The risks to companies and their investors, of operating in conflict-affected areas, are becoming more apparent than ever. And it’s important for investors to be aware of their responsibilities, in order to better avoid and mitigate these risks.
Human rights abuses, conflict-zones and sovereign risk can all seem like far-away problems, but as Russia’s attacks on Ukraine have escalated, so too has the focus of investors around the need to consider the impact of remaining invested.
A new resource from The Responsible Investment Association of Australasia (RIAA) Human Rights Working Group, aims to help; the Investor Toolkit on Human Rights and Armed Conflict: Managing human rights impacts and international humanitarian law implications before, during and after armed conflicts arise.
It can help investors to understand where a portfolio company might be operating in a conflict area, how to identify potential human rights risks, and how to work with a company that is affected.
OnImpact spoke with Kate Turner, Global Head of Responsible Investment at First Sentier Investors and Chair of the Armed Conflict subgroup of RIAA Human Rights Working Group, about why this report was important now, and how impact investors can integrate consideration of these factors into their decision-making.
RIAA is a valued supporting organisation of the Impact Summit.
Is Risk Increasing? Why Should Investors Care?
Operating in conflict areas greatly heightens potential risks across a range of contexts. While international human rights law applies directly to states, meaning they are the primary duty-bearers of upholding human rights law, there are global frameworks that outline the responsibilities of businesses in upholding legal norms.
The report goes into detail about legal liability and how it operates in various regions and situations. As well the legal treatment here in Australia, where we have a specific criminal code covering ‘war crimes’, where prosecution can cover many jurisdictions.
Legal risk then flows into investment risk, and the report highlights a range of case studies in which global companies have faced accusations of contributing to human rights abuses.
“While there are many conflicts happening in the world at any given time, the escalation of the conflict between Russia and Ukraine led to sanctions that were unprecedented in scope and severity at state level as well as for corporates, which really focused attention on the issue.” Kate says.
“Many companies were faced with difficult decisions about whether to continue operating in the region – and the impact that their exit might have on civilians who needed their goods or services. Investors were also implicated in the crisis, with clients asking about the merits of divesting from these companies.”
Considering ‘risk to people’
It’s vital for investors and businesses to understand their responsibilities when operating in conflict areas.
Responsible investors are accustomed to due diligence processes that involve assessing the risks of certain external factors on their portfolios, but if they apply a model like the UN Guiding Principles, they will also need to assess the broader ‘risk to people’.
“There are several international frameworks relevant to companies operating in conflict zones. Two of the key frameworks outlined in the Toolkit are international humanitarian law (IHL) and international human rights law (IHRL). While the legal frameworks are distinct from each other, they are also inextricably linked.” Kate says.
“Under the UN Guiding Principles on Business and Human Rights (UNGPs), companies have a responsibility to respect human rights. A key way for companies seeking to apply the UNGPs to identify risks in order to meet this responsibility is to conduct human rights due diligence (HRDD). If they are in a region where armed conflict is present or possible, then it may be appropriate to carry out a heightened human rights due diligence (hHRDD) process in order to understand how human rights risks may be impacted or elevated by the conflict. This will identify the range of risks and provide a pathway for managing them.”
Beyond this, companies need to be aware of how activities perceived as acceptable in peacetime may need to be re-assessed in a conflict context. Such as employing private security to protect staff and facilities, which has the potential to impact local conflict dynamics.
“Investors can play a role by setting out their expectations to investee companies, and engaging with them to understand how the company is managing armed conflict risks, from complying with sanctions, to understanding the human rights implications of decisions made through to understanding international humanitarian law (IHL).” Kate says.
“The Toolkit looks at the steps investors can take before, during and after an armed conflict takes place, as the requirements evolve along this timeline. For example, IHL is only triggered when an armed conflict begins, while human rights law is relevant at all times.”
A useful model was featured in the Business and Human Rights Journal in regards to the Russia-Ukraine conflict. It defines some factors that an investor must, should and can do:
- must ensure that they, and the companies in which they invest, comply with sanctions and export controls;
- should take a principled approach to the situation, grounded in human rights and international humanitarian law, which includes undertaking HRDD and recognising the need to avoid doing harm together with broader business needs; and
- can take a number of additional actions, including releasing public information on the approach taken, taking escalation measures such as collaborative engagement and filing shareholder proposals, and consider divestment after undertaking proper due diligence to ensure this action would not result in related human rights issues.
A ‘Responsible Exit’
Divestment is one potential reaction to heightened risk, of any sort. But in a conflict context an exit needs to be considered carefully, as it could further destabilise an already fragile situation.
Many investors didn’t hesitate to withdraw funds from Russia inline with government sanctions, but each case should be reviewed individually.
Considerations could include whether the assets could fall into the hands of those perpetrating human rights abuses. Whether goods being provided by the investment are essential to the remaining populations, and whether remaining in the country could help to mitigate some of the human rights impacts.
“There are several ways to address human rights risks in a portfolio. While the Toolkit does not recommend one over the other, the right approach depends very much on the context. It focuses on company engagement as a first step to better understand the risks and how they are being prioritised, and to communicate the concerns and priorities of investors to a company’s leadership, foster better business practices, and protect client capital.” Kate says.
“The toolkit provides guidance for investors to more confidently and effectively engage with companies on the issue. As with a responsible exit, investors should consider the human rights implications of investment versus divestment, as divestment may reduce the human rights risks faced by the portfolio, but not reduce the human rights risks overall.”
Companies that find themselves in conflict zones will have a heightened risk of human rights abuses. For investors, it’s useful to understand how these risks can flow through to become their responsibility. Taking a proactive approach would involve embedding sensitivity about the potential impact of conflict, and installing a culture of positive action along the entire supply chain.
“We would recommend all types of investors read the Toolkit, to better understand both the risks and opportunities. The Geneva Academy tracks armed conflicts globally, and notes there are more than 110 happening currently. So, it’s clear that this is a pervasive economic and human rights issue, and will take collective action from companies, investors and governments to solve.” Kate says.
“If impact investors, that have a sound understanding of the human rights issues at play, can identify opportunities to contribute positively to this effort, we would love to see them making a difference.”