If environmental, social, governance (ESG) investing was a soundtrack, “S” would be the song too often skipped over for its more catchy “E” counterpart – the green, chart-topping hit that has crowds gathering at a certain Glasgow concert later this year.
Encompassing a complex and broad range of issues, the majority human rights related, the social factor of ESG has arguably received less attention than the “sound of the moment” – the environmental dimension. Poor quality of data available and lack of knowledge are reasons often cited for this.
But there are signs that this is shifting as sustainable investing goes viral and countries adopt new standards and regulations. The coronavirus pandemic and the socio-economic devastation left in its wake has also reinforced the importance of the social component of ESG. Investors can’t afford not to engage in human rights concerns.
For Dorothée Baumann-Pauly, director of the Geneva Center for Business and Human Rights (GCBHR), understanding how Europe’s financial institutions were already addressing human rights was one of the first things her team embarked on after launching the GCBHR at the University of Geneva in 2019.
The result was a study published at the end of 2020, conducted across six countries and surveying financial institutions with a combined €14.5 trillion of assets under management. Ahead of a webinar organised in collaboration with Sustainable Finance Geneva (SFG) on the topic on 4 May, we sat down to speak to Baumann-Pauly about the role of human rights in sustainable finance and wider ambitions for the GCBHR this coming year.
The “S” in ESG - is it fair to say that it is overlooked?
Absolutely. When I arrived at the University of Geneva in 2019, which was also around the time of the first Building Bridges conference, it really struck me that the sustainable finance conversation at this point was all green. This wasn’t only exclusive to Geneva but across the finance industry. And coming from NYU Stern Center for Business and Human Rights where we had recently published a report on the need to better define the “S” in ESG, I saw this as an opportunity where we could really help practitioners committed to sustainable finance figure out how to integrate human rights into their data.
When we say “overlooked”, in what way and why?
Our research at NYU Stern showed that social factors have not been the focus of early ESG products, particularly those developed for investor use. Of the 580 rating products aggregated by the Global Initiative for Sustainability Reporting, 97 per cent of environmental efforts and 80 per cent of governance efforts target investors as the primary audience. When it comes to social efforts, only 14 per cent similarly target investors.
The NYU report also highlighted that the measurement of “S” usually focused on what was “most convenient” as against what was “most meaningful”, and that “S” measures were often “vague”. Consequently, measuring these “S” factors was unlikely to yield the information needed to identify social leaders among issuers.
Today there are indications that particularly the “S” factors can make a difference for investment outcomes but social factors are more difficult to package for investor use than environmental factors. More work needs to be done to address this gap and financial institutions can create incentives for companies to provide better data on the “S”.
Surely ecological and social considerations need to be taken together?
Definitely. Human rights are the other side of the same coin of climate change. One affects the other and hence those agendas should go together. We need a conversation on sustainability from exclusively environmental issues to including social aspects in a world that is increasingly concerned about global inequality. It's timely now that the finance industry also addresses this issue.
Another understanding that has evolved significantly in the past year is that a lot of companies have claimed for many years that they are just the middleman and that they have no leverage over social and environmental conditions. This is not the case – we have seen this in the context of commodity traders in the cobalt supply chain.
If there is a political will, business to business companies can also certainly create leverage. To highlight this, we are currently working on a case study of ABN AMRO, a Dutch bank that through their lending practices engages with palm oil producing companies in Indonesia to ensure decent working conditions and respect for environmental standards on palm oil plantations.
You recently surveyed financial institutions across Europe, including 20 in Switzerland, to find out how they are addressing human rights. What did you find?
We wanted to create a base of data to show what was happening in the finance sector and to see where things stand; what is the status quo for human rights at financial institutions. The results were quite optimistic in that the respondents say they are really open to taking this on but they lack the manpower and the expertise to do it well. So it was almost a call for more support. Us now teaming up with Sustainable Finance Geneva is hopefully a step in that direction in educating and supporting companies in the financial industry to take on human rights.
You launched the Geneva Centre for Business and Human Rights just over a year ago – what are your ambitions?
Our mission is to challenge and empower business leaders to make practical progress on human rights. To do this, we’re helping them to develop sustainable business models that create value for business and society. We also work on the education front to make sure that human rights become a standard element in business education because it’s at business schools where future leaders are being educated. In Geneva, for example, a lot of graduates from the Geneva School of Economics and Management find jobs in the finance industry. So preparing them for the human rights challenges that the industry is facing is highly relevant.
Finance is just one of the areas your team is working on. Can you tell us about your other projects?
Human rights challenges are so different in each industry. The classic cases are sweatshops in global manufacturing supply chains in the garment or electronics industry, but there are new challenges as well for example in the ICT sector with questions around right to privacy or freedom of expression. At the GCBHR, we have projects in different industry sectors that matter to Switzerland.
In the extractive sector, we focus on commodity trading companies sourcing cobalt from the Congo where we support the development of responsible sourcing standards for artisanal and small scale mining sites. We also have a project on agriculture supply chains in India where we are supporting the development of human rights risk mitigation strategies during the Covid pandemic to enhance supply chain resilience. We are also partnering with the Geneva Centre for Security Sector Governance (DCAF) and the International Committee of the Red Cross (ICRC) on substantially revising a toolkit for companies that operate in complex business environments, such as conflict and post conflict environments.
I am personally very involved in advancing human rights through adapting business school education. In 2017, I co-founded a network of business schools, the Global Business School Network for Human Rights, that today comprises over 60 schools from around the world. I am also co-chairing the business and human rights working group of the UN Principles for Responsible Management Education (PRME) to integrate human rights in core management education. Bringing human rights to business school education and educating future business leaders advances our objectives long-term.
What about current standards and regulations - how are these helping advance human rights in the finance industry?
Human Rights due diligence requirements will affect financial institutions in the future. The EU Taxonomy Regulation came into force in July 2020 and it will start to apply in practice from January 2022. It includes requirements for human rights due diligence: in order to qualify as “environmentally sustainable” according to the EU Taxonomy Regulation, businesses' "economic activities" must align with the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs). This means that beyond the mounting expectations from clients, there will also be regulatory requirements to align corporate policies and practices in the financial industry with human rights.
How can we increase the conversation here in Geneva?
Our aim for this year is to ensure that the next Building Bridges at the end of November, which is the exact same week as the UN Forum for Business and Human Rights, has a human rights component. Everything starts with shaping the debate to then taking action. As the biggest sustainable finance event in Switzerland, the summit will be really important in providing a platform to drive the conversation on human rights. We hope to partner with the Thun Group of Banks, an informal industry platform that was created in 2011. The Thun Group has already been discussing the implementation of the UN Guiding Principles in financial institutions for the past ten years. Since January 2021 we have entered what the UN calls “The Decade of Action” and the GCBHR stands ready to support companies in advancing human rights in corporate practice.
Professor Dorothée Baumann-Pauly is the director of the Geneva Center for Business and Human Rights, at the University of Geneva’s School of Economics and Management. Since 2013, she has also been research director at the NYU Stern Center for Business and Human Rights.
Over the past ten years, she has taught both in the United States and in Europe on various topics related to human rights and has published extensively on issues at the intersection of business ethics, corporate responsibility and private governance mechanisms.
She earned her PhD in Economics at the University of Zurich and lives in Lausanne with her family.