cases have not yet led to a company being held liable, there are various pieces of litigation going through the courts, which are incrementally seeking to expand this concept of duty of care and also seeking to break down the barriers that not -- it's not piercing the corporate veil between the subsidiary and the parent but getting around some of the protections of the corporate veil by seeking to impose these duties directly on parent companies. And that has been mirrored in certain, as I say, civil jurisdictions.

And perhaps one of the most interesting features of the last 12 to 24 months has been the connection claimants are making between climate change and human rights issues and various pieces of litigation being brought, which seek to get damages based on the human rights impacts of climate change.

So alleging that climate change causes physical consequences through, say, changes in weather and has various physical effects and that those physical effects of climate change have knock-on human rights consequences for example, by affecting people's right to life or health?

Gautam Naik: Phil Bloomer, Executive Director of the U.K.-based Business & Human Rights Resource Center explains why the transition away from fossil fuels could trigger human rights concerns for some companies?

Phil Bloomer: A lot of the companies in the energy transition, particularly … the energy transition minerals like lithium, cobalt, copper, manganese, zinc, nickel, those companies have to start looking as this enormous growth happens in the demand for thos3 -for those transition minerals. Those companies have to make sure that's done in a way which does not destroy the human rights and livelihoods of many communities in those areas where these deposits are found. They're often in an isolated regions, and therefore, they are often indigenous people that have special rights that have to be respected.

The second would be this extraordinary rise in regulation. And I think what you -- we've talked about the European human rights due diligence. We're also seeing now that, for instance, the European directive for decent work, which includes a copy of the Tariff Act in the United States, which essentially would put an import ban or ban imports from goods that are likely to have been created through forced labor -- with the inclusion of forced labor.

And that is about due diligence because it puts the onus of proof back onto the importer. It's not up to the authorities to prove it, it's up to the importer to prove that it's not been produced with forced labor. So again, you can see this shift that's happening in that regulatory environment. We also believe that, that's going to start growing out into some emerging markets and will not be just a Western concept. After all, due diligence is -- human rights due diligence is central to the UN guiding principles.

Gautam Naik: Robeco, the Dutch Asset Manager, has long engaged with companies on traditional human right subjects such as forced labor or unfair pay practices. More recently, it has branched out into new areas of human rights risks, such as the advent of social media and even artificial intelligence. Here is Danielle Essink, an engagement specialist on human rights at Robeco.

Danielle Essink: Key example I would like to share today is an engagement we're doing -- still doing in the technology sector, where you see a lot of societal impacts like hate speech on Internet platforms, but also the topic of this and misinformation, especially around COVID, for example, that actually can have severe impacts if people don't get the right information.

So what we're doing there across that technology sector, we're really asking those companies about their approach to content moderation specifically. And what we've seen is that, that push from investors sometimes joined by multi-stakeholder initiatives, civil society asks is creating two things. It's, first of all, creating for us as an investor, more clarity on what the processes are that these companies are trying to tackle quite complex issues. So we can assess the quality of that.

On the other hand, we're feeding that those companies with information on what we would like them to do additionally. And that's mainly based on information from civil society experts. So this is not something we think about from a desk in our head offices, but really try to inform ourselves by experts. And steps companies have taken, for example, is we've seen amended content moderation policies. There's better transparency on these topics, but also many more and more of these technology companies are actually providing us with human rights policies that they're implementing and throughout their organization. So I think bringing that investor importance of human rights and these societal impacts is really helping these companies develop on that side.

So one of the key concerns we had a couple of years ago with the tech sector is that we were really concerned about the fact that we were unclear about how they're taking human rights into account within their business model and strategic planning. This was also emphasized by indices like the Ranking Digital Rights Index that ranks companies based on how they deal with privacy, but also how they look at freedom of expression.

And we started engaging with a number of tech companies on the lack of, for example, having a human rights policy. And in one case, we were actually able to provide feedback to a human rights policy that was still in a draft format and added some really important parts like, for example, this specific commitment to the UN guiding principles but also making sure that the use of artificial intelligence was particularly mentioned in that policy.

And it's really great to see that after a long engagement with the company, that policy is currently public. We're talking to them about the implementation. That's really where we will see the results, of course. But that ongoing dialogue is really where we're trying to add value to both our own investment process, but also creating a societal impact.

Gautam Naik: Now geopolitical conflict can be a challenging subject to ESG-minded investors. But long before Russia invaded Ukraine, Robeco had started a research project on the human rights risk as it relates to conflict areas. Here again is Danielle.

Danielle Essink: Let me start by saying that we're, of course, deeply saddened with the situation currently happening in Ukraine. And unfortunately, we have seen an increase in conflict-affected areas in the past year with also the 2021 coup in Myanmar is another example.

We indeed did an extensive piece of research that will guide our engagement for the coming three years on this particular topic. And the main reason for starting that research was really the disconnect we saw between NGOs and their reports, but also the more data-driven processes that we run on the investment side. The data and controversy scores we received from our data providers were generally very quite low when it comes to company performance in these type of specific environments.

We felt that conflict-affected areas was really an under-researched topic in the investment community, not really broadly picked up by investors and that is luckily improving. I think that is also an important trend we see. But we really felt, first and foremost, that we needed more information to really do our own due diligence in a good way.

Gautam Naik: So that's really interesting. Are there any particular parts of the world where you focused your attention when you started the program?

Danielle Essink: Yes. We take a broad focus here. So what we, first and foremost, did we tried -- we worked on a methodology to really evaluate human rights risk exposure and due diligence efforts of our portfolio companies in really any conflict affected area worldwide. Unfortunately, there is quite a long list where we have concerns. And how we do that is we really look at the human rights policies that these companies have.

The grievance mechanism, a very important part, but also things like remediation is very important. What we did here is really to try to bring the information that NGOs bring to us really the information from local conflicts or situations of ongoing conflict to our investment process.

Gautam Naik: It seems that not just Robeco, but other companies or asset managers are also getting more concerned. There are more shareholder resolutions. So investors are certainly picking this up as an important subject. But is it mainly for moral ethical reasons? Or is there a business case for why an asset manager and investor should care about a human rights conflict thousands of miles away?

Danielle Essink: Yes. Two things to add there. I think, first and foremost, we really recognize that conflict-affected areas pose big challenges for companies to operate responsibly and safeguard human rights on the ground. But indeed, I think there is also clearly a business angle. So of course, first and foremost, we would like companies to do the right thing in any markets where they're operating.

But if you look at the additional amount of regulatory pressure on companies, the increased transparency also on what companies and actors are doing in certain circumstances. I think the amount of information we get from current conflicts is really different than what we saw 10 years ago. So I think it's more visible and it's more scrutinized and thereby also a business risk for these companies.

Esther Whieldon: So as we've heard, human rights issues can be difficult to assess if they can pose a serious threat to the legal, financial and reputational well-being of companies because they involve sensitive issues such as child labor, climate change and even data privacy.

Lindsey Hall: And increasing pressure from investors, legislation and the public is really pushing businesses to understand, identify and publicly disclose such risks. But the really tough part isn't just knowing that these risks exist, it's then doing something about it. If you'd like to hear more about the topics we discussed in today's episode, please stay tuned for our upcoming series where we take the ESG Insider podcast on the road.

Throughout May, we'll bring you interviews and key highlights from the S&P Global Sustainable1 Summit. The Summit will be held in Paris on May 10, in New York on May 17 and in Sydney on June 9. And we'll include a link in our show notes in case you want to sign up to attend any of these events in person. We'll be digging into topics like net zero and nature positive, advancing social equity and measuring progress. So we hope to see you there.

Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Canjelosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

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