By far the largest focus in recent years in terms of 'responsible investment' has been on the 'Environment' limb of ESG. The UN Principles of Responsible Investment ("PRI") – an international organisation working to encourage the integration of ESG factors into investment decision making – is now seeking to change this with the launch of its 'Advance' initiative, which is a "collaborative stewardship initiative where institutional investors work together to take action on human rights and social issues". This forms part of a renewed effort to reinvigorate the 'Social' and 'Governance' limbs to ESG and bring social initiatives to the forefront of 'responsible investing'.
What is the PRI's Advance initiative?
The Advance initiative is composed of 220 institutional investors - representing an aggregate US $30 trillion in assets under management - that 'endorse', or 'participate' in, the initiative. Endorsement is simply a public declaration of agreement with the initiative's goals, whilst participation focuses on engaging with companies that are a part of the initiative as a lead or collaborating investor.
40 focus companies have been selected to be in the first phase of the Advance initiative, all of which are within the metals & mining and renewables sectors. These companies are the "initial focus" companies for which it is intended that investors will engage in the promotion of human rights as they relate to company operations. The selection methodology for the initial focus companies incorporates a number of factors, including whether a company could be considered systemically important within their sector, and so selection does not necessarily indicate that a company has a poor human rights record.
The metals & mining and renewables sectors were initially chosen due to: (i) the high human rights risk profiles associated with such companies; (ii) the relatively limited issues surrounding ownership structures,1 which allows for influence by investors; (iii) the shift towards more renewable sources of energy; and (iv) the closely linked relationship between the sectors.
The expectation set by the Advance initiative is that each of these 40 focus companies will:
- implement the UN Guiding Principles ("UNGPs") (for further information on the UNGPs, please read our earlier blog posts here and here);
- align their political engagement with their responsibility to respect human rights; and
- further progress on the most severe human rights issues in their own operations and across their value chains.
The first of these requirements likely presents the most tangible example of where companies need to operationalise and implement a strategic plan. The UNGPs focus on three pillars, namely: (1) the state duty to protect; (2) the corporate responsibility to protect; and (3) access to remedy (from both the state and organisational levels). In relation to the first pillar, the UNGPs establish that there is a requirement in companies' roles as "specialised organs of society performing specialised functions.to comply with all applicable laws and to respect human rights". Guiding Principle 15 of the UNGPs states that in order to meet this responsibility to respect human rights, companies should establish policies and processes appropriate to their size and individual circumstances, including (but not limited to):
- a policy and commitment to meet their responsibility to respect human rights;
- a process of due diligence to identify, prevent, mitigate and account for and address their impact on human rights; and
- processes to enable the remediation of any adverse human right impacts caused or contributed to by them.
Such requirements will demand tangible action from the initial focus companies that goes further than simply considering human rights impacts.
The expectations placed on companies by the second and third pillars of the UNGPs go hand-in-hand. A crucial part in making progress in relation to the most severe aspects of human rights is active political engagement, especially in the sectors of metals & mining and renewables, where projects require significant government consultation and dialogue, in addition to various permits and regulatory requirements. The Advance initiative is placing the onus on these companies to push forward a human rights centric agenda in their dealings and political involvement.
Investors and companies setting the standards - an early indication of the direction of travel
The adoption of the UNGPs as the benchmark for the Advance initiative is significant in and of itself. Whilst that may to some degree be purely pragmatic, the UNGPs underpin and inform human rights rules across the world – albeit such rules generally fall short of the UNGPs, often as result of 'watering down' during the legislative process. By adopting the UNGPs as the benchmark, the PRI and participating investors are communicating expectations in relation to human rights engagement by businesses that goes beyond established national and international rules and regulations.
The Advance initiative serves as another reminder of the leading role that companies and investors are playing in enhancing focus on human rights and environmental due diligence ("HREDD") in the face of actual, or perceived, inaction from governments and international bodies in relation to HREDD. Whilst mandatory HREDD obligations are already in-place across Europe, including in France, Germany and Norway, and the EU is expected to adopt the Corporate Sustainability and Due Diligence Directive in 2023 (see our earlier blog post on the Draft Directive here), both the UK and the US are yet to adopt similar legislation2, causing investors to call for the introduction of such legislation.
As legislation and investor led initiatives such as Advance increasingly become the established norm in relation to human rights standards, it is likely that other governments will follow suit in establishing human rights legislation, with the UNGPs as the baseline for such legislation.
What can companies do going forward?
The Advance initiative represents a clear statement of expectation from an informed community of investors, which serves to highlight the steps that responsible companies might consider adopting in order to meet the expectations of the Advance initiative.
All companies, whether Advance initiative focus companies or not, should consider assessing their current human rights policies and procedures and whether they meet the requirements of applicable human rights laws and international best practice in the first instance. Companies should then consider whether there are any further actions that they can take to demonstrate progress on human rights issues within their own operations and across their value chain.
The Advance initiative's focus on the broader value chain is both a risk to be mitigated and an advantage to be utilised for focus companies in particular. Senior management and compliance personnel will already be aware of the legal and reputational risks that human rights factors can present. Such risks should be appropriately mitigated by way of consideration of human policies and procedures and their application to suppliers, customers and other third parties.
However, the Advance initiative should also be seen an opportunity for focus companies to use their selection to their advantage. The focus companies were selected partly because of their position of systemic importance within their own sectors. The focus companies can, therefore, leverage their position in the market to place pressure on companies in their value chain to improve their human rights policies and procedures, thereby positioning themselves as corporate human rights leaders. This 'chain reaction' throughout industry supply chains is, in part, what may make the Advance initiative more effective than existing initiatives.
Public scrutiny of all companies in relation to human rights factors is only likely to increase in the short to medium term. Companies who carry out proactive and early consideration of the requirements of the Advance initiative and of other similar initiatives such as the GRI Standards (which came into force on 1 January 2023 and were the subject of our earlier post here) in order to manage human rights risks may find themselves in a better position in the future as the 'business and human rights space' matures and established best practice crystalises.
1. Companies with greater than 50% state or cooperative ownership were excluded due to the limited leverage that investors are likely to have with such companies.
2. Whilst the US proposed human rights due diligence legislation in 2019 (Corporate Human Rights Risk Assessment, Prevention, and Mitigation Act of 2019), it has yet to be adopted. In the UK, no proposals have been made in relation to HREDD legislation. See our earlier blog post here (Investors call on the UK Government to mandate human rights and environmental due diligence).
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2022. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.