Human rights: A just transition and what disclosures mean for confidence

Human rights and climate change 

Almost a decade ago at COP21 in Paris, a UN report highlighted the inextricable connection between climate change and human rights[1]. The conclusion was that climate-induced harms in vulnerable areas and job displacements from technological advancements are indivisible. 

In LGIM’s Human Rights Policy[2], we highlight that companies should address not only the primary impacts on human rights, but also the secondary impacts resulting from other issues. Examples may include assessing the human rights impacts of deforestation activities or companies’ decarbonisation strategies. 

What we discovered from our survey responses

Our survey, undertaken as part of our human rights campaign, sought to understand how companies manage such secondary impacts. 

Climate impact emerged as the top-cited issue of concern for about 50% of the respondents, especially within the auto, utilities, and extractive industries. Artificial intelligence was also cited as a key challenge, according to 16% of surveyed organisations. 

The symbiotic relationship of human rights and climate change is particularly reflected in companies undergoing business transitions as they respond to a changing climate. 

Here are some examples of companies that have responded to the impact of climate change on human rights: 

·         In the energy sector: A Latin American company has invested in asset rotation for over a decade to transition to a low-carbon economy. This includes ramping up renewable energy goals and shutting down existing coal-fired power plants. While creating new jobs, this required managing existing workforces’ job security, reskilling workers and addressing land rights and displacement issues.

Many companies in the survey highlighted partnerships with local communities as part of achieving a just transition benefiting employees and society:

·         In the mining sector: An Asian metal and mining company highlighted that its business activities are evolving as it expands into green energy and metal opportunities. This strategic shift, aimed at addressing climate-transition risks, involves operating in more complex environments and jurisdictions outside the company’s established home market. Consequently, it faces challenges in navigating international markets, where human rights standards vary significantly between jurisdictions. This has pushed the company to evolve its corporate human rights policy and adapt its human rights risk management to align with local practices in managing specific risks. 

·         In the automotive industry: A European company demonstrated how human rights remains an integral part of its just transition strategy, from managing supply-chain risks for the extraction of raw materials for batteries of EVs, to retraining employees. While the company’s electrified mobility solutions should benefit the climate transition, they also potentially entail higher human rights risks with the need to manage upstream supply-chain risks. 

While international guidelines – such as the UN's 'Protect, Respect and Remedy' Framework – provide a valuable foundation and frequently shape regulations for businesses regarding human rights and climate change, we believe it is ultimately the responsibility of companies to be accountable for their human rights impacts. They must engage responsibly in climate change mitigation and adaptation efforts, ensuring full respect for human rights as they do so.

From disclosures to efficacy and investor confidence

Our Human Rights Policy recognises that managing human rights requires continuous effort. Even if companies meet all our disclosure expectations, this does not necessarily indicate that a company is ‘good’ regarding human rights.

Companies need to be accountable for human rights risk management in their own operations and supply chain. 

Currently, our view is that there is a lack of global consistent guidance and methodology in measuring businesses’ human rights performance. An indication of whether we consider a company to have high confidence in human rights management goes beyond meeting the disclosure expectations we have outlined. 

Our engagement has, therefore, focused on companies’ ability to demonstrate accountability in human rights management, which for us involves setting up robust management systems. We engage with companies regardless of whether they have met our human rights expectations, as meeting these does not necessarily indicate strong human rights performance. 

One consideration is if companies are willing to disclose their human rights performance. While more organisations are beginning to do so, we notice the level of detail is often insufficient, in our view. 

Transparency and confidence

Another focus of our engagement is emphasising the importance of how companies respond to actual human rights incidents, not just potential ones, and demonstrating the effectiveness of their management. Companies that we engaged with in our campaign showed that better disclosures lead to higher investor confidence. These companies disclosed identified salient issues and lessons learned from incidents, demonstrating the effectiveness of their policies and plans. Failing to identify and address issues suggests that companies have not thoroughly examined potential human rights concerns, indicating that current measures might not be effective.

In our direct engagements, some companies revealed that they have established quantitative Key Performance Indicators (KPIs) and disclose relevant performance data to evaluate human rights performance. However, we believe that human rights performance should be assessed using both quantitative and qualitative approaches. 

KPIs should align with identified salient risks and evaluate the effectiveness of measures to mitigate, prevent, and remedy these. We encourage companies to incorporate qualitative performance evaluations into their human rights management practices to drive continuous improvement. 

These examples illustrate how we gain confidence in investee companies’ management of – and accountability for – human rights. Specifically, we emphasise showing efficacy through actions taken beyond policy commitments. 

What’s next?

As we draw the first stage of our human rights engagement campaign to a close, we will continue to assess what we can learn from our survey responses, and to select a smaller number of businesses for future engagement, using our broader research to drive meaningful dialogue with companies whose positive practices and developments have the potential to improve human rights standards across their industries and supply chains.

 
[1] New UN Report Details Link between Climate Change and Human Rights 
[2] https://www.lgim.com/landg-assets/lgim/lgim-human-rights-policy-004_v2.0-1.pdf