In March 2020, the PRI launched two discussion forums on the PRI collaboration platform to collect investor experiences relating to the COVID-19 pandemic.
The first, entitled ESG responses by investors to COVID-19 in the short-term, brought together 221 investment professionals to discuss immediate social, governance and corporate AGM issues. The second, called Ensuring a sustainable financial system in COVID-19 recovery phase, involved 224 investors and focused on recovery packages, inequality and the need for long-term planning.
The second phase of the PRI’s COVID-19 response led to the creation of five workstreams that focus on themes raised by investors through the collaboration platform. These are:
- COVID-19 and the 2020 AGM season;
- COVID-19 and immediate human and labour rights concerns;
- Financial system functioning in a time of crisis;
- Implications of COVID-19 for emerging markets; and
- Sustainable and inclusive COVID-19 recovery and reform.
To address some of the immediate human and labour rights concerns, the PRI has developed a series of webinars1 and short briefs focusing on three overarching themes:
- Protecting Workers’ Rights through the COVID-19 Crisis
- Supporting Suppliers and Building Resilient Supply Chains
- COVID-19 and Privacy Rights and Cyber Security Risks
Whilst the pandemic and subsequent lockdowns have had substantial negative impacts on a broad range of human rights, the briefs focus primarily on the impacts that the actions of businesses have had both in their direct operations and through their supply chains. The rationale to limit the scope was motivated by the sense that current violations of labour and privacy rights should be addressed immediately and that investors can play a critical role in shaping corporate behaviour. We also consider that a number of these rights are enabling, meaning that when they are violated they deny individuals access to other rights.
Applying the lessons of the current crisis, the aim of these briefs is to increase awareness and understanding of what investors can do now to address, mitigate and remediate human and labour rights concerns, while also emphasising what companies should be doing to ensure alignment with the UN Guiding Principles on Business and Human Rights, with its clear focus on managing labour rights.
It is critical to consider the broader range of risks and negative impacts that the COVID-19 crisis has had on individuals, and sometimes communities — in particular in emerging markets, where the livelihoods of entire groups have sometimes been compromised by lockdowns, in the absence of social safety nets. Lockdowns have also been associated with a surge in domestic abuse, exacerbating the plight of women and children at risk. For children, lockdowns have brought greater risks of online abuse.
Vulnerable and minority groups have been particularly affected by the pandemic and the subsequent economic crisis. In countries including the US, Brazil, and the UK, ethnic minorities have been disproportionately represented among COVID-19 cases and deaths. Migrant workers across the globe have been particularly exposed to human rights risks, with many left stranded without access to work or social safety nets.
The case for investor action
Investors must respect human rights, including labour rights, under the UN Guiding Principles on Business and Human Rights and under the OECD expectations of Responsible Business Conduct for Institutional Investors. Investors are also expected to respect the ILO core standards and to work with investee companies to ensure that they respect human and labour rights.
In addition to these expectations around responsible business conduct, investors should be aware of increasing regulation and legislation around human rights and labour rights relevant to both companies and investors. Policies include the Modern Slavery Acts in the UK and Australia, the California Transparency in Supply Chains Act, the French Duty of Vigilance Law, the Dutch Child Labour Due Diligence Law, and ongoing discussions around mandatory human rights due diligence in the European Union. Given the abuses highlighted by the pandemic, it is likely that the regulatory trend will be reinforced in the recovery phase. Further, inadequate management of human rights risks can expose businesses to legal, operational and reputational risks.
Investors should also pay attention to digital rights. A good approach is to focus on cyber governance, which can be a proxy for cyber resilience and help investors lacking deep technical knowledge assess whether a company has an organisation-wide approach. Two key rationales for focusing on cyber risk:
- Cyber risk can undermine a company’s ability to leverage data as a value driver and reduce trust in products and services.
- Cyber incidents can lead to network disruptions, reflecting high levels of connectedness to suppliers, service providers and customers. These can become legal and regulatory risks and have adverse impacts on portfolio company valuations and earnings.
Considerations for long-term recovery – how do we build back better?2
Restrictions on business activity will be eased at different rates in different countries, and may return if the pandemic accelerates again. This would have an impact on jobs and workers as well as on consumers and spending patterns, with long-lasting effects on supply chains.3 One result may be increased localisation of sourcing, inhibiting exports from some countries. Still, we do not anticipate an end to international trade, which will continue to drive economic growth in developed and developing economies. Companies must also do better at factoring in the true cost of labour; indeed, many businesses too often rely on social externalities and underpaid workforces, which are neither resilient nor sustainable, and which may in fact highlight a market failure because it creates significant costs for society at large. These costs are accumulating and may eventually feed through to risks for long-term investors, including the possibility of significant political or economic upheaval.
As the global economy starts to reopen, businesses, governments and investors have an opportunity to build back better. Investors also have an opportunity to go beyond national and regional legal frameworks, and ensure that supply chain management is in line with best practice, especially in countries where there has been a relaxation of labour laws to attract foreign investment. Investors should also engage with policymakers and regulators to close the current gap in protection of workers’ rights globally.
As set out in the PRI report Sustainable and inclusive: COVID-19 recovery and reform, investors must contribute to a recovery that is fair and inclusive, and which has respect for human rights at its core. The report presents recommendations to investors on how to best approach and devise their engagement with policymakers and regulators, based on a seven-part framework:
- Undertake policy engagement, aligning your engagement and investment objectives
- Work to policymakers’ timetables, not your own
- Leverage arguments based on technical expertise
- Engage at all levels of the policy process, as well as through the media
- As far as possible, work together and speak with a coherent voice, especially where there is consensus
- Better understand the relevant dynamics of policy decision-making across committees and groups
- Be clear about who you represent and how policies impact your investor base
As part of the policy priorities for purpose, fairness and human rights, specific recommendations relate to:
- Understanding the changing nature of connections to human rights risks.
- Safeguarding human rights of workers, suppliers, partners and associates.
- Implementation and disclosure according to UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, and ILO core labour standards.
- Equal treatment of workers in terms of labour and social protection, regardless of contractual status (temporary or part-time contracts, self-employed or gig workers), including rights to paid sick leave and health insurance.
- Disclosure by companies on living wages, freedom of association and collective bargaining, job security and benefits.
- New streams of private finance for communities affected by the low carbon transition.
Besides policy engagement, investors should take into consideration the below when engaging with companies post COVID-19. The considerations encompass issues relating to workers’ rights in their direct operations, supply chain resilience and inclusivity, and human, labour and digital rights,4 which must be adequately embedded in companies’ governance structures and work practices.
Considerations around working conditions
- Carry out risk assessments in countries of operation according to the country’s health care and infrastructure preparedness to deal with epidemics.
- Understand the level of access employees have to treatment and health care facilities in different geographies.
- Understand the level of access direct and indirect staff have to social safety nets (i.e. unemployment benefits, paid sick leave) in different countries.
Considerations around business models and supply chain operations
- Conduct scenario planning for production or service provision to understand the implications to the business (i.e. levels of inventory, changes in demand, purchasing patterns) depending on short-, medium- and long-term recovery scenarios.
- Establish long-term relationship with critical or strategic suppliers and provide capacity building and training around labour performance.
- Ensure that labour costs of products are adequately priced in products and services to allow for payment of at least minimum wage to workers.
Considerations around privacy rights
- Boards and executives should include digital rights as priority in the management of the pandemic.
- Understand how the landscape has changed with the crisis and reinforce the importance of robust corporate governance structures.
- Public-private partnerships to assess risks on digital rights landscape.
- Support regulations relating to data protection and cyber security that companies are expected to adhere to and demand transparency and implementation.
1 All in the same storm but not in the same boat - protecting workers’ rights through the Covid-19 crisis, Supply chain management during the COVID-19 crisis and how to plan for recovery, Navigating cyber security and privacy rights during COVID-19: recommendations for investors
2 See also PRI Sustainable and Inclusive: Covid-19 Recovery and Reform.
3 ILO, Policy brief, A policy framework for tackling the economic and social impact of the COVID-19 crisis, May 2020
4 Some good examples of advanced legislation in that regard are the European Union GDPR and the Network and Information Security Directive (NISD)