The COVID-19 pandemic and heightened concerns about climate change, racial injustice, and income inequality have injected fresh urgency into the need for more sustainable investing. The pandemic’s devastating effects have laid bare how health and economic crises disproportionately affect families living in poverty, no matter where they live around the globe. More recently the conflict in Ukraine has highlighted how complex the decisions around investments, as well as around divestments, in countries violating international law can be. What are the consequences for a population if massive investments flow into a country that may violate human rights? But also what will happen to a population when divestment touches access to food and essential goods? This makes the case for integrating human rights into impact investing, particularly if investors want to ensure they’re truly using their money for good.
Results-based management and a narrative of change
The idea of sustainability-focused enterprises is that they are built themselves, help build societies, and take on these challenges. They seek to advance solutions to poverty, equity, justice, and climate change – in theory – and if prioritised and well guided, in practice – they address the gap between the increasingly crucial SDGs and current investments. It is a question to ponder: why is it that ESG investments are increasing as well as the amount needed to reach the SDGs? If the former really had an impact, the latter ought to decrease. The SDGs have not changed, but the focus on ‘sustainable’ investing has. And not all sustainable investments are necessarily supported by a framework – e.g. results-based management – around a narrative of change which is necessary for any sustainable development initiative.
A theory of change is a method that explains how a given intervention is expected to lead to specific development change, drawing on a causal analysis based on available evidence. It helps identify the underlying assumptions and risks that will be vital to understand and revisit throughout the process to ensure the approach will contribute to the desired change.
The issues around human rights and development challenges are complex. A theory of change can help decipher the many underlying and root causes of development challenges and how they influence each other. This is helpful when determining what an investee should prioritise to maximise their contribution to achieving development change.
Results-based management influences every stage of the activity’s cycle, including programmatic, business and policy. From obtaining and using evidence about existing conditions, analysis and trends to strategic planning, implementation, monitoring and reporting, and evaluation, which should ideally be repeated regularly. This means that while the process may seem linear and each step builds on the other, the process should be dynamic and iterative rather than static in practice. Otherwise, the responsiveness and the adaptation that are crucial to effective actions are lost.
Factoring human rights into impact investing
Private sector actors who claim to be sustainable and work towards the realisation of the SDGs should strive to respect, promote and implement good standards in their practices – even when operating in a state whose policies violate international law. The company may have little influence over such governmental policies. However, it should at a minimum refrain from endorsing or supporting a particular policy or activity that violates human rights. This includes instances where the government may be acting to protect the company’s interests such as public security clamping down on activists protesting against a company’s operations. It also includes having internal policies that respect and implement international standards.
This means using human rights as a guide to the impact of our decisions. One major positive outcome of this is the change in the understanding of the work this requires. The hope is that the thinking of these requirements around social sustainability will shift – from more paperwork to acknowledging that there is a lot to be done around the process. All while showing actual impact, even if slow, on social issues.
Legislative developments
Increasingly more legislation about human rights due diligence for the private sector is being proposed in the EU, as well as the EU Member States individually. It is evident that very soon it will become mandatory to be able to show more than just a nice policy on non-discrimination, for example, but actually show how workers’ rights are respected beyond the EU. Investors will also be asked to report on this and this will have a spillover effect in countries where suppliers, as well as a company’s operations, are located.
This means businesses can’t simply mitigate negative externalities of business practices, but must rather find ways to anticipate and prevent negative impact in the first place. Otherwise, there will be clear legal repercussions. This suggests a significant step towards increased responsibility of firms, which goes beyond symbolic efforts and implies a major change to the overarching business model. It also means, however, that there will be a focus on “accountability”, “transparency” and “redress” as well as “effective control”. Interesting that these concepts were developed in the context of international public law which guides private entities and they are now being used as a basis for regulations for private actors – those with power over individuals, and groups and a real influence on the future impact on societies.
When it comes to dealing with internal violations of rights in international instruments, this is done by national institutions. This is why it is so important to respect due diligence if a violation has been committed and to have fair legislation, law enforcement and an impartial and effective judiciary. In these cases, the state is dealing with violations as it is supposed to – taking action to prevent and address (and redress). This shows the national system is functioning and thus direct international responsibility (as in “liability”) will not follow as it would if the state did nothing to prevent or address these violations – or even actively participated in them. There is thus a responsibility to prevent wrong-doings and to act if they have taken place, rather than an expectation that a violation will never occur. This non-discriminatory legislation creates a fair society based on respect. This is what the EU and many of its member states are doing now. Realising the power that private sector actors have on sustainable development, environment and human rights issues, the states are regulating their operations. Not only indirectly within the complex web of relevant national and regional legislation and standards, but directly with legislative acts addressing the responsibility of these private actors on society and the environment.
All private actors are subject to this “horizontal” effect of international law. An individual cannot expect impunity for committing murder or kidnapping, for example. The states that have ratified such conventions are obligated to implement these rights and are bound by said international law. The first thing they do is enact legislation that protects all of us from violations and ensures redress if we experience any. Until recently, it must have been presumed that detailed legislation specifically targeting investors and companies was either not desirable or not necessary. Not so now.
The notion that this is the state placing the responsibility of respecting people and climate on the private sector is erroneous. The EU is a group of sovereign states with requirements they agreed to upon ratifying treaties on, such as human rights and labour standards. They are obligated to guarantee adequate legislation for all subjects that ensures that any violation of rights can be addressed at a national or regional level so as not to be in violation of the treaty. Requiring a company to ensure that they guarantee decent labour practices is no different from putting the legal obligation on me not to murder my fellow man. Similarly, requiring investors to do their due diligence on investees as to how they treat people and the planet – and having sanctions in place if they don’t or actively engage in rights violation – is no different than obliging me not to sign false cheques. We each have a certain power over others and are accountable for our actions to the law. Putting the onus on investors and private actors is proportionate to their power over others. It may be new, but it is not the states putting their responsibility on others. It is the competent legislative body doing what they are supposed to and requiring relevant entities to follow the law.
It is crucial that the investment world and those who claim to be sustainable, use tried-and-tested tools that already exist. Social impact will not happen overnight but that does not mean that steps cannot be taken to positively affect social issues right away. It is a misconception to think that this is too onerous for the sector. If the sector wants to be sustainable, we are well beyond the point where being sustainable can be a claim to fame without making the necessary efforts. The bottom line here is that you must take human rights into account in impact investing. Amongst the tools available is also using human rights and a human rights-based approach to analysing situations and effects on society, as well as elements of internal governance.