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Child labour and other human rights violations remain too prevalent in business.Ahmed Shah

As environmental, social and governance (ESG) issues factor into more investment decisions, critics say one element is often overlooked: the human rights records of businesses.

When clients initiate a discussion, the ‘E,’ for environmental performance, is at the forefront, says Linson Chen, a financial advisor at RGF Integrated Wealth Management in Vancouver. The ‘G’ of governance tends to also get attention, while the ‘S’ for social can be tracked for things such as HR practices, community investments, and health and safety. Human rights frequently avoid the same sort of scrutiny.

The worst offenders might stand out. “Beyond that, everything is not so black and white. It’s more kind of like shades,” Mr. Chen says. “Each fund has their own scoring.”

Business and Human Right Resource Centre, a U.S.-based think tank, notes this is part of the problem. It reports that human-rights violators, in Asia and Africa for example, can still make the cut when it comes to some key ESG indices. Moreover, some institutions that speak out strongly on human rights nevertheless lend money to regimes responsible for human-rights abuses.

Earlier this year, a blog on the site of the European Corporate Governance Institute noted that firms can offset bad behaviour in one area with good behaviour in another, as most ESG ratings are linear weighted averages.

Using the ESG stamp of approval under a loose framework can make it harder to hold companies accountable for human-rights violations. It’s already difficult enough to carry out due diligence regarding human rights across the lifecycle of an investment, says Rebecca DeWinter Schmitt, an associate program director for the Investor Alliance for Human Rights (IAHR). To help asset owners and managers, IAHR has developed an investor toolkit on human rights.

Ms. DeWinter Schmitt, based near Washington, D.C., has heard many concerns from investors that companies are getting better at talking the talk, but don’t really have the follow through. “Companies need to get better at walking the walk,” she says.

The current ESG framework does not go nearly far enough to outline the harm done to people when the world’s corporations don’t uphold human rights, says Paloma Munoz Quick, associate director and global lead of financial services and human rights in New York for Business for Social Responsibility.

“ESG is still considered a ‘nice to have’ and human rights is not, and should not be, in that category,” Ms. Munoz Quick says.

She adds human rights should be the underlying framework for all investments in a portfolio “because a human rights-based approach helps fill in a lot of the gaps that exist in traditional ESG practices.”

The E, S and G are often siloed, with investors focused primarily on issues such as climate or diversity on a company’s board of directors. “Doing this, we miss a whole list of material risks that stem from the impact on people,” Ms. Munoz Quick says. “By having this human-rights framework you’re able to see other material issues around the corner.”

Ms. Munoz Quick acknowledges that investors have to sift through a lot of information when making choices. She says she believes basing investments on a company’s behaviour and impacts on people along their entire supply chain or value chain is imperative.

“This is the responsibility of all businesses, to ensure you’re not making profit off of forced labour, privacy violations, land grabs or the killing of human rights defenders – that is truly just the minimum,” she says.

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