Increasingly, executives and boards need to understand these costs and ensure they have adequate systems in place to identify and address such impacts. Management of human rights risks should be part of a firm’s overall approach to risk management.
From 2005 to 2011, I served as the UN Special Representative on Business and Human Rights. My mandate involved extensive consultations with business leaders and other stakeholders around the world. I encountered many companies that had experienced significant legal, reputational and operational costs as a result of stakeholder concerns regarding the adverse impacts of their operations.
Legal risks include exposure to claims under the Alien Tort Statute, a federal statute that allows foreign plaintiffs to bring claims against companies for involvement in the violation of certain international human rights norms. Even when these plaintiffs’ claims are ultimately dismissed, these cases are costly to litigate and may involve long-term reputational damage to the defendant. Companies may also be exposed to high-profile international advocacy campaigns, shareholder resolutions and local community protests if they fail to manage the adverse human rights impacts of their operations.
Managing risks related to social impacts may formerly have been considered purely a matter of philanthropic or public relations concern. Companies have come to realise, however, that failure to develop cross-functional strategic responses to these impacts can have devastating results. In my April 2010 report to the UN Human Rights Council (UNHRC), I referred to one company that found it had experienced a $6.5 billion ‘value erosion’ over a two-year period due to non-technical risks, including community opposition and delays in regulatory approvals. Indeed, in some industries such stakeholder-related risks constitute the single largest category of non-technical risk companies face, yet many companies do not adequately measure or manage them.
A convergence of expectations
Earlier this year, at the conclusion of my mandate, I released the UN Guiding Principles on Business and Human Rights. They provide a standard of expected conduct for companies, and the means to help firms manage human rights-related risk by adopting adequate human rights due-diligence processes.
Human rights due diligence requires companies to develop effective policies and procedures for assessing the actual and potential human rights impacts associated with their activities and business relationships, and to act upon the findings. In practice, some human rights will be more relevant than others in particular industries and operating contexts, and will therefore be the focus of heightened company attention.
Broader periodic assessments are also necessary to ensure no significant issue is overlooked. The UNHRC formally endorsed the Guiding Principles in June 2011. These principles are not just another set of voluntary standards vying for attention in an increasingly crowded space: they are authoritative UN standards around which the articulated expectations of many public and private institutions have already converged.
Major business groups, including the United States Council for International Business, the International organisation of Employers and the International Chamber of Commerce, support the principles. The organisation for Economic Cooperation and Development has updated its Guidelines for Multinational Enterprises, adhered to by 42 countries, adding a chapter on human rights that explicitly draws on and is virtually identical to the UN Guiding Principles.
The International Finance Corporation (IFC) has revised its sustainability policy and the corresponding performance standards it requires clients to meet. For the first time, these now explicitly reference businesses’ responsibility to respect human rights.
In turn, the IFC performance standards get tracked by more than 70 private sector lending institutions and by several national export credit agencies. Finally, the guidance contained in the Guiding Principles is embedded in a new social responsibility standard adopted by the International organisation for Standardization, ISO 26000.