Shift’s Response to the UN Working Group Consultation on Investors, ESG, and Human Rights

In 2016, ESG investing amounted to US$ 22.8 trillion of global assets – by 2025 it’s expected to reach US$ 53 trillion.[1] Yet, while lenders and investors are increasingly using Environmental, Social and Governance (ESG) indicators in their decision-making processes, confusion about metrics persists, particularly when it comes to the ‘S’ in ESG. So, it’s vital that these approaches align with the UN Guiding Principles on Business and Human Rights, which leading financial institutions, states and businesses have been working to implement for over a decade.

In June 2024, the United Nations Working Group on Business and Human Rights will present a report to the UN Human Rights Council on the approaches to ESG taken by financial institutions, including investors, in recognition of their “unparalleled ability to influence companies and scale up on the implementation of the Guiding Principles”.[2] The report will provide guidance for governments, financial actors and others, on aligning ESG approaches with the UN Guiding Principles. As part of this, the group put out a call for input from a variety of stakeholders to inform their recommendations.

This response is Shift’s submission to the consultation, which builds on a decade of experience working with a range of financial actors, including investors, to drive successful implementation of the UN Guiding Principles on Business and Human Rights. For over 10 years, we’ve been supporting financial institutions to identify, assess, and manage the adverse impacts on people associated with their financing activities. In that time, the landscape has changed significantly – marked by new regulatory incentives, increased data availability, and a growing appreciation of the value of robust due diligence processes to financial institutions.

[1] ESG assets may hit $53 trillion by 2025, a third of global AUM, Bloomberg, via OHCHR

[2] P.15, para 77, A/HRC/47/39, Guiding Principles on Business and Human Rights at 10: taking stock of the first decade

Aligning the EU Due Diligence Directive with the International Standards: Key Issues in the Negotiations

Aligning the CS3D with the core concepts in the international standards

The EU is currently in the process of negotiating a legal instrument that will establish new corporate human rights and environmental due diligence duties across the single market – the draft Corporate Sustainability Due Diligence Directive (CS3D). At the heart of the negotiations is how to ensure the CS3D is meaningful in driving better human rights and environmental outcomes while also being manageable for companies.

This crucial phase of negotiations is a vital opportunity to align the CS3D with the core concepts in the international standards. The international standards on sustainability due diligence – the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises (OECD Guidelines) – help answer precisely that question, so it’s not surprising that the negotiators’ positions have increasingly built on the core concepts in these standards. Not only have they been shown to work in practice – diverging from them in the CS3D would risk creating a fragmented and confused approach, especially for the many companies that have already been working to implement them.

In this report, Shift takes stock of where progress has been made – and where work still remains – to ensure greater alignment between the positions of the three EU political institutions – the Commission, Council and Parliament – and the international due diligence standards.

Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions

From early warnings to controversy data, investors and lenders are increasingly recognizing their reliance on civil society and human rights defenders for their human rights due diligence (for more see No News is Bad News, the product of a collaboration between ABN AMRO, APG, ING, Robeco, and Morningstar Sustainalytics). This includes the essential insights they provide on salient human rights issues that are material impacts in client portfolios (e.g. for CSRD) include those impacts on people related to climate change and biodiversity loss – to which banks are connected through their financing of clients and transactions.

However, the civic space necessary for this important work is being increasingly restricted (see People Power Under Attack, CIVICUS Monitor, 2022). In 2022 alone the Business and Human Rights Resource Centre tracked 555 lethal and non-lethal attacks against human rights defenders. And according to Global Witness’ report, Standing firm: The Land and Environmental Defenders on the frontlines of the climate crisis, at least 177 land and environmental defenders lost their lives last year.

So, what role can – and should – financial institutions play in addressing shrinking civic space? In our latest Financial Institutions Practitioners Circle report, Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions, we explore key aspects of this challenge, including how banks can start to overcome the barriers they may face when engaging with civil society and human rights defenders.

Living Wage Accounting Model and Progress Tool

Developing a Living Wage Accounting Model

Shift, together with the Capitals Coalition, has spent two years working with companies, investors, standard-setters, living wage initiatives and accounting experts to develop an accounting model for living wages to enable standardized, meaningful, and comparable reporting on progress made by companies in their own workforces and supply chains.

Efforts to tackle growing levels of inequality and poverty around the world are increasingly focused on the payment of a living wage. That’s because realizing the human right to a living wage is essential to raising the living standards of the most vulnerable workers and their families – and to fulfilling a range of other human rights, including rights to food, water, health, adequate housing, education, family life, and fair working hours.

The wider impact on society is also clear. Studies have shown that reductions in poverty and inequality can lead to greater social cohesion, as well as benefits to business. Paying a living wage can deliver not only a more motivated and productive workforce, with lower staff turnover, but also improved revenues and profits and increased value chain resilience and performance.

Measuring and reporting on living wage progress is essential to driving better outcomes for workers, businesses, and for society.

Investors are increasingly interested in whether companies are taking action on living wages, and if so, whether those actions are having any positive impact on workers’ wages. To be able to make an informed assessment of this aspect of a company’s performance, investors need access to reliable and comparable data.

Measuring Progress on Living Wages

Until now, there has not been a generally agreed, straightforward and measurable way for companies to reflect their work to achieve living wages in their public reporting. As a result, investors, civil society and other interested stakeholders have not been able to access the information they need to compare companies’ progress, assess which are contributing to the solution and push those sitting on the sidelines to play their part.

“To get more companies to walk the talk on paying a living wage, we need to define what success looks like, and how to measure progress along the way. And we need common metrics for companies to account for that change in their public reports. Only then can markets reward those companies that are part of the solution to today’s growing inequalities, and push others to play their part.”

Caroline Rees President of Shift

The Accounting for a Living Wage project has resulted in a model that helps paint a picture of the scale and scope of the living wage deficits experienced by workers, as well as progress towards living wages over time. Having a shared and simple methodology to track and report on progress has proven key to the success of similar efforts to embed sustainability goals in business decision-making. This Living Wage Accounting Model has the potential to play a catalytic role in:

  • Delivering greater transparency regarding the payment of Living Wages
  • Informing new standards around Living Wages
  • Creating incentives for improving wages and reducing inequalities.

These resources are designed to support the work of:

  • Businesses – who can use the model and tool to measure and disclose their progress on living wages in a standardized way
  • Standard setters – who can embed the model in their standards to ensure that companies provide valuable, comparable information
  • Investors and CSOs – who can use the information disclosed by companies to make assessments and incentivize better performance

The Living Wage Accounting Model Tools

3 resources
September 2023
A Model to Measure Progress on Living Wages

The background to the project and the rationale for developing a model to measure progress on living wages.

September 2023
Using the Living Wage Accounting Model

The metrics, basic and expanded disclosures and accompanying statements of methodology that companies can follow to measure and report their progress on living wages.

September 2023
Contextual Indicators

A set of additional disclosures that draw on existing indicators related to living wages. When used in conjunction with the Accounting Model, these disclosures provide companies with a comprehensive Living Wage Reporting Framework that follows the ISSB four-part framework of Governance, Strategy, Risk Management and Targets and Metrics.

Coming Soon: Living Wage Progress Tool
A customizable and downloadable tool that facilitates use of the model by performing all the calculations needed for the disclosures, based on wage and related data entered by companies.

Shift’s Submission to the ISSB’S Consultation on Agenda Priorities

The ISSB has proposed that two of the four options for inclusion in its agenda priorities for the next two years could be ‘human capital’ and ‘human rights’: both social-related topics. This is an important and welcome signal, which in turn reflects the significance of these issues to the interests of investors. In light of regulatory and legislative developments related to human rights due diligence, this interest in reporting on social-related issues is set to continue increasing at a rapid rate.

Shift therefore strongly endorses the need for the ISSB to include within its near-term agenda research work that would lead towards a standard on social-related financial disclosures.

This submission to the ISSB’s public consultation sets out the key challenges with addressing social issues through its proposed approach, including the  difficulties arising from its proposed categorization of ‘human capital’ and ‘human rights’. It proposes an alternative approach that would focus instead on the development of a cross-cutting social standard that would align with the ISSB’s stated objectives by:

  • encompassing issues relevant to both human capital and human rights, avoiding any need to draw boundaries between them, and without needing to address the specific topics they cover in detail,
  • meeting the most essential needs of the providers of capital regarding material social-related issues by enabling them to assess the extent to which any company is equipped in its core governance, strategy and risk management to identify and manage social-related risks in its operations and value chains
  • establishing the global, foundational building blocks for reporting on social issues, following much the same approach as the ISSB Climate standard S2: mirroring the structure of standard S1 on General Requirements, but extending beyond its content by addressing significant factors particular to social-related issues
  • being coherent and interoperable with the existing European Sustainability Reporting Standards (ESRS) on social issues, including by providing a common understanding of the relevant architecture of social-related topics in sustainability reporting
  • providing a resource-efficient project that the ISSB could reasonably undertake in its immediate work plan, being (a) broader but less granular than either of the two proposed projects, (b) able to leverage substantial existing resources including the international standards on human rights due diligence and the ISSB’s own CDSB Framework for Reporting Environmental and Social Information.

The submission sets out the detailed rationale for this approach, the benefits it would bring and the resources on which it could draw.

Understanding business impacts on people: the complementary approaches of ‘business and human rights’ and ‘social and human capital’

The fields of ‘business and human rights’ and ‘human and social capital’ address the management and measurement of business impacts on people – but there is often confusion about where these approaches overlap and where they diverge.

This is partially due to their distinct starting points: the field of ‘business and human rights’ is founded on the proposition that all companies have a responsibility to respect the human rights of people affected by their operations, products and services – this is articulated in the UN Guiding Principles on Business and Human Rights and reflected in a range of other standards. The field of ‘Social and human capital’ is part of the ‘capitals approach’ to decision-making which is grounded in the principle that natural capital, social capital, human capital and produced capital form the foundation of human wellbeing and economic success. By understanding how they impact and depend on the capitals, companies are supported to make holistic decisions that create value for nature, people and society alongside businesses and the economy.

In this paper, Shift and the Capitals Coalition set out the key similarities and differences between the two approaches and outline how they can be applied together to inform business decision-making. This includes a closer look at terminology, outcomes and impacts, and their shared focus on people.

Putting the European Sustainability Reporting Standards into Practice

Shift’s Guidance on the European Sustainability Reporting Standards

Primers for practitioners

7 resources

Throughout August and September, Shift will be releasing weekly primers on key aspects of the European Sustainability Reporting Standards (ESRS). These standards help meet the purpose of the EU’s Corporate Sustainability Reporting Directive (CSRD) in ensuring greater rigor, completeness and comparability in companies’ reporting on their sustainability performance across environmental (including climate), social (primarily human rights) and governance issues.

This series is for everyone and anyone tasked with putting the standards into practice – whether you’re working within a company, or advising one. We hope this series supports the coherent interpretation and robust implementation of the standards that will unlock high-quality reporting on sustainability.

As a ‘co-construction’ partner in the early development of the ESRS, and with our Director of Business Engagement, David Vermijs, sitting on the Sustainability Reporting Board (EFRAG) that guided the process, we are glad to be able to help demystify the standards for practitioners.

The need for guidance

The ESRS are set to apply to more than 50,000 companies in the EU and at least 10,000 companies outside. To say the advent of the standards has generated a flurry of activity would be an understatement; companies are now bringing together parts of their organizations that rarely met before – finance and internal audit, compliance and legal, environmental teams and human rights specialists. There are questions about who should lead and whether and how these different experts might work together to apply the standards. And many companies are spending significant amounts of money on hiring consultants to guide them through the process.

So it’s understandable that we’re already seeing a proliferation of interpretations of the standards. The ESRS are hardly drafted in the most accessible terms – indeed, it seems to be the fate of many reporting (and other) standards, to be unhelpfully technical and complex in ways that risk undermining their actual intent.

In addition, consultants are often inclined to interpret standards in ways that best suit the methodologies they are used to applying with their clients. Selective interpretations can come into play as part of a desire to fit these advisory engagements into ‘business as usual’. Indeed, there are cases where internal company experts familiar with key aspects of the ESRS have had to correct their consultants on what they know to be faulty advice. But many more companies lack the in-house expertise to tell the difference.

Clarity is greatly needed. The European Financial Reporting Advisory Group (EFRAG), which was responsible for drafting the standards, will be developing some key guidance over the coming weeks and months; Shift team members David Vermijs and Michelle Langlois will be supporting this process, which will hopefully go some way to addressing gaps in understanding and preventing misinterpretation.

In the meantime, we hope this series of primers will help to answer some of the most frequently asked questions we hear on key aspects of the standards, with a particular focus on social issues and their connections with international standards on human rights due diligence. The series will cover: “double materiality” – and the links between impact materiality and “salient human rights issues”; the novel people-centered architecture of the Social standard; the risk-based approach to identifying material impacts in the “value chain”; and much more.

Bridging the gap between action and reporting

Why are we doing this? Because interpretation matters. It is no accident that the ESRS align closely with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises – the international standards of conduct on corporate respect for human rights. This ensures that reporting requirements tally with international expectations of how companies identify and address risks to people in their operations and value chains.

Too often, that connection between action and reporting on sustainability has been tenuous – whether that’s because non-financial reporting has been seen by companies as a PR side-show; or because the data demanded of companies has failed to either reflect or support good management of sustainability risks and impacts. 

Sustainability reporting should be a natural extension of action – to ensure the authenticity of insights provided to shareholders and other stakeholders, and to ensure that the data being gathered is of value for internal managers. It is this relationship that turns the costs of reporting into an investment in effective risk management. If a hundred interpretations of the ESRS now emerge, that prize will be lost.

The coming months and years will be a litmus test for whether the ESRS can re-solidify this relationship between action and reporting on sustainability matters, including on material social issues that have too long been ignored or downplayed. If not, this pioneering European initiative will in good part have failed. Now is the time to make sure that it succeeds. We hope that this series of primers can help you play a part in helping ensure that it does.

Indigenous Rights and Financial Institutions: Free, Prior and Informed Consent, Just Transition and Emerging Practice

Companies, civil society and the finance sector are paying increasing attention to Indigenous Peoples rights and expertise, which are critical in the context of our most pressing global agenda items: climate change and biodiversity loss. This is not least because much of the world’s biodiversity, and many of the natural resources needed for the energy transition, are located on indigenous territories. However, recent events, from the Dakota Access Pipeline protests to the Juukan Gorge disaster, demonstrate that prevailing approaches to identifying and managing the impacts of business on Indigenous Peoples are falling short. That is, businesses are failing to meet their responsibility to respect indigenous rights under international standards.

Free, Prior and Informed Consent

Financial institutions (FIs) are critical players in the value chains associated with impacts – both positive and negative – on Indigenous People.  With the rapid scale-up of financing for transition minerals and growing awareness of the need for nature-based solutions, FIs must ensure both they and their clients understand and respect Indigenous People’s rights – which includes ensuring that clients obtain “free, prior and informed consent” (FPIC) when developing projects on indigenous lands. Without FPIC, project owners and their financiers face the prospect of conflict, reputational damage, lengthy delays and project cancellations, as well as a failure to meet international standards.

Overcoming Key Challenges to FPIC

In December 2022, Shift held a Financial Institutions Practitioners Circle (FIs Circle) on Indigenous Peoples rights. Two expert contributors, Lloyd Lipsett and Mark Podlasly, shared their insights from decades of experience working with Indigenous Peoples interfacing with development on their lands. Together, we fielded some of the burning questions financial institutions are grappling with as they finance clients with projects or value chains connected to indigenous territories:

  • What do FIs need to know when there are differing views on whether a community is “indigenous”?
  • How can FIs determine what “good” Free, Prior and Informed Consent (FPIC) processes look like?
  • What steps should FIs take when supplied with limited or poor-quality information on respect for indigenous rights by their clients?
  • How can FIs spot – and address – power imbalances between clients and Indigenous People?

This paper captures key takeaways from the session, focusing on the responsibility to obtain and maintain FPIC. This focus reflects the importance of FPIC as a process to safeguard Indigenous Peoples rights to self-determination, to participation, and to their lands, territories and resources.

Designing an EU Due Diligence Duty that Delivers Better Outcomes

What is the CS3D?

Starting in 2022, the European Union has been negotiating a draft Directive on Corporate Sustainability Due Diligence (CS3D), with discussions on a final law expected to begin by mid-2023. The draft Directive aims to ensure companies active in the single European market contribute to sustainable development by preventing and addressing negative human rights and environmental impacts.

How can we ensure the directive delivers for people and planet?

In our latest report, From Policing to Partnership: Designing an EU Due Diligence Duty that Delivers Better Outcomes, we set out clear recommendations to better align the core content of the duty to do due diligence in the draft Directive with the authoritative international standards for sustainability due diligence.

While the new duty will only apply to certain companies headquartered or operating in the single market, their business partners and other companies in key sourcing and production markets outside the EU will have an essential role to play. Our report is based on interviews with businesses and other stakeholders in Bangladesh, Kenya, Tanzania, and Thailand on the challenges and opportunities facing local companies in meeting their EU business partners’ human rights and environmental expectations, and in preventing and addressing human rights impacts in their operations.

The report looks at some of the current dynamics between EU companies and their non-EU business partners in managing human rights risks, and explores the opportunity the Directive presents to shift from a top-down ‘policing’ approach to one based on collaboration and mutual responsibility, in line with the international standards. It aims to bring the perspectives of companies in key markets into the current debate to provide vital insights into the kinds of practices and behaviors that should be incentivized in the new Directive – and those that should be discouraged – if we truly want it to deliver better outcomes for people and planet.

This report is divided into two main sections:

Section B, What did we hear? provides an overview of current behaviors and practices that are often not conducive to meaningful human rights due diligence.

Section C contains two parts:

  1. What is different about the international standards? benchmarks some of the problematic practices encountered against the international due diligence standards. It highlights what would signal more meaningful due diligence approaches, as compared to those that currently seem to dominate many of the relationships between EU companies and their business partners.
  2. What is the opportunity? underscores the potential for the CS3D to define a carefully crafted due diligence duty that incentivizes a shift towards practices that are more aligned with meaningful due diligence.

This research is part of a project funded by the Ministry for Foreign Affairs of Sweden.

Human Rights Due Diligence: The State of Play in Europe

What’s at stake?

Beginning in 2017, several European states including France, Germany and the Netherlands began to adopt versions of human rights due diligence legislation. This created momentum for the European Union (EU) to help level the playing field.

In 2022, the EU began negotiating a draft Corporate Sustainability Due Diligence Directive (CS3D). The draft CS3D represents a significant opportunity to advance better outcomes for people and planet by scaling uptake of quality human rights and environmental due diligence and enhancing corporate accountability for due diligence failures. However, realizing this potential depends on the Directive being firmly grounded in the international standards on sustainability due diligence – the UNGPs and OECD Guidelines. At Shift, we are committed to helping ensure that this happens through our close involvement in the regulatory debate.

What is the process at EU level?

European law-making involves the three EU institutions: the Commission, Council and Parliament. The European Commission released its proposal for a Directive in February 2022. The Council of the EU issued its position on the proposal in a ‘general approach’  in December 2022, and the European Parliament is expected to settle its position in June 2023. The three institutions will then begin joint negotiations on a final law, with the final result expected before the European Parliamentary elections in early 2024.

Once a final Directive is adopted, EU Member States then have a certain period of time to transpose it into their national laws, after which enforcement would commence.

For an up-to-date list of mandatory Human Rights Due Diligence initiatives in Europe, visit the Business and Human Rights Resource Mandatory Due Diligence portal.

Core Resources

Our Analysis of the Debate

4 resources
October 2023
Aligning the EU Due Diligence Directive with the International Standards: Key Issues in the Negotiations

Aligning the CS3D with the core concepts in the international standards The EU is currently in the process of negotiating a legal instrument that will establish new corporate human rights and environmental due diligence duties across the single market – the draft Corporate Sustainability Due Diligence Directive (CS3D). At the heart of the negotiations is […]

May 2023
Designing an EU Due Diligence Duty that Delivers Better Outcomes

What is the CS3D? Starting in 2022, the European Union has been negotiating a draft Directive on Corporate Sustainability Due Diligence (CS3D), with discussions on a final law expected to begin by mid-2023. The draft Directive aims to ensure companies active in the single European market contribute to sustainable development by preventing and addressing negative human rights and environmental impacts. […]

March 2022
Shift’s Analysis of the EU Commission’s Proposal for a Corporate Sustainability Due Diligence Directive

On 23 February 2022, the European Commission released its ‘Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence. Its overall objective is to ensure that companies active in the internal market contribute to sustainable development …through the identification, prevention and mitigation, bringing to an end and minimization […]

February 2021
“Signals of Seriousness” for Human Rights Due Diligence

This discussion draft is intended for the consideration of the European Commission and other stakeholders as the Commission develops proposals on mandatory human rights and environmental due diligence (mHREDD) and considers how national regulators would implement any such legislation. Shift is submitting this draft together with our formal response to DG JUST’s consultation on a […]

Previous Comments and Analysis by Shift

  • Rachel Davis’ March 2022 COMMENTS to the European Parliament RBC Working Group on the release of the Commission’s proposal
  • Our March 2022 ANALYSIS of the Commission’s proposal for a draft Directive
  • Our October 2021 Key Design Considerations for the Enforcement of Mandatory Due Diligence, developed in collaboration with the Office of the UN High Commissioner for Human Rights
  • Our August 2021 viewpoint on how legislating a new standard of conduct CONNECTS TO OUTCOMES FOR PEOPLE
  • Our July 2021 viewpoint on the relationship between HUMAN RIGHTS AND ENVIRONMENTAL DUE DILIGENCE 
  • Our June 2021 viewpoint on the need to include SMEs in the scope of new regulations while allowing them APPROPRIATE FLEXIBILITY
  • Our April 2021 recap of the mHRDD debate in Europe (see below)
  • Our February 2021 RESPONSE to the European Commission’s initial consultation on the need for an initiative on sustainable corporate governance
April 2021: Shift’s Vice President, Rachel Davis, shares a quick summary of where things are at in the debate on mandatory HRDD in Europe