Human Rights Day: Placing business practices under real scrutiny

Newton’s Andrew Parry writes how engagement is leading to companies taking action to prevent human rights abuses


Andrew Parry, head of sustainable investment, Newton Investment Management

The Covid pandemic is accelerating a number of global trends that present both challenges and opportunities for human rights.

One of the challenges is that most companies rely on audit systems to assess the conditions of their supply chains, and to assure that there are no human rights abuses at any level. With the lockdown measures and travel restrictions in place, audit activities on the ground have become increasingly difficult, if not entirely impossible.

On a more positive note, we believe that there has been a shift in how we are thinking about human rights issues as a society. The Covid emergency has really brought the role of corporations under the spotlight. Right before the pandemic, a US business roundtable saw 180 companies pledging to take into account the wellbeing and interest of stakeholders and not only shareholders.

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Both investors and the general public are placing business practices under real scrutiny, and are now realising that human right abuses do not just happen in developing markets, but involve workers throughout the entire supply chain. One example is the investigation into fashion company Boohoo for modern slavery; when it was announced, there was a huge backlash against the company with significant consumer reaction and the shares of the company fell by close to 30%.

One of the most exciting drivers of these changes is technology. Social media is changing the sentiment of consumers and investors, and how they react to news flow concerning human rights abuses. It was easier to ignore these issues when they involved people and situations perceived as far away, to which people could not easily relate: social media has made these issues more tangible, more real. New technological advancements are also making it easier to monitor and track labour practices throughout the supply chain.

As investors, we think it’s important to engage with the companies to help them improve their social practices. Most of the challenges for large businesses comes from the fact that supply chains can grow to become so complex and convoluted – sometimes involving tens of thousands of providers. With transparency around much of the supply chain often lacking, it becomes difficult to spot human rights abuses on the ground. A survey by ETI – Ethical Trade Initiative showed that 67% of large companies believed that modern slavery was present to some degree in their own supply chain, and 42% cited the complexity and length of the supply chain as the main reason why it is so difficult to completely avoid or prevent such occurrences.

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While companies could simply refuse to work in countries and markets where such abuses happen, we don’t think this is necessarily the best outcome. There are other factors to consider: some issues may derive from cultural differences or from a lack of infrastructure, and sometimes those very supply chains provide the means of living for a significant part of the population. So we believe our duty as responsible investors is to engage with companies and help them take action on site, to develop social infrastructures and education programmes that may help to identify, mitigate or prevent human rights abuses.

The range of sectors where there is a risk of human rights abuse or modern slavery is broad and wide, including almost any type of commodity, from coffee to cocoa, from fishing to mining. The risk increases the closer one gets to the beginning of the value chain, but consumer-related companies may also suffer as their brands can be swiftly damaged by news relating to abuses within parts of their supply chain.

The companies that manage risks well often achieve operational efficiencies and related benefits; they are usually more efficient and flexible in inventory management, and can harvest a reputational premium – either by simply avoiding involvement in legal cases and lawsuits, or by catering to a small but growing number of consumers who are actually willing to pay more for a sustainable brand. A 2016 study published in the Journal of Operations Management found that glitches in the supply chain resulting in any productions or shipment delay leads to a decrease in shareholder value by 10%; now we would argue that this is even higher when cases of human rights abuses are involved.

Human Rights Day marks the anniversary of adoption of the Universal Declaration of Human Rights (UDHR) by the United Nations General Assembly on December 10, 1948. The document proclaims the inalienable rights which everyone is entitled to as a human being – regardless of race, colour, religion, sex, language, political or other opinion, national or social origin, property, birth or other status.

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