Spotlight on Human Rights, Climate Change, and a ‘Just Transition’
3 July 2022
Most Money Matters clients rate human rights as a key ethical issue. At Money Matters, we aim to help our clients make a difference on this issue – and these three new reports (highlighted by the Responsible Investment Association Australasia (RIAA) Human Rights Working Group) assist us in doing so:
Human Rights and Climate Change – a guide by KPMG and RIAA.
Human Rights with a focus on supply chains – an investor toolkit from RIAA
An Investor Focus on Indigenous Peoples’ Rights and Cultural Heritage Protection – an investor toolkit from RIAA
We highly recommend all investors read these reports. In this blog, we discuss some key points of interest from the first report; Human Rights and Climate Change.
Accounting for human rights when tackling climate change
This report highlights that many investment funds are failing to properly account for the social dimension of human rights when accounting for the environmental dimension of climate change. It includes the following quote from Brynn O’Brien, Executive Director, Australian Centre for Corporate Responsibility:
“Human rights and climate change remain very siloed in current investor practice. Climate goes into the ‘E’ bucket of ESG (Environmental, Social and Governance) risk and human rights goes into the ‘S’ bucket. It has been hard to get investors to see that they need to merge the two.”
The report provides the example of an investor wanting to making a positive contribution to the United Nations Sustainable Development Goals (see the Money Matters blog on the UN SDGs) SDG 13 (climate action) and 7 (affordable and clean energy) by investing in lithium-ion battery technology. However in doing so, they may be ignoring their impact on SDG 8 (decent work) due to widespread child labour in mining for cobalt for some such batteries.
How some customer-facing companies are addressing transition-related human rights
Two German care manufacturers recently took action to address transition-related risks to human rights within their companies’ value chains. They decided to investigate potential human rights issues related to the procurement of Chilean lithium for the batteries used in their electric vehicles.
The report explains that this consideration of human rights risks is appearing more and more often within sustainable tech companies – which are generally more sensitive to the importance of reputation than their upstream suppliers. This is in part because consumers who choose to buy electric vehicles are considered more likely to take into account the ethical nature and human rights impact of the manufacturing process.
When South American Indigenous communities publicly expressed concerns about the impact of lithium extraction, Volkswagen responded by sending a delegation to Chile’s Atacama region. The delegation’s role was to assess the social and environmental impact of the mining operations. Its findings revealed a lack of clarity around lithium mining’s impact on the local community’s water access. This meant extraction could not be classed as non-damaging.
Since recognising this potential human rights risk, Volkswagen and a number of other companies created the Responsible Lithium Partnership. This is an initiative including multiple stakeholders – both German and local Indigenous – which aims to encourage sustainable lithium extraction in the area.
Existing frameworks for identifying human rights and environmental impacts
Several international frameworks are already working to establish expectations surrounding how companies and investors identify and mitigate their human rights and environmental impacts. They are significant and practical instruments, such as the UN SDGs. Another example, “The United Nations Guiding Principles on Business and Human Rights”, states that the responsibility to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate. The challenge to business is highlighted by the UN Office of the High Commissioner for Human Rights: “Businesses are also duty-bearers. They must be accountable for their climate impacts and participate responsibly in climate change mitigation and adaptation efforts with full respect for human rights.”
New legislation regarding companies and human rights
The EU Mandatory Environment and Human Rights Due Diligence law is a key new development in this area. Adopted in March 2021, the European Parliament’s Draft Directive recommends a law requiring companies to:
respect human rights, the environment and good governance
not cause or contribute to potential or actual adverse impacts through their activities
prevent and mitigate those adverse impacts
be accountable and liable for those impacts
The proposed law would apply to any companies operating in the EU or governed by the law of a member state. Importantly, it would include not just the business itself, but also its value chain. This means its impact would be global. A company’s ‘value chain’ is much broader than its ‘supply chain’. The ‘value chain’ refers to all activities, operations, business relationships and investment chains of an undertaking. It also includes direct and indirect business relationships, both upstream and downstream, which either:
a) Supply products/services that contribute to the company’s products/services, or
b) Receive products/services from the company.
These proposed laws are also to have extraterritorial effects, which would “affect the social, economic and environmental development of developing countries and their prospects of achieving their SDGs”. This new law’s potential impact is incredibly significant – not just for a company’s own operations but for their supply chain’s operations, too. It will require companies (and investors) that have not engaged with climate‑related human rights risk to do so, and there will likely be penalties for non-compliance.
In May 2021, the USA introduced legislation recognising the need to address the dual challenges of environmental and social issues. US President Joe Biden signed an executive order on climate-related financial risk. The order commissioned a roadmap towards enhanced regulations on climate-related disclosures from financial companies. Importantly, the order recommends that the social cost of greenhouse gas emissions should be woven into government procurement decisions. This indicates that Biden’s administration believes human rights risk should be part of climate disclosure.
Investing in a ‘just transition’ to a low-carbon global economy
Institutional investors, such as fund managers, represent the interests of a vast number of stakeholders – and collectively control over USD$100 trillion. This puts these institutions in a strong position with great responsibility, as well as unparalleled leverage. They need to respond to the increasing global demand for achieving a ‘just transition’ – i.e. ensuring that the transition towards a sustainable low-carbon global economy is achieved with minimal harm to humans. Despite the crossover of these trends, many investors have been slow to recognise that the human rights impacts caused by climate change must be factored into their calculations of portfolio risk.
The Human Rights and Climate Change report provides a range of strategies investors can use to identify and assess climate-related human rights risks. To learn more about how we can cease, prevent or mitigate adverse impacts in a way that aims “to achieve a holistic, de-siloed approach to the issue”, I highly recommend reading the full report.
