With regulators and investors demanding action, companies need to get on the front foot with human rights

Our last article asked if companies are prepared to meet new demands to address human rights. Having spent several years assessing companies on their approach to human rights, I believe most companies have – for decades – failed to meet fundamental expectations on respect for human rights, and that these new demands are in part a response to that failure; voluntarism hasn’t yielded sufficient results, and mandatory due diligence and disclosure legislation is booming.

Some companies do the hard work, and also rightly call for a level playing field through useful legislation to address the problems of free-riding and a race to the bottom. But for other companies, fully implementing the UN Guiding Principles on Business and Human Rights is a bridge too far. And not because it can be hard and cost money – companies spend money and manage to do difficult things all the time. But consider one wicked barrier: problematic business models where negative impacts on people are built into the business, through labour exploitation, community impacts, consumer harm etc.

It becomes very hard to respect human rights, when your profit margin relies on uncosted externalities. And we can end up in a depressing situation where companies effectively argue that it is their fiduciary duty to not respect human rights if doing so would threaten shareholder value. If that sounds odd, have a look at how hard corporate lobby groups have pushed back against mandatory due diligence and sustainability disclosure legislation.

Institutional investors, which often invest in hundreds or thousands of companies, have a key role to play in helping companies meet the new demands to address human rights, and this goes beyond their stewardship and engagement activities. They need to be articulating the materiality of human rights to their portfolio. Whisper it, but in the short term, an individual company’s attempts to respect human rights might not actually create better returns. However, a company that relies on social externalities will be having impacts on the broader systems that society and markets rely on. This can drag down the whole market. So the relatively small gain from one bad apple not respecting human rights, may be far outweighed by the subsequent harm to a diversified portfolio. Recognising this requires a shift in investor mindset – away from a focus on individual companies, to a view of the broader systems that companies operate in and impact.

Overall, action and disclosure by companies on efforts to respect human rights is slowly becoming a hard law requirement, reinforcing the materiality of the issue to corporate boards and their shareholders.

Companies should take every opportunity to get ahead of this trend and implement a holistic approach to human rights, rather than playing regulatory whack-a-mole chasing global regulation on narrow, if important, issues. Investors need to help advance this agenda. Together, they can push towards economies where companies profitably solve societal problems, without profiting from societal harm – something we should all agree is a good target to aim for.