A deep dive on how salient human rights and material risks intersect in an increasingly turbulent world.
09 September 2024
Corporate proximity to human rights harms can create financial costs for companies, leading to myriad risks for their shareholders. This white paper, collaboratively written by Heartland Initiative, Wespath Benefits and Investments, and Schroders, describes how salient human rights and material risks intersect in an increasingly turbulent world.
The intersection of these risks, referred to as the “saliency-materiality nexus,” can exist in any operating context, but human rights risks to people most often translate into financial impacts for companies and shareholders in conflict-affected and high-risk areas (CAHRA). Recent geopolitical crises – such as the wars in Gaza and Ukraine, the military coup in Myanmar, and allegations of forced labor in Xinjiang, China – have triggered widespread human suffering, an array of corporate losses, and impacts to global markets. With geopolitical conflict and authoritarianism on the rise, many investors are seeking solutions that meet both their fiduciary duties and responsibilities under the United Nations Guiding Principles on Business and Human Rights in these complex environments.
While CAHRA pose a higher degree, quantity, and frequency of risks, this paper is not meant to deter investment in these markets, as they depend on capital investment to spur economic growth, reduce conflict, and bolster human rights protections. Rather, the paper describes the saliency-materiality nexus as a practical, rights-based framework that can focus investors’ analytical and engagement efforts on identifying and addressing the most severe and systemic social risks in their portfolios.
Part one of the paper examines the challenges faced by investors pursuing stewardship of human rights risks in the midst of an increasingly conflict-affected and fragile world. These challenges include widespread and diverse human rights impacts, lack of fit-for-purpose data on corporate proximity to harms, and under-resourced staff to interpret available data.
Part two introduces the saliency-materiality nexus as a solution for conducting proactive and robust human rights due diligence (HRDD). This section uses case studies to show how corporate proximity to human rights harms in CAHRA can translate into regulatory, legal, operational, and reputational risks with tangible financial impact on companies and shareholders. The paper includes twelve case studies where companies that caused, contributed to, or were directly linked with human rights harms in CAHRA suffered financial losses totaling over $85 billion through financial penalties, judgments, settlements, fines, loss in share price, or decreases in revenue or profit.
Finally, part three details the ways in which Heartland, Wespath and Schroders put the nexus into practice. These three institutions have long been involved in identifying and mitigating investment risks in CAHRA. This section describes how focusing HRDD on salient and material risks in CAHRA can meaningfully assist investors as they identify and address the most at-risk companies in their portfolios and, in doing so, can fulfil their responsibilities to clients, fund mandates, emerging due diligence legislation, and vulnerable populations.