Despite all the interest in ESG (Environmental, Social, and Governance) investing— as well as growing recognition that failure to account for ESG risk can undermine human rights outcomes — one critical source of expertise is underutilized by investors: human rights defenders.

Human rights defenders — and the civil society organizations that support them and their communities — are a vital source of early, on-the-ground information. They can serve as partners in developing strategies to reduce risk and strengthen social license.

Starting in 2015, I ran a graduate student clinic on investment chain mapping at Columbia University. We assisted the human rights organization Inclusive Development International (IDI) by experimenting with financial databases to map the investors in harmful projects and then assessing the leverage that each has to stop or redress corporate harms. This research was carried out for communities in Southeast Asia and Africa who were at risk of being displaced or had been displaced by an agro-industrial or infrastructure project and facing related harms — including contamination of water, destruction of houses and sacred sites, disruption of livelihoods, or violence.

One day the students showed an anonymized investment chain map to a senior infrastructure lender who was unconnected to the case. He remarked that community advocates need to get this type of information to investors before the deal is done. Once the money is out the door, there is little a lender can do, except “buy the [affected] villagers houses” as a form of compensation.

This led to an interesting discussion in the classroom the next day. We wondered how to share information about harms with investors when it is not public knowledge which lenders or shareholders are considering the deal. We puzzled over why they don’t have this information to begin with. Do they not want the information? Would it get in the way of the deal? Did it not matter? Did they not know how to get the information? Did the organizational structure make it impossible to flag the environmental and social risks? Were the timelines too tight?

Or is it all of the above? The answer no doubt is case-specific – but I have also observed in subsequent exchanges with investors that there is a tendency to undervalue civil society organizations (CSOs) as a key information resource – and this has something to do with a problem of trust, on both sides. For example, a common perception among CSOs is that the huge profits linked to infrastructure, agro-business, and natural resource extraction projects means there is pressure for investors to side step effective due diligence on a deal, while investors perceive that CSOs only want to kill projects.

To address the trust gap, in 2019 Rights CoLab began hosting CSO–Investor Dialogue Tables. These are intimate events of 14–16 people — with equal representation of investors and human rights advocates — who meet for four hours over dinner and participate according to agreed-upon Principles of Engagement, as well as the Chatham House rule.

Through the Dialogue Tables, we aim to identify measures that can be taken to build trust between the investment and CSO professionals that will lead to more effective collaboration on human rights. For CSOs, the Dialogue Table is an opportunity to present the perspective of the victims of human rights violations and explain what they believe financial professionals need to do to prevent, mitigate, and remediate those violations. For investors, it is an opportunity to demystify civil society concerns in a safe setting, jointly develop solutions, and take appropriate measures to prevent human rights harm. By building a network for advice and knowledge transfer in which participants can share experiences and establish a partnership in problem-solving, the Dialogue Table can have the effect of making participants work more effectively individually and within their organizations.

These conversations uncovered several misunderstandings. Let’s look at one negative example of miscommunication between investors and CSOs, and then a positive example.

A Wind farm in Oaxaca, Mexico

One CSO coalition spent five years campaigning on behalf of Indigenous communities that had not been adequately consulted before the development of a massive windfarm project in Oaxaca, Mexico. The Mexican government provided the company with energy permits; however, Indigenous communities objected due to a lack of free, prior, and informed consent (FPIC). An investigation by the Inter-American Development Bank later determined that FPIC documents had been falsified by the original developer.

Because of this investigation and subsequent engagement, a key investor with a relatively good environmental and social risk management program sold its equity stake in the project, leading the project to fold. The project renamed itself, resulting in a worse version of the original project from the community perspective.

What should a responsible investor have done?

The discussion at our Dialogue Table turned to whether in such circumstances a responsible investor is obliged to make a public statement upon exiting. Silence typically exacerbates the distrust the CSO supporters of the community has towards the investor, despite having divested. In response, investors at the Dialogue Table remarked that a lack of a public comment is understandable since doing so will “burn the party” the investor is selling to, or make it impossible to sell their stake.

From the investor perspective, CSOs have a reputation for trying to upend projects. As one of our dinner companions put it, “If any CSO breathes around your project,” you want to diligence it “up the wazoo. And even if we do that, they are going to pick on everything.” Other investors concurred that this “kill the project” perception often drives responses at their own banks and investment houses when faced with an “CSO scare.” This might result in clamming up, or in some cases quickly selling off the asset without any discussion.

For their part, CSOs recognize this reputation. One CSO leader explained that his organization never sets out to cancel projects. Instead, they want to accompany communities in their defense of human rights, which includes engaging with investors to improve projects and ensure benefits to the community, if that’s what the community wants.

Mining in West Africa

Investors can help bring relief to affected communities even when serious harm is involved, as it often is with the mining industry.

For example, one mining company holds an 85% stake in a large joint venture in West Africa. The company has signed the Voluntary Principles on Security and Human Rights and has a land acquisition policy consistent with the Performance Standards of the International Finance Corporation (IFC), but did not comply with these standards when acquiring land to expand the mine. As a result, hundreds of households were violently evicted from their ancestral lands.

A CSO assisting the community reported that when negotiations with the company broke down, the community’s negotiators were arrested and detained. State security forces then moved into the area and began a campaign of violence and intimidation. In the aftermath of this violence, armed soldiers accompanied company representatives in pressuring residents to sign resettlement documents.

Because one of the company’s lenders is a client of the IFC, the community was able to take their complaint to its Ombudsman. The CSO contacted the company’s major lenders and shareholders to seek their assistance in getting the company to engage in the dispute resolution process. Of about a dozen or so investors contacted, most responded and about half of those agreed to a meeting with the CSO.

One who did agree to a conversation with the CSO was an asset manager of a major pension fund and a UN Principles for Responsible Investment member. The manager wanted to do something, but was hamstrung because the case didn’t fit within their company engagement criteria. The CSO followed up with the pension fund, which agreed to write a letter to the company. Other investors told the CSO that they would engage the company. Following this investor pressure, the company finally agreed to mediation.

According to the CSO, however, the company continued to act in bad faith during the process and was not genuinely committed to remediating the harm it had caused. The CSO continued to urge investors to use their influence; this time only a few responded. Only one confirmed that that it had engaged with the company again, but this investor pressure apparently had an impact on the mediation process, and as a result the community was able to conclude several remediation agreements with the company.

Two lessons can be drawn from this case. First, when investors have leverage, they should use it. Company engagement guidelines should not apply when an CSO representing victims comes to investors with serious, well-substantiated allegations of abuses and a concrete request to use their leverage in a way that can help bring about remedy.

Second, these are sensitive cases not just for companies, but also for communities whose national governments don’t recognize the land rights they are entitled to under international law. As such, CSOs assisting communities in defending land rights understand that a nuanced approach to advocacy is necessary due to the fear of repercussions to already vulnerable communities. In this regard, investors can be key allies in helping to ensure that companies carry out their projects in ways that respect human rights.

Quiet or Loud Advocacy?

The need for nuanced advocacy points to one reason why investors tend to receive only spotty and outdated information. When dealing with extremely sensitive issues, like land rights, issues often do not appear in media or even CSO reports right away because of the risk that such publicity could bring further harm to the already vulnerable community. The decision about quiet or loud advocacy must be considered carefully since the community must be fully aware of the situation and the risks of speaking out.

By the time the information goes public, the harm often has already been done. Even the most sophisticated AI-derived data “incident” trackers, which data providers use to track social and traditional media reports on company impacts, are inherently flawed. The typical algorithm – the higher number of incidents, the higher the risk – fails to account for the fact that the most vulnerable people are living under threat and repression. In other words, it is just as likely that the lower the number of reported incidents, the higher the risk.

Environmental and social impact assessments (ESIAs) – are regulatory and lender requirements for investment deals – are used to establish a baseline of local conditions to assess a project’s impact on the baseline.  They are also designed to conduct stakeholder engagement to varying degrees. depending on the particular requirements of the ESIA.  Dialogue Table participants remarked that, important as they are for obtaining social license, they are often done badly:

“I do a lot of ESIAs and I agree [they are often weak].”

“Companies often don’t know how to conduct ESIAs.”

“In some cases, the company seems unfamiliar with IFC Performance Standards.”

“Companies just want to produce the report that is going to help them get the debt financing. FPIC is way more complex, especially where regulatory requirements are not that robust. How do you reach stakeholders in this way? Who are the people without a voice? How do we engage them?”

“Most equity investors also aren’t aware of the problems with ESIAs. In the end these projects create more costs for developers.”

“If there was something to encourage an educated and better ESIA in the first place — if all of this could happen earlier — we would avoid all this.”

“Stakeholder mapping is not done well.”

Investor participants noted the challenges of community engagement, stemming from the difficulty of assessing who the communities are and of building community consensus. As one investor participant warned, “You need a record that you tried to build as much consensus as possible. Document that you’ve done that in good faith.”

The Way Forward

How, then, can we improve the situation? My recommendations to investors – as well as data providers – center around improving relationships with CSOs, opening channels for dialogue, and utilizing the resources they can provide.

Investors, advocates, communities, and data providers can all benefit from the implementation of these guidelines. Instead of development projects undermining human rights or vice versa, helping each other move forward cooperatively and productively should be the goal.

This blog post is adapted from a presentation Joanne Bauer gave as part of a UN Principles for Responsible Investment (UNPRI) webinar entitled “The Social License: The Foundation for Sustainable Infrastructure Investing” on March 5, 2020. The webinar may be viewed at this link and the slides are available here.

 

Photo by Saad Salim on Unsplash