In order to earn an ethical premium in the long term and convince increasingly demanding investors, companies have few options but to integrate social responsibility in their business model way upstream.
The Covid crisis might have given a welcome boost to reformers seeking more social justice in business. The next edition of the World Economic Forum (WEF) is looking for a «commitment to urgently build the foundations of a more fair, sustainable economic and social system». The WEF envisions «a new social contract centered on human dignity, social justice, where societal progress does not fall behind economic development».
Often credited for accurately seizing the current state of mind, the WEF is not the only institution to push for change. Inspiration is coming from many initiatives. Companies are increasingly aware that commitment to sustainability should be paid more than lip service, as investors are getting ever more demanding in this area.
«We need to change the corporate view that companies are not politically responsible», says Professor Dorothée Baumann-Pauly. The German-born scholar founded the Center for Business and Human Rights at the University of Geneva’s School of Economics and Management. With a doctoral degree in economics from the University of Zurich, she argues that business and human rights can go hand in hand.
«From a corporate perspective, bringing human rights into the business context is still very new», she admits. «But we work with companies and support them to make practical progress, without any blaming or shaming.» Seven years earlier, she had pioneered that field at the NYU Stern School of business. «Change is not always immediately possible», she acknowledges, «but it’s possible, because, increasingly, respecting Human Rights is business relevant.»
She works on case studies of companies that explore how to develop business models that align business objectives with human rights, «like ABN Amro or Decathlon». Now she hopes to scale and replicate some of the positive approaches with a critical mass of companies, including those gravitating within the WEF network.
Professor Baumann-Pauly emphasizes that human rights challenges are sector-specific. In the commodity trading industry, challenges include issues such as child labor in cobalt mining production chains. In the garment industry, where multinationals employ very cheap labor in Bangladesh or Ethiopia, brands can do more. «Companies in the garment sector must change their purchasing practices in order to build human rights into their core business», she says.
Proving that profitability and share price performance are as good or better when companies respect human rights throughout their value chain is a challenge. But sustainable investing is increasingly grading companies based specifically on their ESG (Environmental, Social, Governance) performance and impact. Many funds select companies based on both the ethical grade and the more classical performance metrics.
The Swiss financial sector is particularly scrutinized when it comes to sustainable finance. Sustainable funds have been growing fast. But banks move in reaction to clients and regulators rather than leading the trend. The investing industry focuses primarily on the environment area, but not so much on the social area.
Pre-crisis, activities of the Swiss financial sector generated around 20 times as much CO2 as all the countries activities combined and represented 2% of global emissions. But the Swiss financial sector is now also bound, to a certain extent, by the Paris Agreement. Its article 2c provides that «finance flows must be made consistent with a pathway towards low greenhouse gas emissions and climate-resilient development».
In line with the Swiss liberal tradition, the Federal Council does not want to regulate the financial sector too specifically when it comes to climate issues, relying on self-regulation instead. But we know from a climate test undergone by 79 pension funds and insurance companies last year (representing two thirds of the assets managed), that their investments would longer-term lead to a global warming of four to six degrees – instead of the 1.5 degrees required by the Paris Climate Agreement. The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (Finma) will have some responsibility in reporting on the sector’s climate risks.
The real green pressure is coming to the financial sector from the EU action plan. It aims to push a big chunk of invested assets into green investments. This means integrating sustainability risks, factors and disclosure requirements in several EU directives (MiFID II, UCITS, AIFMD, Solvency II), effective by the first quarter 2021. Soon it will be required from the banking and asset management industries operating with EU clients to recruit ESG research teams and integrate ESG ratings in their IT systems (portfolio management, trade compliance, reporting systems) to be compliant with these EU directives.
Professor Dorothée Baumann-Pauly aims to focus on the poorly defined «S» in the ESG objectives. «The value creation process impacts society at large», she explains. Companies sometimes relocate local communities in order to build infrastructure. «Any such project needs to be subject to stricter human rights checks, so that the impact of economic activity can be turned into a systematic positive impact.» But getting companies to protect basic human rights is still a remote prospect.
Recently, after the tragic death of George Flyod in the U.S., the racial issue took center stage. Jeff Bezos placed a «black lives matter» banner at the top of the Amazon website, Nike pledged 40 million $ to support the black community (with its partner Michael Jordan donating 100 million $ the same day), while rival Adidas pledged 120 million $ for the same purpose a few days later.
Commendable initiatives. But it will take deeper change to entrench human rights within business processes.