Environmental, Social, and Corporate Governance (ESG) is all the rage in finance.
Investment portfolios deemed ESG-compliant now amount to $40.5 trillion assets under management worldwide. That’s around 40 times the value of the world’s richest corporations. The global social bond market (where returns are measured against beneficial social outcomes) in now worth $163 billion according to law firm Linklaters, having increased by a factor of 10 in just 12 months.
And the 2021 version of BlackRock’s Larry Fink’s totemic letters to CEOs talks of companies with better ESG profiles as enjoying a “sustainability premium” in investment returns. According to Fink, a remarkable 81% of “a globally-representative selection of sustainable indexes” outperformed their parent benchmarks throughout 2020.
Yet, the fact remains that while the E and G are relatively well understood, the S is not. Nowhere is this more evident than in the finance sector. “What does the ‘S’ really mean?” Bloomberg breathlessly asked in one of its recent sustainability analyses of investment trends.
We believe the findings of our new research help reach an answer.
In a world first for the sector, my colleague Kym Sheehan and I have compiled a Financial Services Human Rights Benchmark to measure the sector’s compliance with the human rights standards that lie at the heart of the ‘social’. We recently released our first Annual Report.
The ‘S’ is commonly misunderstood. Good corporate social responsibility is not just about charity – donations to artistic or sporting events, or to political or civic causes. Rather, a truly meaningful social profile is one that recognises the impact of a corporation’s core business on a range of social issues including employee relations and diversity, health and safety, privacy, and freedom of expression. In other words, respecting human rights.
A big part of why corporate social responsibility is such an elusive and malleable concept lies in the continuing confusion over what this or ESG have to do with human rights. On this point, the Bloomberg report put it well: it nominates “the human experience of day-to-day life” as the “endpoint of ‘S’”.
Kym and I argued much the same in our submission to the Hayne Royal Commission, where we noted that in the vast majority of ASIC misconduct cases involving financial services entities, the human rights of customers or clients were adversely affected, even if neither ASIC nor the financier recognised as much.
These findings formed the basis for the development of our Benchmark, which examines the human rights policies and practices of the 22 largest ASX-listed financial institutions, across the breadth of their operations, for the financial year 2019.
Using human rights categories that reflect intuitive, everyday interpretations of what they mean in a financial services context, we found that people’s rights to privacy and information, non-discrimination, economic security, health and safety, voice and participation, and adequate remedies were all at risk across the full range of business operations.
Our data shows banks, fund managers and insurance companies mis-selling products to retail customers based on dodgy information exchanges and discriminatory tactics, alongside weak or non-existent due diligence processes regarding corporate lending.
Predatory workplace cultures in wealth management entities and lax supply chain management practices are also problem areas. And while recent modern slavery legislation in the UK and Australia has caught the attention of risk managers, this is the exception that proves the rule of human blindness and neglect throughout the sector.
Overall, the ‘traffic lights’ system of measurement we use in the Benchmark yielded mostly red and amber with only a smattering of green in respect of stated human rights policy positions (NB. the green-free graphic below reflects overall company results after factoring in levels of performance which, tellingly, did not match up to the biggest policy promises).
For many financial institutions the problem is not a lack of awareness – we found that many in our sample made references to human rights policies of some sort. Rather, the problems lie in ownership and understanding of what these policies mean in practice.
Simply put, human rights are seen as peripheral, non-financial risks that fit loosely within an ESG framework, and not as material risks to institution’s core business.
Our Report underlines this point by revealing that none of the 22 firms we examine “allocate a role to the board or to its key committees to consider human rights in the sense envisaged in the UN’s Guiding Principles on Business and Human Rights.”
Not only is this a risk management problem, it is also an opportunity missed. As demonstrated by the banks accommodating approach toward pandemic-stressed debtors, financiers can be active promotors of social goods including human rights.
The tide, however, may be turning. BlackRock’s latest statement on human rights, for example, can be fairly summed up in the words: “of course human rights risk is a material risk to any business!”
And further, Deloitte’s most recent global survey of risk management highlights the fact that financial firms see ESG factors as by far the most pressing risk they face, ahead of cybersecurity and credit, and nearly three times more pressing than conduct, culture and reputation.
The time is therefore ripe for the sector to get serious from the top down about how human rights fit into the ‘S’, and what they mean for finance. Our Benchwork bears this out, but also, importantly, it signposts a path towards catching more green lights and running fewer reds.
Prof David Kinley is a Human Rights Law expert and co-lead designer of the benchmark. Follow David on Twitter at @dwkinley and read more about his research interests and curriculum vitae.