M-RCBG Faculty Working Paper Series No. 2018-01
Money, Millennials and Human Rights: Sustaining 'Sustainable Investing'
John G. Ruggie and Emily K. Middleton
As recently as the late 1990s, “there was no recognition that companies had human rights responsibilities,” according to Arvind Ganesan, head of business and human rights at Human Rights Watch. Today, that responsibility is increasingly recognized by global firms as well as the transnational regulatory ecosystems in which they operate. According to the Economist, the “watershed event” in gaining recognition for the corporate responsibility to respect human rights was the endorsement by the United Nations in June 2011 of the Guiding Principles on Business and Human Rights (UNGPs). UN High Commissioner for Human Rights, Zeid Ra’ad Al Hussein, calls the UNGPs “the global authoritative standard, providing a blueprint for the steps all states and businesses should take to uphold human rights.”
Of course, this responsibility is far from being universally acted upon even in societies where the recognition itself is relatively robust. “We didn’t take a broad enough view of what our responsibility is, and that was a huge mistake,” Facebook CEO Mark Zuckerberg conceded in the wake of the Cambridge Analytica privacy breach fiasco, in which as many as 87 million Americans’ user profile data was compromised and then weaponized in the 2016 United States presidential election.
Capital markets and stock analysts in particular have been remarkably slow to catch on to the issue of corporate responsibility, let alone human rights specifically, even as their salience to companies and stakeholders has increased significantly for the past two decades. But that complacency is now being challenged by the fast growing interest on the part of asset owners and asset managers in “ESG” investing: taking into account environmental, social, and corporate governance performance of companies in making investment decisions. Some form of ESG investing, also known as “sustainable investing,” now accounts for some $26 trillion or more than one-quarter of all assets under professional management (AUM) globally.
However, a potential challenge for of ESG investing going forward is the lack of standardization and the mixed quality of information in all three domains, especially the S, which is by far the weakest. Social performance is about how well a company manages risks to people connected with its core business. In doing so, it drives positive outcomes for society and protects and creates value for the business. Thus, the S domain in ESG is heavily populated with human rights-related elements, as seen in Table 1. But these are seriously under-conceptualized and fail to draw on well-established substantive and procedural human rights standards. Fixing this problem would improve the reliability and comparability of S ratings, and of trust in ESG data overall.
The first part of this paper examines the rise and current state of ESG investing. The second addresses the conceptual and statistical weakness of the S domain. The third describes how drawing on internationally recognized human rights standards can strengthen the S and thereby improve the robustness and comparability of ESG aggregations. This should interest investors, issuers, and human rights advocates alike.