Human rights in the social aspect of ESG

The social aspect of ESG reporting includes employment-related activities, respect for human rights, interaction with communities, and communication with customers. Companies often disclose that the multiple reporting requirements can be confusing and that measuring the social impact is more difficult than reporting environmental or governance indicators. One of the social aspects that is difficult to report and somewhat unclear is related to human rights.

When we talk about business activities and human rights, the association is that companies comply with the local laws and human rights as well as labour standards which makes this aspect difficult to measure and report. Indicators that could be included here are the existence of human rights policies, whether companies carry out human rights due diligence; engagement of companies with topics related to child labor, modern slavery, women’s rights, gender equality policies, engaging with stakeholders, complaints, and remedies.

Human rights-related risks

In addition to the above-listed indicators, companies are required to conduct human rights risk assessments as per the United Nations Guiding Principles on Business and Human Rights. The human rights risk assessment is different from the risks that are often associated with operational risks for businesses, or the global risks presented by the World Economic Forum. The risk here is an assessment of the potential adverse impact on human rights. The impact may be indirect, requiring prevention or minimization of the impact, for example, the production of sugar products that may impact childhood obesity. If the impact is direct, it requires a form of compensation for affected communities such as contamination of drinking water and the need for cleaning up the water source, and compensating families if the expenses for accessing drinking water have increased. It is recommended that the risk assessment process begins at the start of a new project or product. The due diligence process outlines the different stages in which companies can address, mitigate, and remedy the human rights adverse impact.

The importance of human rights in ESG reporting

The investor’s interest in measuring human rights in ESG is growing as the social impact is indicative of responsible business conduct and contribution to the communities in which businesses operate. There are various measurement and reporting standards, but there is a risk that they will only become a tick-box exercise rather than a genuine effort from companies to improve their practices to implement minimum standards related to human rights, such as gender equality and fair treatment of employees, supply chain management and diversity and inclusion practice.

Whether the inclusion and reporting on human rights indicators in the social aspect of ESG will increase investors’ future project approval is not yet entirely clear. But from the perspective of the Working Group on Business and Human Rights and the report they are preparing “Investors, ESG and Human Rights“, it is clear that financial actors have the opportunity to encourage the implementation of the UN Guiding Principles by companies. The question is whether human rights reporting becomes a compliance practice rather than a commitment to corporate respect for human rights.