Social factors under ESG have rightly taken the front seat for asset managers in the past year, notably when it comes to human rights violations within complex supply chains.

Asset management firms are ramping up their engagement programmes with firms that could be deemed as violating these rights, and when this is ineffective, ramping up the escalation process which could lead to divestments.

Peter van der Werf, senior engagement specialist and team lead of engagement at Robeco outlines the firm's ambitions. Firstly, starting with a global controversy engagement programme where they analyse minimum norms set by the UN's Global Compact Principles, as well as OECD guidelines. Companies in breach of those principles run the risk of being excluded if there is not sufficient progress after three years. However, the ESG market-leader has laid out how it plans on tackling this issue by establishing a human rights due diligence process this year.

"In some cases, we feel that based on the screening methodology we apply, we do not always see the smaller, more localised issues in terms of how many people are affected by very serious issues of human rights violations. That is why we are in the process of developing this programme to go a step beyond what we screen out in that minimum standards process," says van der Werf.

This approach is more subtle in nature, but more proactive by reaching out to the companies directly. Screening for companies with very complex and opaque supply chains who might be at risk of very serious human rights violations can be a hard and complicated process. Van der Werf notes that it might not be clear at the onset for the company where their human rights risks lie and how to deal with them. As such, the asset management firm is bringing those elements into its new framework.

Nezhla Mehmed, corporate governance analyst at DWS, says that Deutsche Bank's asset management arm has a similar approach, where an initial screening process occurs by looking at compliance with the UN Global Compact principles or those set out by the International Labour Organisation. A similar engagement process occurs thereafter for companies that run the risk of not meeting international norms. "We are seeing a shift from a shareholder centric to stakeholder centric expectation on companies from investors and the public. This causes the capital markets to be less forgiving in terms of how companies are affecting the society they operate in and how they are making sure that their supply chains are in line with their business sustainability strategy," says Mehmed.

Similarly, Marte Borhaug who leads Aviva Investors' sustainable outcomes team, adds that the firm has an exclusion policy for companies involved in producing controversial weapons for example. However, she states that prioritising an engagement approach with companies is a more powerful tool. As ESG issues are embedded in the firm's investments, if there are big human rights risks from a bottom-up perspective, the ESG researchers and fund managers team up and engage with those companies directly. "We are also engaging with companies that are scoring poorly on the Corporate Human Rights Benchmarks. That means sending letters and doing intensive one-on-one engagements to help them improve their scores. We know that modern slavery is happening in supply chains so let's encourage companies to identify and fixing it, as well as taking steps to prevent them, rather than pretending they're not there," says Borhaug.

An issue for Borhaug, is the absence of quality information and judgement in the ESG market. Whilst she acknowledges it is helpful to see the level of risk that a company faces, it does not always tell the full story. "Boohoo was a company that had good ESG scores from some of the data providers and a lot of sustainability funds had the company in their portfolio, but underneath there were a lot of social risks. Our view is you need to combine the data with qualitative assessments, which is why we have a very strong ESG team," comments Borhaug.

Mehmed adds that last year the asset management firm had an issue in the UK with an important retailer, which can only be assumed to be Boohoo. The ultra-fast fashion retailer came under scrutiny after The Sunday Times found in July that it was paying employees well below the minimum wage, as well as not providing workers with proper equipment to protect against the coronavirus. "Many companies, especially some of the largest retailers, be it online or not, have been hiding behind their huge supply chains and very complex relationships on a global level. Consequently, it becomes difficult to monitor, but that is no longer an excuse. These huge companies are the ones that can really bring change to the small suppliers in each individual market," says Mehmed.

Robeco's approach is not to hand out immediate sanctions to companies that fail the engagement process. However, van der Werf notes this would be brought into perspective when evaluating the ESG performance of a company and could result in favouring companies that score better on sustainability metrics.

Similarly, DWS' approach focuses strongly on the engagement process before having an exclusion approach. The firm sends letters to companies as a first step, informing them about its policies and expectations. A one-on-one engagement follows suit and if a company has not been responsive, the asset manager will send a letter to the board of directors expressing its concerns. Mehmed says the firm could also attend the general meeting of a company with a public speech, a strong tool directly addressing the board in-front of the press and other shareholders. As a last resort, DWS would consider downgrading or divesting from a given company. "We have had cases in the past where we downgraded due to social issues. We saw the risks weren’t diminishing and the company wasn't as responsive and we divested due to ESG issues, but mainly social issues," says Mehmed.

EOS at Federated Hermes also mapped out its engagement plan for 2021-23. Within its priorities, ensuring that human rights are respected when it comes to companies' operations was top of the list alongside other climate and governance concerns.