ESG Investing: Greater transparency and accountability needed
Financial actors have an important role to play in enabling compliance with the UN Guiding Principles on Business and Human Rights (UNGPs). However, questions remain about how the integration of environmental, social and governance (ESG) approaches into investment decision-making drives sustainability and impacts rightsholders. To this end, Swedwatch recently submitted input on “Investors, ESG and Human Rights” to the UN Working Group on Business and Human Rights.
In its stocktaking exercise of the implementation of the UNGPs, the Working Group on Business and Human Rights (the Working Group) recognised the significant role of financial actors – as investors in and funders of businesses across industries – in supporting the implementation of the UNGPs.
With a growing demand for responsible investment, financial institutions are increasingly including an ESG approach in determining their decision-making on investments – ESG investing is expected to more than double by 2025. This heavy reliance on ESG is, according to the Working Group, a concern as there is a prevailing lack of understanding on how human rights issues should be reflected in ESG indicators and investment practices. Moreover, what is considered ESG can be highly subjective as there is little consensus around definition and scope.
In preparation of a report* aimed to provide practical guidelines to better align ESG approaches with the UNGPs, the Working Group submitted a call for input from relevant stakeholders.
Swedwatch‘s submission zooms in on responsibilities of ESG index and data providers and investors, and the importance of integrating conflict sensitivity in investment decision making.
Below is a summary of the key points. The full analysis and set of recommendations can be found in the submission document.
Important to enhance transparency and accountability of ESG service providers
Key concerns regarding shortcomings of ESG service providers, according to Swedwatch, include excessive reliance on corporate disclosure to assess companies’ due diligence practices, as well as excessive reliance on dialogue with companies when assessing impacts along with poor understanding of local contexts.
Given these concerns Swedwatch regrets that ESG service providers have for too long been allowed to operate in an unregulated market, and calls on regulators to critically evaluate the role of ESG service providers and their use by investors, aimed at enhancing transparency and accountability within the industry.
Investors need to recognise limitations of ESG ratings
While ESG ratings may give investors an indication of how a company manages environmental, social, and governance-related risks, in the absence of on-site visits and meaningful stakeholder engagement, they cannot be seen as a substitute for environmental and human rights due diligence or an appropriate tool to advise investors on their responsibilities to prevent, mitigate or remediate adverse impacts.
Heightened human rights due diligence critical in conflict affected areas
Drawing on Swedwatch’s work in high-conflict regions, we see it as critical that investors put pressure on companies to comply with heightened HRDD and conflict-sensitivity assessments throughout the project cycle. Investments in high-risk sectors such as agriculture, mining and renewable energy are of extra concern, as these may exacerbate land conflicts
* The report will be presented by the Working Group to the 56th session of the Human Rights Council in June 2024.