The private market industry is grappling with how to carry out effective due diligence on human rights issues associated with portfolio companies. “There is a recognition that the industry needs to do more, but doesn’t have the tools to do so,” said Simon Whistler, head of real assets for the Principles for Responsible Investment, at the Responsible Investment Forum 2022: Europe last week.
Over the course of the two-day conference dominated by discussion about climate action, the issue of human rights was the subject for one panel discussion towards the end of day two; a reflection of its position on the industry’s overall ESG agenda.
“While it is a growing concern, its often not front and centre,” said Kate McKeon, director and head of sustainability at InfraRed Capital Partners, who was also on the panel.
While most private equity firms are starting to recognise the need to conduct human rights due diligence, there is still a lack of strategy on how to achieve it, Whistler explained. The broad range of areas that fall into this category and how they differ across cultures and regions has left investors without a consistent assessment approach to dealing with human rights, he said.
“It is a hugely complex and context-specific issue, without a one-size-fits all approach. When it comes to due diligence, if you are not asking the right questions in the right way then you are not going to find what you are looking for. Increasingly, firms need to go the extra mile and roll their sleeves up to get that level of information,” Whistler said.
To support investors on this, the PRI is moving towards finding a benchmark that will allow investors to track and measure a company’s human rights performance. The organisation recently set out expectations for investors based on global human rights standards and provided recommendations on the integration of human rights into investment practices. “We eventually hope to develop a framework that will provide investors with the level of support on human rights that they haven’t had before,” Whistler said.
Without a specific private equity-focused template, firms have been largely “feeling their own way”, said McKeon. However, with regulatory obligations on these issues set to increase, McKeon said there is “a growing awareness” of the need for firms to engage more deeply on this.
One regulation coming down the pipeline is the Corporate Sustainability Due Diligence Directive, which will require companies to identify and, where necessary, prevent, end or mitigate impacts of their activities on human rights, such as child labour and the exploitation of workers. “It is a good example of regulation being the carrot as well as the stick,” McKeon pointed out.
Whether or not it is possible for private equity firms to give target investments a score on human rights, or whether this must be approached in a more subjective and qualitative way, depends on the portfolio company and the sector it sits in. “It’s a complex issue; some areas like health and safety are relatively easy to monitor whereas other areas will require a little bit more thought and time to design these metrics in the right way,” said Phil Davis, director of ESG at Helios Investment Partners.
McKeon added: “This is why we support what the PRI is doing… it is a great opportunity for the industry to work together and outline what we are aiming for what the benchmark is. That clarity and consistently will be really helpful.”
While the industry is calling for a methodology it can deploy, Whistler warned that it is dangerous to expect too much in the sense of uniformity. “Human rights as a topic covers so many different things and is so context specific. People can get into trouble by trying to do the same thing across all businesses and geographies that makes no sense to do so… it has got to be specific to each individual investment.”
The fact that most human rights abuses are systemic also means investors don’t have direct control, making it “very challenging to make a difference”, Whistler added.