In the Mindful Money/RIAA annual survey of NZ investors, Human Rights scored as the highest issue for concern (90%). The HR Category identifies companies in any fund whose activities have caused major harm to human rights. Business leaders need to ensure their culture and strategy, creates good outcomes for people and reduces risk of human rights infringement. A company makes choices about the countries in which it operates, how it treats people, how it manages complex supply chains, and how it manages worker and product safety. The risk of harm is high if businesses focus on profits and short-term goals with little regard for ethics, long-term reputation, or even the long-term financial health of the company.
What are Human Rights and are there global standards?
As stated by the UN:
“Human rights are rights inherent to all human beings, regardless of race, sex, nationality, ethnicity, language, religion, or any other status. Human rights include the right to life and liberty, freedom from slavery and torture, freedom of opinion and expression, the right to work and education, and many more. Everyone is entitled to these rights, without discrimination.”
There are two primary international instruments which set out minimum expectations:
International Bill of Human Rights - brings together all the important treaties and protocols including the foundational document, the UN Declaration of Human Rights agreed in 1948. NZ is a party to the specific covenants within this framework.
International Labour Organization’s Declaration on Fundamental Principles and Rights at Work - protects fundamental rights of workers including freedom from forced labour or child labour and rights to be free from discrimination and to be free to bargain collectively.
Expectations for fund managers to respect Human Rights are laid out in the UN Guiding Principles on Business and Human Rights (UNGPs). The OECD has adopted these within the “Guidelines for Multinational Enterprises (2017)” which contains specific principles for institutional investors. In addition, fund managers can sign up to higher standards, through another UN framework, the Principle of Responsible Investing (PRI).
Nations need to embed these human rights into laws. However, some countries have not protected these human rights by law. As the Principles of Responsible Investment guide states; ”where (laws) fall short, business entities’ responsibility to operate to higher international standards remains.”
Many global companies have signed up to the UN Global Compact and supporting principles. This is a voluntary code with no enforcement. However, information services monitor compliance and provide information on non-compliance to professional investors.
Expectations from society continue to rise. A nation can add laws to drive higher standards. For instance, UK and Australia have Modern Slavery Acts, requiring companies to perform due diligence over their supply chains. In Aotearoa, more businesses are changing their practices in order to honour the principles of Te Tiriti o Waitangi.
Why do Professional Fund Managers care about Human Rights?
There is a clear market in serving savers who have strong ethical values and do not want any of their savings in companies that cause harm to people. Some NZ funds have created strong approaches to serve these investors – recognizing that there can sometimes be a trade-off in better ethical outcomes over short term returns.
The financial case is also strong, as harmful events may reduce the financial performance and share price of the company through penalties (lawsuits or fines), loss of customers and brand reputation. Impacts from bad practices may not emerge until years afterwards. For instance, Glencore (a very large mining company and commodities trader) pleaded guilty in 2022 to corruption charges in the USA and UK dating back more than 6 years and agreed to pay fines of $1.5bn.
Responsible Investors manage risk through a range of approaches:
- Using ESG scoring to identify companies with higher risk of harm and reducing the weighting to those companies.
- Actively engaging in meetings with the management of companies on issues of concern.
- Using voting power on AGM resolutions to encourage better outcomes e.g. voting against re-election of the Chair.
- Excluding a company from a portfolio if the financial risk or harm is above a threshold.
How does Mindful Money identify companies who have breached Human Rights?
Mindful Money’s philosophy for Human Rights focuses on the scale of harm to people. This aligns with our mission to make money a force for good. Financial risk is a supporting consideration. Our philosophy means Mindful Money may identify more companies than some fund managers who focus on the financial perspective.
Mindful Money aims to make consistent decisions and has a structured framework supported by data from Sustainalytics, a global screening service (covering 30,000 global companies). This service gathers public data from media and NGOs about events involving a company that have caused harm to human rights.
A company may have caused a single event with a large negative impact e.g. a pollution accident affecting the people’s health in a large area. Or it has a pattern of events, which indicates a culture of poor practices e.g. on worker health and safety.
Sustainalytics builds an overall company score from specific sub-categories. Mindful Money’s threshold for consideration for inclusion on the list is any company with an overall rating of “High” or “Severe” or where there are multiple “Significant” scores. If a company improves its practices the rating will improve, and Mindful Money will remove the company from the list.
Mindful Money also reviews decisions from major global responsible investors such as the NZ Super Fund and the Norwegian pension fund (NBIM).
Mindful Money’s Investment Committee which makes policy decisions on the Human Rights Category. Some questions are complex. For instance, Myanmar has a large garment manufacturing industry supplying global retailers and employing tens of thousands. The Myanmar democratic government (overthrown by the military) has given guidelines that companies can retain suppliers where “the good outweighs the harm” and if the military is not profiting from the activity. Mindful Money will therefore list those companies with links to the military, but not all companies operating in Myanmar.
Should I be as concerned about Human Rights as the Environment?
Environmental harm and human rights are integrally linked. On 28 July 2022, the UN General Assembly adopted a historic resolution, declaring access to a clean, healthy and sustainable environment, a universal human right. This highlights the risks to human health and habitable land areas from climate change, unsustainable management and use of natural resources, pollution of air, land and water, poor waste practices and the resulting loss in biodiversity.
Our environment is defended by humans and especially by the indigenous people who live in important habitats for climate stability. In June 2022, Indigenous expert Bruno Pereira and journalist Dom Phillips were murdered while investigating harm in an Amazon region of Brazil. This region is home to the greatest concentration of uncontacted peoples on earth and is under severe threat from illegal activities which threaten the livelihoods of the indigenous people.
The question of Just Transition is also important. Communities who rely on high carbon intense industries (e.g. coal mining) could suffer severe economic hardship, unless mine operators and governments can support access to new opportunities. Green technologies also have risks of human rights issues e.g. child labour in lithium mining.
Why is Mindful Money concerned about Governance and Business Ethics?
Governance covers how a business is managed by its board of directors and senior leaders. These leaders create the strategy and culture for the business through targets, rewards, and governance oversight of operations and risks. Governance failures can lead to major corporate failures and harm to the societies in which they operate.
An example of is the Opioid crisis in the US, which caused large scale addiction and deaths in marginalized US communities. Boards and CEOs of large pharmaceutical companies drove the aggressive promotion of opioid painkillers due to the attractive profits and dismissed evidence of the scale of harm. In 2022, 6 companies agreed to settle $22bn in claims brought by a group of US States, Cities and Counties.
Major Human Rights Themes Identified by Mindful Money:
The following examples bring to life the types of harm that Mindful Money investigates:
Labour Rights; harms due to poor treatment of workers, child and forced labour.
Activision Blizzard: In 2021, authorities in California filed a civil action against Activision Blizzard (makers of the Call of Duty game). The action cites equal pay violations, gender discrimination and that Activision fostered a “frat boy” workplace culture where female employees were subjected to ongoing sexual harassment and retaliation. Microsoft has made a bid to acquire Activision (to complete in 2023) and the impact on workers of this deal has been subject to scrutiny from US Federal Trade Commission.
Top Glove: In July 2020, the US Customs and Border Protection banned imports due to use of forced labour by the world’s largest supplier of latex gloves (based in Malaysia). Debt bondage is a form of Modern Slavery, where a migrant worker takes on high debt to pay fees to a recruitment agency who holds their passport until the debt is paid. Workers work excessive overtime to repay the debt and live in overcrowded accommodation (20 to a room). The company has taken measures with $36m paid to 13,000 workers to release them from debt bondage. As a result Top Glove is no longer on Mindful Money’s list. However, Top Glove still risks using forced labour in the future, due to recruitment practices in Malaysia for migrants so will continue to be monitored closely.
Situations of War and Conflict; harms due to violations of the Geneva Convention
Ashtrom Group Ltd (Occupied Palestinian Territories): This Israeli property company lets commercial and industrial premises in Israeli settlements in the West Bank. This is serious infringements of the rights of the individual in situations of war or conflict. The area of the properties in the West Bank area is outside the agreed borders of Israel and has been occupied since 1967 under the civilian and military authority of Israel. Under Geneva Convention a state should not transfer parts of its population to occupied territory. The settlements cause substantial harm to the Palestinian population, resulting in loss of property, access to resources and restrictions on movement.
Adani Ports (Myanmar): Myanmar has suffered decades of repressive military rule, widespread poverty, civil war and ethnic cleansing against the minority Rohingya people. In February 2021, the military ousted the democratic government and continues to violently repress protest. Adani, an Indian port development company, signed a deal with a military-owned conglomerate to develop a Port Terminal in Myanmar. The UN advise that any business partnership with the military regime constitutes a high risk of contributing to human rights abuses and the violation of international law. Adani has announced an intention to withdraw, but has not provided a target date.
Business Ethics; harms due to poor culture, governance and oversight or bribery and corruption
Credit Suisse: The Swiss bank has been subject to international criminal investigations over suspected tax evasion, market manipulation and money laundering. The bank paid a penalty of $2.6bn in 2014 for tax related violations. Failures of governance and risk assessment have been cited in relation to failure to identify fraud and mismanagement of loans to UK company Greensill which collapsed in 2021 and left Credit Suisse with large losses. The UK Guardian also reported on a leak of data which revealed the secret owners of £80bn of funds including from “clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes”.
Public Safety; failure to take sufficient care with product design or in response to issues
Mattel: Different models of Fisher Price rockers have been implicated in the death of infants. On 5 April 2019, the US Consumer Product Safety Commission (CPSC) and FP jointly issued a warning to consumers regarding the company’s Rock ‘n Play sleeper, linked to at least 50 infant deaths and over 700 injuries since 2009. A US House Committee found that FP “failed to ensure the Rock ‘n Play was safe, ignored warnings that it was dangerous, and marketed it for overnight use despite clear evidence of its risks” . In 2022, newer models have been implicated in 13 infant deaths, leading to new product safety warnings by U.S. Consumer Product Safety Commission. The impacts are very large for Mattel across financial, operational (due to product recalls) and reputation.
Human Rights harm caused by Resource Extraction; impacts on communities who live near sites
Mindful Money includes harm caused by poor practices in resource extraction within our Environmental harm category. However, it is worth noting that resource extraction can lead to major harms to human rights such as pollution affecting a community’s safety and access to water and food resources, major accidents results in severe injuries to workers or people living nearby, violations of indigenous rights. Two notable examples of where resource extraction has negative impact on human rights are:
Vale SA: one of the world’s largest iron ore miners, whose failure to manage risks resulted in two horrific disasters in Iron Ore Tailing Dams in Brazil in 2015 and 2019. Toxic waste from the first disaster continues to pollute the large Doce river. In the second disaster, millions of tonnes of toxic waste destroyed a village and killed 272 people. In 2021, Vale was ordered to pay $7bn in compensation.
Rio Tinto: in May 2020, Rio Tinto destroyed Aboriginal 46,000-year-old sacred sites in the Juukan Gorge, at an iron mine in Western Australia. Rio Tinto's board conceded that this should not have occurred and was a major failure of their own governance and policies. There is a pattern of community related incidents involving Rio Tinto in South Africa, Canada, US and Serbia. Shareholder outrage led to the resignation of several senior executives and the Chair. Since the scandal, Rio is commissioned an external investigation into its workplace culture. The investigation found systemic bullying, sexual harassment, and racism across its global mining operations. Although Rio Tinto are taking positive steps towards improving their practices, investors should remain cautious until there is more evidence of delivery.