By Anna Le, Anne Sophie Rex, Elena Wilken Damm, Heng Zhang & Prof. Kristjan Jespersen
Main challenge
In the past, some asset managers stated they care about sustainability and human rights, but in practice, they rarely engaged on environmental, social, and governance (ESG) issues. However, this perception is outdated (Eccles & Klimenko, 2019). Eccles and Klimenko (2019), in a study of 70 senior executives at 43 global investing firms, argue that ESG is a main priority for investment managers, which means corporate leaders will soon take the responsibility of ESG performance requested by shareholders, if they did not do so already.
Corporate sustainability due-diligence (European Commission, 2022) and ESG reporting requirements (IFRS, 2022) are in the pipeline, which generates a new challenge for asset managers and for corporate executives — are they ready for the new trend? The answer is obvious: most asset managers and corporate executives are not ready for the new change, as they do not have relevant experience and expertise to avoid risk exposure of violations Indigenous People (IP) rights. For instance, two of the three largest investment firms in the world — BlackRock and Vanguard — are all involved in violations of the rights of the IP because of their portfolios (Butler, Allam & Wahlquist, 2020). Another example is the resignation of Rio Tinto’s CEO and senior executives after the Juukan Gorge violation. The violations of the rights of IP also have direct financial losses – two Norwegian wind farms lost their licenses, jeopardizing a USD 1.3 billion project (Buli & Solsvik, 2021).
International Work Group for Indigenous Affairs (IWGIA) is a global human rights organization that seeks to increase awareness and protect the IP rights (e.g., Free, Prior and Informed Consent (FPIC), land rights, resources (water pollution, fishing and hunting food resources, etc.), violence and killings). In this journey, one of IWGIA’s focus is to create a due-diligence tool related to IP rights that could be used in the dialogue with investors and asset managers.
An overview over the current situation
From the Danish C25, only two companies (Vestas and Ørsted) focus on the rights of IP in regards to land rights, territories and livelihood under threat (Vestas, 2021); both companies representing the energy sector. Thus, all other 23 top Danish companies that are part of different industries, e.g., healthcare, bio-technical, construction, etc. do not report on IP rights.
Consultancies in Denmark such as KPMG, Deloitte, EY etc., lack the transparency of their capabilities to advise on IP rights due-diligence process. However, these consultancies prove to have strong focus on IP rights in Canada and Australia.
There are numerous Internationally Recognized Standards and Frameworks that provide guidance to companies regarding sustainability reporting. However, few of them refer to IP rights (e.g., UNDRIP, Global Reporting Initiative (GRI), UN Guiding Principles on Business and Human Rights) and usually one framework does not cover all the IP rights. Moreover, these frameworks are voluntary, thereby risking that companies do not include the risk of IP in their sustainability reporting. This leads to minimal transparency for asset managers in the overall company assessment for investment.
A negative impact on IP’s lives can be found in various industries. The extractive industries of basic materials (mining), energy industry (water dams), agriculture and forestry show frequent cases of IP rights violations via lawsuits filed by IP. In this case both parts suffer: IP’s lives are extremely affected and businesses lose reputation as well as pay high fees.
As a way to cover IP rights, certifications that asses and accredit value chains are of great importance, and thus are beneficial for the due-diligence process. However, certifications landscape proves to be complex. They are distributed per industries and similarly to frameworks, only some of them include IP rights. Moreover, acquiring these is considered a complicated and lengthy task.
Recommendation
Based on the findings, a due-diligence tool that gathers a short checklist of the most important IP rights was created. Thus, it is recommended for IGWIA to use the due-diligence tool as a catalyst for conversations with asset managers and highlight relevant gaps in relation to risks of IP rights. By entering a dialogue and emphasizing full transparency from the companies, asset managers are able to make investment on an informed groundwork. Furthermore, IWGIA can help asset managers with an overview of those frameworks and certifications that include IP rights.
Undermining or ignoring a due-diligence process in relation to IP can raise future challenges leading to potential risk of dissatisfaction and complaints from IP or even legal disputes. Therefore, assets managers are advised to follow a complete due-diligence process when analyzing a potential investment. The due-diligence tool serves as a checklist to asset managers in their process to ensure they do not miss any important aspect on the IP risk. Furthermore, companies reporting on IP rights increase transparency and improve on ESG reporting, and thus become more attractive for investors as well as mitigate future indigenous risk.
About the authors
Anne Sophie Rex is pursuing a Master’s degree in Business Administration and E-Business at the Copenhagen Business School (CBS).
Anna Le is pursuing a Master’s degree in Business Administration and Leadership at Roskilde University.
Elena Wilken Damm is pursuing a Master’s degree in Global Studies and Business Studies at Roskilde University.
Heng Zhang is pursuing a Master’s degree in Management (Finance Track) at the EM Lyon Business School.
Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan Jespersen is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.