Reports | Wednesday December 14, 2022

Double Materiality for Financial Institutions

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In the face of emerging regulatory requirements related to environmental, social, and governance (ESG) disclosure and pressure from a wide range of stakeholders, the financial services industry is now looking closer at how to best identify and address the material risks and impacts of their operations and value chains. This is a marked difference from previous ESG materiality approaches, which largely focus on financial risks to the business alone.

Explore our survey on types of materiality approaches currently in use, periodicity and sources of assessments, and priority ESG issues now and in the future.

Blog | Tuesday December 13, 2022

FIFA World Cup: Combating Modern Slavery at Mega Sporting Events

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On Sunday, November 20 at the Al Bayt Stadium in Qatar, Ecuador prevailed 2-0 over the host country team at the inaugural game of the FIFA Men’s World Cup—a tournament marred by controversy over human rights impacts on migrant foreign workers, who were employed at construction sites or provided essential services.

While mega sporting events can be catalytic to promoting human rights, there are indeed serious implications for business not just before, but during and after such events if companies fail to conduct effective due diligence or put in place prevention and mitigation measures. Grave violations of human rights, such as forced labor and human trafficking, entail far-reaching business consequences amidst heightened public scrutiny.

The UN Guiding Principles on Business and Human Rights (UNGPs) provide guidance on the steps businesses should take to avoid infringing on the human rights of others and to address adverse impacts. Businesses that are involved in major sporting events must be aware of their duties and responsibilities.

The Context

Migrant workers who traveled to Qatar with a promise of well-paid jobs, including from Nepal, Bangladesh, India, Pakistan, Sri Lanka, the Philippines, and Kenya, reported widespread labor abuses. Exploitative and forced labor practices amounted to significant recruitment fees, passport confiscation, debt bondage, poor living conditions, and the tragic death of at least 6,500 workers.

Reported abuses are not confined to the construction industry. Thousands of workers in multiple sectors central to the sporting event, such as cleaning services, private security, and waste disposal, have alleged serious human and labor rights violations. Hotel staff in the accommodation and hospitality sector were subjected to slavery-like practices, such as wage retention and high recruitment fees.

Over the years, the nexus between human trafficking and major sporting events such as the US Super Bowl have emerged not only in the lead up to, but also during and after, the event. Sex trafficking, involuntary servitude, and labor exploitation can all increase because of the demand for services and, sadly, due to the influx of visitors to a host city or state. Even beyond an event, infrastructure, such as sporting facilities and hotels, will continue to require workers to maintain and run properties.

Key Business Priorities

Beyond the FIFA World Cup in Qatar, and with other major sporting events planned such as the Summer Olympic Games in France and the 2026 FIFA World Cup across Canada, Mexico, and the United States, there are several key steps business and investors can take:

• Implement a strong company anti-trafficking policy. A viable prevention strategy to address the risks of modern slavery starts with taking a leadership position in developing and adopting a forward-facing policy that addresses fair recruitment of migrant workers. Suppliers and vendors should responsibly source their products and hire staff ethically—sub-contracting practices should be limited and duly monitored.
• Train staff on how to respond. Standard Operating Procedures (SoPs), especially for hotel personnel, should be adopted. Training staff on human trafficking indicators can help identify victims and address the misuse of accommodation premises, including for sex trafficking.
• Enhance grievance mechanisms. Companies can introduce an effective reporting mechanism for workers to safely report labor abuses, exploitation, and other human rights abuses. The application of technology-based innovation can help workers report anonymously.
• Ensure remedy to those affected. As a follow-up to established abuses, companies involved can take urgent action, ensure decent and safe work for migrant workers, and provide effective remediation.
• Involve local organizations and grassroots associations. Businesses can meaningfully engage with human rights and civil society organizations on the ground before, during, and after their involvement with a sporting event to assess risks and adopt necessary mitigation strategies.

Human rights abuses related to large sporting events are sadly not infrequent. With the release of the new Global Estimates on Modern Slavery pointing at 86 percent of forced labor cases happening within the private economy, companies have not only a responsibility under the UNGPs’ framework to counter modern slavery, but also a critical role in promoting and advancing human rights at mega sporting events worldwide.

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Jennifer Easterday

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Blog | Wednesday December 7, 2022

Conflict-Sensitive Human Rights Due Diligence for Tech Companies

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The last decade has seen an increase in state fragility and the number of violent conflicts around the world and a decrease in rule of law. Conflict-affected and high-risk markets are often characterized by serious human rights violations and harm to individuals—including loss of life, basic freedoms, or livelihoods.

Companies operating in these contexts face heightened risks of involvement with human rights harms and could exacerbate conflict and instability through hiring and procurement decisions, partnerships with local entities, compliance with local laws, or the use of their products and services. This exposes companies to potential reputational damage, interruptions in business operations, legal liability, and financial penalties

The tech industry has a particularly complex connection with conflict and instability. Emerging digital technologies have become increasingly essential and ubiquitous factors in our lives, communities, and societies. At the same time, there is increasing evidence of the industry’s role in exacerbating conflict. Moreover, the malicious use or disruption of technology to undermine international peace and security is a growing concern among states and regulators.

Conflict, fragility, and human rights are closely linked: grievances over human rights violations can destabilize and drive conflict, while violent conflict creates additional fragility and heightens human rights risks. The UN Guiding Principles on Business and Human Rights (UNGPs) call on companies to conduct heightened—or more in-depth—due diligence in conflict settings due to the proportionately higher risk of adverse human rights impacts.

What is eHRDD?

Heightened “HRDD” or “eHRDD” is, in essence, HRDD plus conflict sensitivity. It requires identifying human rights impacts as well as conflict impacts.  For tech companies, conducting eHRDD in conflict-affected and high-risk areas (CAHRA) poses unique challenges and requires a rethinking of how technology can impact conflict and pose heightened risks of human rights harms.

CAHRA are “areas in a state of armed conflict or fragile post-conflict as well as areas witnessing weak or non-existent governance and security, such as failed states, and widespread and systematic violations of international law, including human rights abuses.”

They can include situations of mass violence as well as areas with weak governance or rule of law; extensive corruption or criminality; significant social, political, or economic instability; historical conflicts linked to ethnic, religious, or other identities; closure of civic space; and a record of previous violations of international human rights and humanitarian law.

Due to the vast diversity in business models, products, services, and technologies used in the tech industry—such as social media platforms, search engines, facial recognition, AI, machine learning, cloud computing, software companies, quantum computing, telecommunications, or network infrastructure—no two due diligence processes will be the same. However, there are clear phases to eHRDD and concrete steps all tech companies can take.

BSR’s Toolkit provides analytical and operational decision-making guidance for tech companies on navigating conflict-related issues. This practice-oriented guidance was written in close consultation with both the technology industry and other diverse stakeholders, including local civil society from high-risk markets.

We lay out nine steps for eHRDD, and each step has multiple components. By adapting these nine steps, we hope that tech companies can develop robust enhanced human rights due diligence processes that can help reduce the risk that technology contributes to conflict. These steps are:

1. Develop a Formal eHRDD Policy and an eHRDD Process
2. Build and Strengthen Cross-Functional Capacities
3. Scope eHRDD Application: Triggers and Thresholds For eHRDD
4. Conduct a Conflict Assessment
5. Analyze Actual and Potential Impacts
6. Address Impacts
7. Communicate Progress
8. Cross-Cutting Issue: Stakeholder Engagement
9. Cross-Cutting Issue: Leverage Industry-Led and Multi-Stakeholder Collaboration

The guidance is targeted to larger multinational technology companies, but it can also be scaled down and applied by small and medium-sized technology companies or startups. We’ve also developed a short accompanying primer that summarizes the steps above and can serve as a rapid reference framework for companies as they build out these processes. 

Next Steps

However, additional work remains to be done. This guidance is meant to be a starting point for further collaboration, research, and diligence. Specific areas of future focus should include a robust analysis of the impact of different types of technologies on conflict, additional guidance on how to conduct conflict-sensitivity analyses for diverse types of technology, such as artificial intelligence or machine learning, social media, telecommunications, etc., and deep dives or pilots of this methodology in diverse parts of the world.

We look forward to building on this guidance and invite tech companies to get in touch to find out how to get involved.

Reports | Wednesday December 7, 2022

Conflict-Sensitive Human Rights Due Diligence for ICT Companies

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The last decade has seen increases in state fragility and the number of violent conflicts around the world and a decrease in the rule of law. Conflict-affected and high-risk markets are often characterized by serious human rights violations and severe harm to individuals—including loss of life, basic freedoms, or livelihoods.

Companies operating in these contexts face heightened risks of being involved with those human rights harms, and the tech industry has a particularly complex nexus to conflict and instability. 

Our toolkit provides analytical and operational decision-making guidance for tech companies on navigating conflict-related issues. It is intended to help these companies determine:

1. What key systems and processes they need to have to detect and address human rights risks during conflict;

2. What situations and contexts should trigger heightened due diligence practices; and

3. What enhanced or heightened due diligence should entail

We’ve also developed a short Accompanying Primer that summarizes this guidance and can serve as a rapid reference framework for companies as they build out these processes.

Blog | Wednesday December 7, 2022

Scenario Analysis Learnings: Three Big Implications of Climate Risk to Business

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Physical Impacts Locked In over the Next Decade

Rising global temperatures have been affecting climate patterns for decades. The frequency and severity of acute events, such as wildfires on the western coast of the US or 1 in a 1000-year rainfall events in Dallas show that the impacts of these small but accumulative changes in climatic conditions are picking up pace. It’s not only the acute events that we are now witnessing. Chronic physical risks, like sea level rise, glacial melts, and resultant flooding, are causing havoc in low-income countries.

BSR’s three climate scenario narratives explore the worsening physical impacts of climate change. These impacts are nearly identical over the next decade. However, climate modeling data suggests the possibility of a radically better pathway if we raise our current climate policy ambitions. 

Even in the most ambitious policy scenario, “Net Zero 2050," the world suffers from the “locked-in” physical impacts resulting from emissions that have already been released into the atmosphere. It is only by the mid-2030s that physical impacts start to diverge because of increased ambition. While business will have to prepare for physical impacts over the next decade, they must take bold action now to prevent irreversible and potentially catastrophic consequences in the long-term.   

Financial Impacts on Business

The financial impact on business is yet to be fully considered. Natural disasters, disruptions to supply chains, a need for increased cooling, water scarcity, and increased environmental costs are all examples of climate-related costs driving down national GDPs. Scenario analysis points to these costs increasing in emerging and advanced economies alike. Eventually, these costs will trickle down to the bottom line of businesses globally.  

For example, data suggest that in the absence of business investment, there is likely to be a decrease in labor productivity and economic activity. The “Current Policies” scenario, which assumes a continuation of 2020 climate policies, sees a significant loss of labor productivity due to heat stress, with as much as a 12 percent global decline by the end of the century. By contrast, in the Net Zero 2050 scenario, impacts on labor productivity would stabilize from 2035 onward.

Business can assess physical risks beyond asset exposures and begin thinking of investments toward systemic change that safeguard against severe long-term physical impacts.

How Transition Risks Will Materialize

Carbon regulation, whether through direct taxes, trading schemes, or other various pricing instruments, now cover more than 30 percent of emissions globally, extending across regional, national, and sub-national jurisdictions.

The global average price of carbon, however, continues to fall short of levels sufficient to account for the increased marginal damage of an additional metric ton of CO₂ emitted into the atmosphere.

Keeping within the remaining carbon budget, however, necessitates much higher prices over the coming decade. In the case of a coordinated net-zero transition, companies can expect a predictable and steady upwards exposure to transition costs.

In contrast, with an uncoordinated and hasty global response, as is the case in the “Delayed Transition” scenarios, the private sector may be forced to comply with disparate policy regimes and exposed to volatile carbon prices. Such an unpredictable transition policy shock will leave business exposed to unmitigable risk across their value chains. When this shock happens, the urgency of the situation will dictate higher transition costs over a longer period, far beyond 2050. Pricing in emissions now, however, ensures that business plans for such uncertainty well in advance and can pivot and capitalize on opportunities as governments pull available levers to promote drastic decarbonization.

Evolving Needs for Investment

If we are to collectively reach net-zero emissions, the energy system will need to forerun the global economy and decarbonize much sooner than 2050. Climate models suggest these investments will need to substantially increase over the next 10 years.

Businesses are not currently directly addressing their own energy consumption. While mechanisms like renewable energy credits or virtual power purchase agreements have gained popularity in high income countries, national grids in emerging economies remain fossil fuel-heavy. Companies can take direct action to curb emissions from fossil fuels, especially in emerging markets. Practically, this means increased corporate investment in on-site renewables in countries where global corporates have a presence, participating in policy engagement platforms at the national and sub-national level, and actively engaging suppliers to reduce emissions. This ensures that businesses setting net-zero commitments take substantive action and can credibly demonstrate tangible decarbonization.  

The challenge to deploy capital to existing climate mitigation solutions is well understood. It is equally important to invest in research and development (R&D). In the specific case of agriculture, our utilization of land resources requires transformational shifts. Competing priorities, such as protecting and restoring forests and meeting the demand for bioenergy and food crops, will mean that agricultural systems will have to produce more with less to keep up with rising demand. Sustained investment in internal R&D programs, adoption of sourcing practices that support regenerative and sustainable production, and backing disruptive startups are just some of the examples available to food, beverage, and agriculture companies to enable the transition to a net-zero state.    

Conclusion

Business can accept business disruption, and in some cases, permanent changes to operating environments caused by climate physical impacts—this is the new normal. Additionally, transition risks such as carbon pricing and changing market conditions present transition risks that, if left unaddressed, leave business exposed to shocks. By committing to R&D in climate solutions and making tangible and real investments, business stand to improve their resilience to climate change risks.

Blog | Wednesday November 30, 2022

Accelerating an Inclusive Energy Transition beyond COP27

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The substantial business presence at COP27 in Sharm el-Sheikh, Egypt, where governments focused on public finance to address loss and damage, showed how climate has become a mainstream business concern. Key outcomes suggest that an energy transition—from a fossil-based economy to a low-carbon or decarbonized world—is inevitable and that climate justice will mainstream into corporate sustainability.

COP27 continued the evolution of UN climate conferences into trade fairs. Momentum for business action was noticeably stronger than for strengthened national targets.

With nearly 150 pavilions in the official venue, a proliferation of events reduced the average value of any one stage. At COP27, they began to look like extensions of networking and dialogue in the climate community. This proliferation will likely continue at COP28 in Dubai next year with an announced attendance of 80,000 delegates. Climate COPs are now a key annual opportunity for the sustainability profession to meet in person and are certainly the most global opportunity to do so.

COP27 also made clear that the just transition and nature will be two major themes through to COP28 in Dubai. A new section on Energy in the Sharm el-Sheikh Implementation Plan speaks to “low-emission energy,” triggering a debate on the role of non-renewable energy, such as blue hydrogen, nuclear, and carbon capture and storage, in a just transition. A new work program and Ministerial table on just transition may well be where this debate is fought.

As for nature, COP27 recognized the “interlinked global crises of climate change and biodiversity loss” and the “importance of protecting, conserving and restoring nature and ecosystems to achieve the Paris Agreement goal,” encouraging countries to consider “nature-based solutions or ecosystem-based approaches.” Three strong tailwinds for nature will arrive in the coming year, including new global biodiversity goals at Biodiversity COP15 in Montreal, guidance for companies on science-based targets for nature in early 2023, and the recommendations of the Taskforce on Nature-related Financial Disclosures in Q3 2023. These tailwinds will reinforce that companies are uniquely positioned to protect the ecosystems on which their businesses depend.

The major UN outcome at COP27, a new “loss and damage” fund, will address harm from climate impacts that is neither prevented by emissions reductions, nor adapted to on the ground. The fund will support countries particularly vulnerable to climate impacts. This emphasis on loss and damage tells companies that climate justice will be a part of corporate sustainability in the years to come. Companies have an opportunity to work with civil society organizations to support communities affected both by climate impacts and by the just transition.

While 29 countries updated their national climate targets this year, this did not materially change the global emissions trajectory, which heads toward a median of 2.4°C of warming by the end of the century. Positive signals included the new Biden-Harris administration proposed rule requiring the US federal government’s largest 1,000 suppliers to disclose scopes 1, 2, and 3 emissions and undertake science-based targets; the announcement of the Indonesia Just Energy Transition Partnership (JET-P) with US$20 billion in public and private financing; and the restart of US-China bilateral cooperation on climate.

Intensifying climate impacts through the end of this decade are already baked into the atmosphere. Anti-greenwashing sentiment will grow, as evidenced by the Integrity Matters report from the UN High-Level Expert Group on non-state net-zero commitments. These will generate increasing stakeholder pressure on businesses, even as they expand climate action.

So in the future, typical company emissions reductions will be seen as increasingly insufficient. A science-based target will become a floor and not a sign of leadership. By preparing for this turbulence—working on climate justice, supporting local communities, seizing synergies with nature, and transforming business models—companies will build resilience for the long road to net zero.

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Signe Andreasen Lysgaard

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Blog | Tuesday November 29, 2022

Deciphering EU Regulation on Finance and Human Rights

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The EU’s ambitious Sustainable Finance and Corporate Sustainability policy agendas are establishing the contours of an ecosystem of regulation with the potential to substantially scale up respect for human rights by businesses and financial institutions.

A mix of noble objectives underpin this development—to close the SDG funding gap, combat greenwashing, and craft a sustainable internal market, among others.

While few will disagree with these objectives, some concerned parties have described the current development as “an avalanche” of regulation. While that might be an overstatement, several interlinked measures are in the pipeline, and many stakeholders are struggling to connect the dots and see the full picture.

Taking a human lens to some of the more prominent regulatory developments will further align with business and human rights standards and can decrease administrative burdens and improve their individual and collective impact on people.

Regulatory Incentives and Increased Transparency

From January 2023, companies with taxonomy-eligible activities must report on their taxonomy alignment. The Taxonomy regulation is known for its environmental focus and for introducing a classification system for environmentally sustainable economic activities and corresponding disclosure obligations on financial market participants (FMPs) and real-economy companies.

It also includes an often overlooked human rights element in its so-called “minimum safeguards.” For an investment to be considered sustainable as per the taxonomy, the investee company is required to respect human rights by the UN Guiding Principles on Business and Human Rights (UNGPs), which can serve as a vehicle to scale up business respect for human rights.

In October this year the Platform on Sustainable Finance published a report which clarified that human rights alignment is part of taxonomy alignment.

Alongside the taxonomy are two additional disclosure-oriented regulations which seek to further incentivize investors and their portfolio companies to improve human rights practices:

The Sustainable Finance Disclosure Regulation (SFDR) introduces human rights related reporting requirements for Financial Market Participants (FMPs). Through Regulatory Technical Standards, the SFDR requires FMPs to publish sustainability statements that involve reporting on five mandatory social indicators (so-called PAIs) related to the human rights performance and processes of portfolio companies.

In this way, the SFDR prompts investors to consider and report on human rights performance across their portfolios and at the level of individual financial products. However, whereas the taxonomy regulation and the platform report reinforce the UNGPs, the five social indicators are not as neatly aligned.

Despite this, meaningful reporting under the SFDR will require significant scaling up of human rights due diligence efforts by investors as well as their portfolio companies and prompt investors to share data relating to human rights management and performance across investees.

The second disclosure-oriented regulation is the Corporate Sustainability Reporting Directive (CSRD), which mandates disclosure on human rights risks and impacts of eligible companies and could be a real game-changer in terms of driving data flows related to human rights processes and performance from companies to investors and other stakeholders.

This information will be key to filling the data gap on "the S" in ESG (environmental, social, and governance) investing that investors have struggled with for years, thereby enhancing their ability to consider a company’s social performance as part of investment decisions as well as in their active stewardship.

A Step Change: Human Rights Due Diligence Obligations on Companies and Investors

Whereas the taxonomy, SFDR, and CSRD can be seen as softer instruments seeking to encourage better human rights performance and reporting, the Corporate Sustainability Due Diligence Directive (CSDDD) takes the agenda to the next level by putting substantive performance requirements on companies and FMPs—enforced through administrative supervision and civil liability.

While FMPs are in the scope of this requirement, there is currently a debate about whether or not to keep it this way. Some argue that FMPs are struggling to meet the wave of regulatory requirements related to sustainability, while others question how a meaningful due diligence process could be carried out across complex products and asset classes.

It is clear, however, from the World Benchmarking Alliance’s latest report that keeping the financial sector in scope is crucial.

The report found less than 10 percent of the 400 institutions assessed disclose the processes they have in place to identify human rights risks and impacts within their operations, and less than 3% within their financing activities, suggesting their journey to UNGP alignment has only just begun.

It speaks volumes that many investors themselves argue they should be covered by the CSDDD and that the number of covered entities should in fact be increased in a recent statement coordinated by the PRI, the Investor Alliance for Human Rights and Eurosif. 

Getting It Right

Bringing each regulation into full alignment with the UNGPs not only improves the quality of the measures individually but also provides a method for ensuring policy coherence. As these regulatory initiatives are finalized and brought into force, we need as much attention to the details of each measure as we do to the joint ecosystem they form. If we get this right at the EU level, we could be on the threshold of a new and more robust era of rights-respecting business and finance.

Originally appeared on BHRRC.

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Juliette Pugliesi

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Juliette is part of BSR’s Nature team, where she helps companies assess their impacts and risks to Nature and develop ambitious strategies to mitigate them across multiple industries.​

Prior to joining BSR, Juliette worked at WWF, where she supported companies on their nature issues (biodiversity, forest, climate, fresh water). She also contributed to the Science Based Targets for Nature initiative, where she was lead coordinator for the working group on biodiversity metrics for companies. Prior to WWF, she worked for Mazars’ sustainability services as a senior CSR consultant.

Juliette holds an MSc in Public Policies and Environmental Strategies from AgroParisTech, a master's degree in Sustainable Development and International Affairs from the University of Paris Dauphine, and a bachelor’s degree in social sciences from the same university. She also went on an academic exchange program at the University of Quebec in Montreal, where she studied environmental sciences and nature conservation. Juliette speaks French and English.