Inclusive Development International has responded to a call for input from the UN Working Group on Business and Human Rights as it prepares a report on the topic of “Investors, ESG and Human Rights.” We applaud the Working Group for focusing its attention on the important—though often underappreciated—implications of ESG investing for human rights and corporate accountability, something we have been focused on for several years as part of our “Stop ESG Washing” campaign.
In our submission, we outline systemic problems in mainstream ESG investing that not only prevent the industry from delivering on its promises to consumers, but more importantly, create a system of ESG washing that undermines efforts to hold companies accountable to their human rights responsibilities.
Our interest in ESG investing stems from years spent investigating the corporate and financial actors behind harmful investment projects, during which we regularly found that ESG-labeled funds were invested in corporations causing and contributing to human rights violations—including mining companies that pollute and grab land without accountability, construction companies that cut corners leading to death and destruction, and dozens of companies that are propping up Myanmar’s genocidal regime.
ESG investment not only benefits these companies financially, but it can shield them from accountability. That is because many investors and lenders see a company’s high ESG ratings and inclusion in ESG-labeled funds as a “stamp of approval,” so are less likely to scrutinize its practices or to pressure the company to take corrective action in the case of human rights abuses. This cuts off an important avenue for advocacy, undermining efforts by communities and human rights defenders to secure redress.
In our comments to the Working Group, we emphasize the role of two types of actors in directing ESG-labeled capital to harmful companies:
- ESG index providers, the firms that create and maintain ESG-labeled indexes, which form the basis of many ESG-labeled funds
- ESG ratings providers, the firms that assess and rate companies’ ESG performance, helping to determine which are included on ESG indexes
Industry leaders MSCI, FTSE Russell, and S&P Dow Jones offer both sets of products and services, giving them an enormous amount of power and leverage within the system. As we argue in our submission, they have a responsibility to use their leverage with companies that appear on their indexes to prevent or mitigate any human rights abuses those companies are causing or contributing to. That includes the responsibility to conduct due diligence to identify abuses and the responsibility to act when abuses are identified, including by downgrading implicated companies’ ratings and excluding them from their ESG indexes when problems go unresolved.
Unfortunately, ESG ratings and index providers, including MSCI, FTSE Russell and S&P Dow Jones, rarely do any of this.
Systemic reforms are needed to ensure ESG index and ratings products adequately capture and reflect human rights concerns, and to align the ESG investing industry writ large with the UN Guiding Principles on Business and Human Rights. Our recommendations, detailed in our submission, include:
- ESG research and ratings firms must go beyond company self-reporting and corporate policies to assess actual impacts, including testimony from communities affected by a company’s operations.
- ESG research and ratings firms should prohibit the use of amalgamated ESG ratings, which obfuscate salient human rights and environmental impacts.
- ESG ratings should assess a company’s performance in each category in absolute terms, rather than grading companies on a curve against industry peers, as is current practice.
- ESG ratings firms should ensure that the ratings of any company that has caused or contributed to serious human rights violations are downgraded to such an extent that it will be automatically excluded from ESG indexes and funds. The lowered score should persist until the human rights abuses are remedied—regardless of whether the “controversy” fades from the news cycle.
- ESG ratings and index firms should establish effective human rights grievance mechanisms to receive complaints related to companies that are rated and listed on ESG indexes.
As scrutiny from regulators and investors has increased in recent years, many financial actors have begun making adjustments to their ESG-related products. Our hope is that this shakeup will ultimately lead to truly responsible investing options.
Our full submission to the UN Working Group is available here.