ESG and Africa’s Unlisted Companies: Human Rights Reporting insights

Part 4 in our ongoing series on ESG and Africa’s unlisted companies

(This article forms part of KudosAfrica’s just-published 2020 ImpactAfrica Report. Download a free copy here.)

Human Rights Reporting insights

By Roger Karmel, Managing Partner of Mazars’ London office and the co-author of the UNGP Reporting Framework and Assurance Guidance

In 2015 the UNGP Reporting Framework on Business and Human Rights was launched following a collaboration between Mazars, the large professional services firm and Shift, the leading centre on Business and Human Rights. Since its launch, this Framework has allowed companies to more successfully operationalize the UN Guiding Principles into their business operations. The UN Guiding Principles on Business and Human Rights, or UNGPs, were unanimously endorsed by the UN Human Rights Council in 2011, and clarify the responsibility of governments and business as regards the impacts businesses can and do have on people and how business should provide or enable remedy to those who have been harmed. The UNGPs are the most authoritative guidance and the blueprint for embedding human rights practices in business. Since 2011, the EU has required all of its 28 states to prepare National Action Plans setting out how businesses need to align with the UNGPs.

In today’s inter-connected world, wherever people are harmed by business, some form of media is likely to have reported the event. It, therefore, seems inconceivable that companies, which spend billions of dollars on building up their brands and reputation, would be pursuing and conducting business practices without putting in place processes to protect people, be they customers, workers at suppliers, the wider communities in which their factories operate, their own employees to name but a few.

One of the key philosophies behind the UNGPs is that of ‘know and show’. Companies need to (1) understand how they can potentially harm people and put processes in place to mitigate against those risks happening in practice (the ‘know’ part) and (2) report on those risks are and what they are doing about them (the ‘show’ part).

So eight years on since the endorsement of the UNGPs and four years since the release of the Reporting Framework, how meaningful is human rights reporting? By looking at public reports (annual reports, sustainability reports, human rights reports), this article sets out some of the trends that can be seen whether by industry or by region and the areas on which companies are reporting well and those with which they are struggling.  This is not a definitive study but the perception of the author from having worked in this area over the past eight years.

The Big Picture

There is an upward trend in the number of companies reporting separately on human rights. In 2015 only 13 companies had separate human rights reports. This figure rose to 52 by 2017 (Forbes, 2018); still a drop in the ocean considering the number of publicly listed companies, but with global companies such as Unilever, Nestle, and ABN AMRO addressing this area, their leadership is proving invaluable for others to follow.  Indeed, they have each produced more than one report so they have been able to demonstrate and report on progress as well as their successes together with the challenges.

As regards industries that have more mature reporting than others, the extractives (oil, gas, and mining) and the apparel sector appear to be leading with those with an agricultural element such as tobacco or cocoa also making notable improvements.  Ironically, the two industries which have a major impact on people’s 21st-century lives are lagging; financial services and media technology industries haven’t yet meaningfully got to grip with how best to report on the risks that they are potentially contributing to or being linked with. There are exceptions such as ABN AMRO and Microsoft, but they are in a minority within their sectors.

Nevertheless, the overall quality of human rights reporting still needs to be more meaningful and prolific. On the one hand, it is pleasing to see many companies stating publically that they are aligning behind the UNGPs; on the other hand, reporting is at such an embryonic stage that it is difficult to see whether they are actually doing so in practice. On the whole, other than some exceptions, human rights reporting is currently not robust enough. Indeed, through analyses of company reporting of many large and listed organizations across several sectors, only 5% are classed as ‘leading’ on human rights reporting. Nearly half of companies fall into or below the improving category.

The struggle many companies have with embedding respect for human rights is that they are less easy to quantify than environmental issues. It is easier to place sensors and meters in the waste outflow from factories than it is to measure the impact of not paying a living wage.  For human rights reporting to be meaningful, it requires a narrative.  For example, to address improvement in working conditions in a factory a company may train all its managers.  And the company will report that it is addressing improvement in factory working conditions through training.  On the face of it, this reads well. However, as a reader we are none the wiser as to the effectiveness of this training; we don’t know the outcomes on the workers who are impacted or on the business itself.

A key ethos behind the UNGP Reporting Framework is straightforward; companies shouldn’t report on every single human rights issue; just report on those salient issues where the business poses the greatest risk to people. By doing this, it provides the company with a methodology for prioritization and focus. However, only 8% of companies reviewed actually identify salient issues which lead to less mature reporting.

Sector differences

It can also be seen that sectors that have inherent issues such as tobacco and oil and gas companies are performing better than other sectors.  For example, in the tobacco sector, several large companies are not only addressing how they are producing less harmful products but also how they are working with governments and others to eradicate child labour in their supply chains.

Despite the lack of robust reporting, the general trend remains upwards. In this sense, some sectors are pulling away from others with differences in the maturity of reporting between sectors. In recent years, the apparel sector has been continually improving its human rights reporting. H&M and Marks and Spencer have been producing strong reports for the last few years but others in the sector are catching up. In fact, Adidas now sits at the top of the Corporate Human Rights Benchmark (CHRB, 2019) after making improvements on their previous reporting. Inditex has also made improvements as companies in the sector compete on human rights. The impacts of the clothing industry – think GAP and Nike at the end of the last century – have been well known for a while. It is only really now that it is becoming more mainstream for consumers to turn to more sustainable sources of clothing. Fast fashion’s environmental and human rights impacts are now becoming unacceptable to consumers and companies within the sector are having to put greater efforts and resources into combating the negatives impacts

Food and beverages also perform higher compared to other sectors, with Unilever, Nestle. and Coca-Cola all providing strong reporting. Mondelez appears to have taken note and is starting to produce improved reports.

However, one of the big issues that we have recently seen in the media is the human rights impacts of the online world. They might not be classed or referred to under the umbrella of human rights, but they are. Three of the biggest companies in the world, have such a big influence on our daily lives yet are not keeping up with their human rights reporting, and one assumes performance. If you look at Facebook, Google and Amazon you will struggle to understand what they see as their key risks to people.  The rapid emergence in online technology has led to firms in this sector almost by-pass their responsibilities as regards human rights and governing bodies are now scrambling to keep up with appropriate and effective laws. Microsoft, however, appears to be bucking the trend, producing a detailed human rights report that identifies their salient issues and tells us how they are tackling them.

Regional differences

Whilst there are differences between sectors, there are also differences within regions. From our findings, an even bigger determinant of maturity of human rights reporting is location. By this, we mean the location of the company’s headquarters rather than the location of their operations, since most companies will cover several geographical regions. Law has played a part in this, such as the UK Modern Slavery Act and the Duty of Vigilance law in France. In addition, improvements to the UK Modern Slavery Act and the government’s National Action Plan (NAP) for implementing the UNGPs, along with a new NAP on Business and Human Rights in Germany are expected during this year.

One leading country is the Netherlands. Finance and banking are sectors that are globally lagging in addressing human rights issues, or at least, reporting what they are doing. There is minimal meaningful reporting from UK and German banks. However, banks headquartered in the Netherlands are bucking the trend. ABN AMRO, in particular, has strong human rights reporting. ABN was one of the first companies to engage and report against the UNGPs and with the public reporting releases made in 2019 they have made significant steps. Furthermore, ABN has become a leader in pushing human rights reporting onto the agenda for business as a whole. Yet, they are far from the only Dutch bank who are proactively addressing human rights. ING Group, De Volksbank and Rabobank are all improving their reporting. Human rights reporting at banks is crucial; they have much influence not only as corporate lenders but also as investors. In fact, this is part of a wider process of the Dutch Ministries of Foreign Affairs and Economic Affairs who are creating sector-based covenants to ensure human rights are at the core of business processes.

We also see a similar trend in the extractives sector. Due to the UK Modern Slavery Act, Anglo mining firms have stronger human rights reporting than many Canadian mining firms, where human rights reporting is weak and human rights abuses are widespread. The exception is Newmont which is far ahead of its regional peers. Total, the French oil company, outperforms other oil firms in human rights reporting. The French Duty of Vigilance Law is probably a key driver in this and helps them sit above their American and Asian competition. Indeed, our general view on human rights reporting is that European companies produce more mature human rights reports than their American and Asian counterparts. Once again, there are exceptions – Coca Cola, Citi, Microsoft in the States and Ajinomoto Group in Japan.

Conclusions and Recommendations

The general trend in human rights reporting is upwards. With that being said, it was from a very low base. Whilst more companies report in some way on human rights, much of the reporting is superficial, ticking a box and lacking depth and purpose. Even the companies with the most mature reporting compared to others know that they still have more to do and are generally not afraid to state this.  Most companies, though, are yet to get to the start line.

Perhaps this is where laws, regulations and voluntary guidelines are starting to have greater influence. Many people are sceptical of law playing its part in human rights reporting, believing it will make it a compliance target rather than one of commitment. However, the difference in the maturity of reporting in different regions suggests that law does have a role to play. At the very least, it is crystalizing recognition in companies that they need to be committing resources to this area and is giving companies a baseline.

At Mazars, we have been helping some of the world’s largest organizations better understand their actual and potential impacts on people.  It brings a new way of thinking about the role that business has to play in our 21st century societies.  The more enlightened companies are already addressing this bringing value to themselves and their stakeholders.  Just because an area that at first glance appears complex doesn’t mean it shouldn’t be addressed.

Overall, good reporting can be a driver for improved human rights performance and for potentially reducing the negative impacts on people. Helping to improves lives provides a tremendous opportunity for companies. Investors need to take note and encourage companies to address this area in order to reap the rewards. Companies that have a strong human rights performance will become the companies of choice for the future.

This article forms part of KudosAfrica’s just-published 2020 ImpactAfrica Report. Download a free copy here.

This contributed article reflects the views and opinions of the author and not necessarily those of Africa Capital Digest.

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