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Human Rights and Portfolio Risk: Why Investors Should Think Big

02 December 2024

4 min read

Erin Bigley, CFA| Chief Responsibility Officer

Luke Pryor| Portfolio Manager—Security of the Future; Co-Portfolio Manager—Strategic Equities and Responsible US Equities

With human rights regulations expanding, investors need a broader approach to assessing risk and opportunity.

Guidelines on human rights have helped shape some of the key principles of corporate responsibility. Increasingly, however, governments are hardening guidelines into law. Penalties for companies that fail to comply may be severe—but the risks to investors can be mitigated, in our view, by the right approach to research.

The launch in July 2024 of the European Union’s Directive on Corporate Sustainability Due Diligence (CSDDD) reflected a global trend for a tighter regulatory approach to ensure that businesses behave appropriately regarding human rights and the environment.

Previously, the regulatory regime had relied on persuasion, rather than enforcement. In 2011, for example, the UN Guiding Principles on Business and Human Rights (UNGPs) recognized that, under international law, companies have a duty to respect human rights. While not legally binding, the UNGPs formed the cornerstone of the business and human rights legal framework.

The CSDDD incorporates the standards of the UNGPs and other voluntary schemes but makes them mandatory for companies that meet certain criteria, such as net worldwide turnover of more than €450 million ($493 million) for EU companies, and net turnover generated within the EU of more than €450 million for non-EU companies. Financial penalties for companies that do not comply are steep, with the maximum penalty to be at least 5% of global turnover.

Compliance requirements and fines are not the only challenge for companies and investors. Like the voluntary frameworks, the emerging legally enforceable regulations are likely to differ across jurisdictions, exposing companies to multiple requirements. The new regulations are also pushing investors to think more broadly about how they account for human rights in their portfolios.

More Rights, More Risks

Investors often associate human rights with issues related to poor working conditions, such as inadequate wages, unsafe working environments or exploitative labor practices. Many companies address these issues by publishing modern slavery statements and by implementing labor-practice codes of conduct along their supply chains.

But the recognized range of human rights extends well beyond the workplace and modern slavery and includes such areas as health, Indigenous rights, equality and nondiscrimination. The shift from voluntary to mandatory regulation provides impetus for investors to incorporate these and other rights into their investment processes (Display).

Growing the Investment Focus of Human Rights

Traditional foci: wages, exploitative & unsafe labor, modern slavery, etc. Emerging: health, Indigenous, non-discrimination.

For illustrative purposes only.
As of September 30, 2024
Source: AllianceBernstein (AB)

Case Study 1: The Right to Health

Per- and polyfluoroalkyl substances (PFAS) are synthetic chemicals used in a variety of industrial applications because of their resistance to heat, water and oil. As they do not break down easily, they accumulate in both the environment and human bodies and have been linked to severe health risks. Regulatory action around PFAS has increased sharply in recent years (Display).

Regulatory Initiatives Concerning PFAS Have Grown Dramatically

Yearly Number of PFAS Regulatory Initiatives

Number PFAS initiatives globally has grown from just 2 between 2009 and 2015 to 36 from 2022 through 2024.

For illustrative purposes only.
Not a comprehensive list. Other includes Asia, Australia and New Zealand. Australia plans additional regulation in 2025, and the European Union plans
additional regulation in 2026.
As of September 30, 2024
Source: Ballard Spahr; European Chemicals Agency; Osler, Hoskin and Harcourt; Secretariat of the Stockholm Convention; Thomas, Tiffany, et al., “Global Regulations Around PFAS: The Past, the Present and the Future,” International Chemical Regulatory and Law Review, vol. 6, no. 3 (2023): 3–17, icrl.lexxion.eu/article/icrl/2023/1/4; and AB

Many companies are facing major PFAS-related litigation. During the last two decades, for example, one major manufacturer has faced about 4,000 lawsuits linked to products containing PFAS. In 2023, the company reached an agreement to pay $10.3 billion over 13 years to fund public water suppliers in the US that have detected PFAS chemicals in drinking water. The settlement reflects only a portion of the company’s legal liabilities, however, and more lawsuits are expected, including personal injury and environmental litigation.

Case Study 2: Indigenous Rights

The site of a proposed copper mine in the US is estimated to hold more than 40 billion pounds of the metal, which is a crucial component of electric vehicles and most electronic devices. But the site is sacred to a Native American tribe. The mine, if built, would create a crater nearly two miles wide and more than 1,000 feet deep. As well as destroying the sacred site, the mining process would use—and allegedly pollute—6.5 billion gallons of water a year.

Such controversies are not unusual, as Indigenous peoples are disproportionately affected by business activities (Display).

Indigenous Peoples Are Disproportionately Affected by Corporate Activities

“By the numbers” infographic includes stats such as 40% of environment defenders fatally attacked in 2021 were Indigenous.

For illustrative purposes only.
As of September 30, 2024
Source: Business & Human Rights Resource Centre; Jérémie Gilbert, “Indigenous Peoples and Litigation: Strategies for Legal Empowerment,” Journal of Human Rights Practice, Volume 12, no. 2 (July 2020): 301–320, https://doi.org...huaa208; Ali Hines, “Global Witness, Decade of Defiance: Ten Years of Reporting Land and Environmental Activism Worldwide” (Sept. 2022), https://www.globalwitness.org/documents/20425/Decade_of_defiance_EN_-_September_2022.pdf; El Observatoria de Conflictos Mineros de América Latina (OCMAL); Arnim Scheidel et al., “Global Impacts of Extractive and Industrial Development Projects on Indigenous People's Lifeways, Lifeways, Lands and Rights,” Science Advances 9, no. 23 (June 7, 2023): https://...sciadv.ade9957; United Nations and AB

The project has faced numerous legal challenges, with Indigenous groups filing lawsuits to halt the land transfer and mining operations. Estimates suggest that the mine’s backers have invested more than $2 billion so far and that progress has been delayed by a decade.

Case Study 3: AI and Rights to Equality and Nondiscrimination

In 2014, a US company began developing an AI-driven recruitment tool designed to automate the review of job applicants. In 2018, the system was said to have favored male applicants over female ones because it had been trained on historical data from predominantly male resumes. The company scrapped the tool in response to public criticism and regulatory concerns.

Think Big and Dig Deep

The challenge posed to investors by the evolving human rights landscape is two-fold: Regulation is becoming compulsory rather than voluntary, with the potential for financial penalties that could adversely affect company valuations. And investors are being steered toward broadening the range of human rights issues they address in their strategies.

Investors can mitigate these risks, in our view, by thinking big and digging deep—in other words, by looking at human rights issues from the broadest possible perspective and using fundamental research and corporate engagement* to understand how these rights intersect with each other, with corporate sustainability, and with their investment strategies and objectives.

_{*AB engages issuers where it believes the engagement is in the best financial interest of its clients.}

_{The authors would like to thank Roxanne Low, ESG Analyst with AB’s Responsible Investing team, for her research contributions.}

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Erin Bigley, CFA

Erin Bigley is a Senior Vice President, AB’s Chief Responsibility Officer, and a member of the firm’s Operating Committee and Women’s Leadership Council. In this role, she oversees AB’s responsible investing strategy, including integrating material environmental, social and governance considerations throughout the firm’s research, engagement and investment processes. Bigley joined the firm in 1997 and previously served as a portfolio manager and trader for the global and Canadian bond strategies. She spent two years based in London as the global head of Fixed Income Business Development for institutional clients. Bigley served as a fixed-income senior investment strategist for over a decade, and as head of the strategist team from 2018 to 2021. Prior to taking her current role, she served as head of Fixed Income Responsible Investing, overseeing the Fixed Income team’s responsible investing strategy. Bigley holds a BS in civil engineering from Villanova University and an MBA from the Massachusetts Institute of Technology’s Sloan School of Management. She is a CFA charterholder. Location: New York

Luke Pryor

Luke Pryor is a Senior Vice President, Portfolio Manager for the AB Security of the Future Strategy, and Co-Portfolio Manager for the AB Strategic Equities and Responsible US Equities platform. Previously, he was a senior research analyst on the US Large Cap Value team, covering the energy, industrial and materials sectors. Before joining AB in 2019, Pryor was a project leader at the Boston Consulting Group in the principal investors and private equity practice. He holds a BA in economics from Cornell University and an MBA from the Wharton School at the University of Pennsylvania, where he was a Palmer Scholar. Location: New York

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