But despite the emerging case for corporate responsibility at the geopolitical level, many investors lack a broader perspective that takes into account threats to civic space and freedoms. Part of the problem is that investors and the human rights community speak somewhat different languages: some investors will not even be familiar with the term ‘civil society space’ and, for those that are, the term can be perceived as political, sensitive or vague. Erosion of civic institutions and the shrinking of civil society space are not typically considered as systemic risks that may affect long-term cash flows and projected profits. The ESG and broader sustainability framework, with its language of ‘just transition’, ‘societal resilience’ and ‘equity’, is more accessible to some investors. Yet, the issue of restricted civil society space is critical, and directly related, to issues around equity and just transition, including in the current discussions about loss and damage in the context of climate change. Widening the discourse to include civic freedoms should have some resonance with investors because of the convergence of values and interests, and stakeholder pressures and expectations, that exist around the rule of law and civic freedoms as the essential underpinnings for predictable, sustainable and profitable returns.
Even for those investors that appreciate and acknowledge the connection between civic freedoms and the resilience and profitability of their own operations, there are numerous barriers to investors factoring these issues into their decision-making. These include a lack of incentives to encourage an approach that goes beyond pure credit risk; an absence of criteria and metrics to factor these wider issues into their operations; and a lack of strategic vision, backed up with appropriate governance structures to enable investors to engage purposefully and effectively on these issues.
Lack of incentives to look beyond credit risk
The primary focus of an investor’s business model is the return on investment. This model encourages short-term thinking that focuses only on the ‘outside in’ and does not factor in the broader impacts of deteriorating civil society space. Currently, investors will take account of, and react to, major political risks such as changes of government, significant legislative reforms and military control. But their investment decisions are not typically sensitive to other, sometimes more subtle, changes in a political environment that can also be detrimental to financial stability, such as new legislation that makes it harder for NGOs to operate; government clampdowns on independent media; and the arrest of human rights defenders. For example, in March 2022, JP Morgan reacted to Russia’s invasion of Ukraine the previous month, a violation of international law that also elevated financial and geopolitical risks, by excluding both Russia and Belarus from its fixed income indexes. But as index providers – which offer a basket, or ‘index’, of funds for investment and decide which funds to include – grade countries by focusing only on the likelihood that they will default on their debt, they tend to overlook more systemic issues that may affect a country’s financial stability, including the erosion of civic institutions and the shrinking of civic space.
Foreign investors such as Blackrock have been increasingly active in China’s large bond market in recent years, despite both the imposition in 2020 of the National Security Law in Hong Kong, which has been interpreted broadly as a means to clamp down on those protesting against the government, and China’s treatment of the Muslim Uyghur population in Xinjiang province, which an unofficial UK-based tribunal has held constituted genocide. In terms of credit rating, China currently has a good score of A+ on sovereign write-up with S&P Global, because, while the ratings agencies acknowledge issues such as corruption, the policy outcomes in terms of growth and fiscal position have been generally good.
Even for those investors that have concerns about deterioration of the rule of law and civic space in a host market, legal and operational factors may disincentivize engagement on these issues – or at least make it more difficult. The position of HSBC in Hong Kong exemplifies some of the conflicting values and interests that investors and companies may have to deal with in politically sensitive situations. In 2020, Aviva Investors – the holder of shares worth nearly £800 million in HSBC and Standard Chartered – expressed unease at the decision of these two banks to support the National Security Law. Aviva stated that it expected ‘both companies to confirm that they will also speak out publicly if there are future abuses of democratic freedoms connected to this law’. In the case of HSBC, Hong Kong is its largest market, where it employs approximately 30,000 people, and the bank must comply with local law to be able to operate there. At the same time, HSBC and other banks have faced criticism not only from human rights groups but also from UK ministers and parliamentarians. A 2023 inquiry by the All-Party Parliamentary Group on Hong Kong concluded that ‘British banks such as HSBC Bank PLC have been complicit in supressing the human rights of Hongkongers, by proactively supporting the National Security Law.’
Privately, many investors and companies are increasingly concerned about the closing of civic space in Hong Kong. Until recently, Hong Kong was home to strong civil society organizations, which provided useful alternative sources of information on listed companies, otherwise covered only superficially by mainstream media outlets. But these alternative sources are steadily disappearing. The rule of law and the independence of Hong Kong’s judiciary – historically pivotal to the territory’s appeal to the international business community due to the transparency and predictability that they provide – are now under threat.
With the shrinking of civic space through the repressive implementation of the National Security Law has come a marked increase in business risk. A March 2023 report by the Atlantic Council detailed how Hong Kong’s diminishing political independence and ‘fractured foundations’ – including the targeting of independent media, pro-democracy politicians and publishers of books and films – are negatively affecting the business sector. Threats to journalism have resulted in a lack of the information needed for the operation of financial markets, as well as risks to the accessibility of broader information flows necessary in a modern economy such as reporting on economic data and corporate financial results. The National Security Law also poses data security risks for financial services providers, including risks to intellectual property, online speech and the privacy of customer information. Coupled with the disappearance of leading Chinese entrepreneurs (including, most recently, tech CEO Bao Fan in February 2023), the closing of civic space is leading some investors to move their money out of not only Hong Kong but also mainland China.
Regulatory pressure
A convergence of pressure points is incentivizing investors to undertake a more thorough assessment of the environments in which they operate. One major factor is the accelerating regulation of human rights, ESG and sustainability issues across many countries and stock exchanges, along with the degree of specificity required in related disclosure regimes. Increasingly, governments are enacting regulation to focus investors and companies on a company’s impact on the world at large, and to provide checks on corporate power and routes for accountability by requiring business to carry out due diligence on the human rights implications of their operations. In the last few years, several countries have adopted laws mandating human rights and environmental due diligence, including Germany, the Netherlands and Norway. Australia, Canada, Denmark, France, Japan, Switzerland, the US and the UK have also all passed or proposed laws on human rights due diligence, supply-chain transparency or modern slavery.
In the EU, the concept of ‘double materiality’ – which refers to how information disclosed by a company can be material in terms of its implications for both the company’s financial value and its impact on the world – has been incorporated into the regulatory framework for sustainability reporting. This ensures that both the ‘inside out’ and ‘outside in’ aspects of a business’s relationship with society are factored into EU sustainability standards and disclosure requirements. Since March 2021, EU rules have required fund managers to disclose how they account for the ESG impacts of their investments. The EU’s forthcoming Corporate Sustainability Due Diligence Directive will impose obligations on in-scope companies to establish a human rights due diligence plan and monitoring mechanism. On 1 June 2023, the European Parliament approved the directive and confirmed that financial institutions will be covered by the rules (a position which also requires confirmation from the European Council). Where relevant, the directive will require investors to engage in efforts to either minimize the extent of adverse impacts by investee companies or to bring such impacts to an end. The draft directive seeks to hold in-scope financial institutions accountable both through administrative supervision (member states must designate an authority to supervise and impose effective, proportionate and dissuasive sanctions, including fines and compliance orders) and the establishment of a link to corporate civil liability for damages.
While the exact requirements of the legislation above may vary, all are grounded in the international human rights standards set out in the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, which provides a degree of regulatory coherence. These standards can be useful for both companies and investors in providing legal cover from host country government requests – for example, to pay bribes or be complicit in human rights abuses. In addition, just as there has been a sharp rise in litigation seeking to hold companies to account for their behaviour on environmental issues in the last five years, as human rights due diligence regulation becomes entrenched, we can also expect to see increasing strategic litigation that seeks to hold businesses and investors to account for their human rights policies, including in relation to civic freedoms.
Sanctions are also forcing investors and companies to pay closer attention to civic freedoms and to their position of responsibility in the broader geopolitical ecosystem. In Belarus, where the government has aggressively clamped down on peaceful protestors, EU sanctions imposed in June 2021 prevent European investors from buying or trading any new Belarusian bonds. Many Swiss banks have Russian clients, but such relationships pose a growing financial and reputational risk, especially after the imposition by the Swiss government of sanctions on Russian assets in the wake of the invasion of Ukraine. As part of the Summit for Democracy hosted by the US government in March 2023, both governments and tech investors came under pressure to prioritize human rights due diligence on spyware technology, which has been used around the world to target activists and journalists. In parallel, US president Joe Biden issued an executive order prohibiting the use of commercial spyware.
Collaboration with civil society organizations
As a result of sustained advocacy and engagement by the Investor Alliance for Human Rights (IAHR), some institutional investors have taken a joint stand in response to threats to human rights, including civic freedoms. For example, in December 2021, a group of 30 investors joined international calls for the full restoration of the democratic transition in Sudan with respect to the rule of law, accountable governance and civic freedoms, following the October 2021 military-led coup. In May 2023, the IAHR, together with the EIRIS Conflict Risk Network and the Heartland Initiative, issued a press release in response to the escalating violence between military factions in Sudan, stating that ‘the restoration of the political transition towards an inclusive, civilian, democratic government underpinned by respect for fundamental rights and freedoms is essential to a stable and prosperous Sudan with a thriving civil society and economy’.
Collective investor statements have had a tangible impact on corporate engagement on the civic freedoms of expression, association and assembly in several cases in recent years. Examples include shareholders of Amazon supporting a resolution on freedom of association, and investors in Starbucks approving a bid to review the company’s principles of freedom of association. Shareholder pressure also pushed Apple into publishing a human rights policy that committed to respecting freedom of information and expression, after years of criticism of the company for its acquiescence in Chinese government demands to limit freedom of expression (for example, by deleting over 600 virtual private networks from its App Store).
Engagement on civic freedoms varies significantly according to the type of investor. Faith-based investors, those able to take a longer-term view and public markets with greater disclosure obligations are more likely to be responsive than private markets, which are not required to make disclosures. Public-facing institutional investors, such as pension funds, increasingly factor risks to human rights and civil society space into their decision-making. For example, in 2021, a group of Danish asset managers sold all their Belarus government debt on human rights grounds and excluded 45 countries, including China, Saudi Arabia and Venezuela, due to demands from members that human rights should be a priority. Germany’s Union Investment also divested from Belarusian funds and declined to buy Tajikistan’s bonds due to human rights abuses.
However, when public funds divest, private capital will sometimes buy the assets, which can simply make the underlying problem less visible, rather than addressing it. There is also a growing trend for large pension funds to invest in private equity funds, which lag behind larger institutional investors on attention to human rights, including civic freedoms. For example, private equity and venture capital firms play an important role in funding the technology sector, but often without due regard for the impact their funding may have on civic freedoms. Amnesty International’s 2021 report Risky Business: How Leading Venture Capital Firms Ignore Human Rights When Investing in Technology highlighted that eight out of 10 venture capital firms showed no evidence that they check whether their investments could be linked to human rights abuses. Silicon Valley investors avoided Saudi Arabia after the murder of Saudi journalist and dissident Jamal Khashoggi in 2018, but now leading venture capital firms are again accepting substantial investments from Saudi Arabia’s Public Investment Fund.
In the last few years, civil society organizations have strengthened their engagement with venture capital and private equity firms to increase awareness of human rights and civic freedoms and help guide private investors on how to meet their responsibilities. For example, the UN Principles for Responsible Investment (PRI), which encourages collaborative engagement by investors on human rights and civic space issues, has recently focused on how to improve human rights due diligence in private markets.
It is becoming increasingly risky – legally, reputationally and financially – for investors to focus solely on short-term profits – or profits plus ‘tick-box’ ESG and sustainability efforts – as opposed to adopting a broader and longer view informed by human rights due diligence that extends to civic freedoms and wider geopolitical risks. This applies equally to private investors. For example, private equity firm Novalpina Capital was involved in financing the Israeli company NSO Group, maker of ‘Pegasus’ spyware. In July 2021, a group of media organizations revealed how Pegasus was being used by certain governments to spy on journalists around the world, as well as targeting leading politicians and activists in several countries. The US responded in November 2021 by sanctioning NSO Group, since when the company’s value has become almost worthless to its private equity backers.
Other pressure points
Pressure on investors to think more proactively about the societies with which they interact is also growing from the public and from within organizations – both employees and business leaders. Demographics are an important factor in this evolving landscape. Recent data suggests that millennial investors care more than older generations about social issues. Among Gen Z (usually defined as those currently aged between 18–25), trust in government and media is fading, but that cohort believes that big institutions have the responsibility to act and that businesses need to improve. Gen Z is 92 per cent more likely to protest than older generations, and can do so more quickly, visibly and extensively, using social media and the internet to mobilize around social issues, including civic freedoms. Investment firms with explicit social purpose are more likely to attract talent from some universities. Younger generations are also more likely to seek jobs elsewhere if their employer does not align with their personal views and values, regardless of whether these issues are part of their employer’s core business.
Some large and well-known investors are showing leadership in this area. For example, in 2023, Dutch bank ABN Amro convened other financial institutions to work with the Business & Human Rights Resource Centre (a leading civil society organization focusing on business and human rights) on a report that explored how financial institutions can strengthen human rights risk assessment of business activities in areas where civic space is restricted. Norway’s sovereign wealth fund, Norges Bank Investment Management (NBIM) – the world’s largest single investor, with assets under management in excess of $1 trillion – has a Council on Ethics, which recommends exclusion of companies from investment if they raise concerns about human rights or civic space. For example, in the past year, NBIM has placed Polish energy company Polski Koncern Naftowy Orlen SA under observation over concerns that it was responsible for human rights violations via its ownership of dozens of Polish media outlets, with the company being accused of increasing government power over the media in that country. NBIM also excluded an Israeli software company over concerns that customers of its surveillance products have been accused of serious human rights violations and two Thai companies for activities that provide the Myanmar armed forces with significant revenue that could be used to finance human rights abuses.
Pressure on investors to think more proactively about the societies with which they interact is also growing from the public and from within organizations – both employees and business leaders.
It is striking, however, that most of the positive examples of engagement come from Europe and the UK, where both the international human rights law framework is well entrenched (including through EU and UK law, and the Council of Europe’s European Convention on Human Rights, supervised by the European Court of Human Rights) and ESG investing is more mature. ESG investing continues to grow in Asia, but a backlash from the political right in the US (with the support of the oil and gas lobby) has mobilized politicians in 24 Republican-controlled states to agitate against the concept. President Biden recently issued his first veto to block a Republican attempt to overturn a federal Department of Labor rule allowing investment managers to consider ESG risks in their investment decisions.
Lack of metrics
Another barrier to investor engagement is that these broader issues are not easy for investors to measure or quantify, or at least not in a way that fits neatly into their standard methodologies. Conversely, ESG ratings have been designed to suit investors’ way of working – which include the use of numbers, standards and metrics to help them assess and quantify risk. In the last five years, the rapidly evolving ESG landscape has produced a proliferation of standards, standards bodies, data analytics and assessment scores to assist investors in their analysis of ‘E’, ‘S’ and ‘G’ issues.
But while these developments have produced more information for investors, they have also resulted in a wide variety of metrics, methodologies and approaches that are not globally coherent, leading to a crowded and complex environment. The ESG framework faces growing criticism for inconsistent criteria and metrics, the conflation of distinct issues, and misleading portfolio construction and fund marketing. Bodies such as the International Sustainability Standards Board (ISSB) are making significant efforts to improve the quality and consistency of the ESG data landscape. In June 2023, the ISSB launched the International Financial Reporting Standards’ (IFRS) Sustainability Disclosure Standards, with the aim of creating a global baseline of high-quality sustainability information for investors, and thus a more coherent approach to sustainability reporting worldwide. This represents an important step forward. At the same time, the ISSB’s approach focuses solely on sustainability-related impacts material to the company (i.e. the ‘outside in’ or ‘single materiality’). This approach differs from that of the EU in its development of standards through the European Financial Reporting Advisory Group, which require double materiality (as noted above). Efforts to improve sustainability disclosures also need to ensure that what is deemed to fall within the ‘S’ in ESG, or under the social aspect of the ‘sustainability’ umbrella, goes beyond an important but narrow subset of issues, such as supply-chain transparency, modern slavery and workers’ rights, to also take into account the health of civic freedoms and the rule of law.
Current ESG and sustainability ratings systems are not designed to pick up broader, and often more insidious, risks to civic freedoms that are nevertheless material to investors. These can include diminishing flows of information and declining predictability following, for example, a government crackdown on media freedom or the targeting of human rights defenders. ESG ratings can even be detrimental, insofar as they may suggest that a company is compliant on ‘E’ or ‘S’ issues when it is not. A recent study by Inclusive Development International found that many ESG funds were investing in companies linked to entities with egregious human rights records, including the Myanmar military. That study also argued that index providers like S&P, FTSE Russell and MSCI – which have significant leverage as gatekeepers to trillions of dollars of sustainable capital – use flawed ratings to create ESG indexes, contributing to increasing misalignment between ESG practices and respect for human rights, including civic freedoms.
Plugging the information gap
Investors need to assess and measure both the way in which the openness of a host country may affect their return on investment, and the wider impact of their own investment activities on the rule of law and civic space. For investors in listed equities, responsible stewardship should involve detailed testing and monitoring of company commitments against both internal information and externally sourced data that specifically identify human rights risks in the host country. The Corporate Human Rights Benchmark provides useful analysis of the track record of companies on freedom of association and freedom of assembly, alongside other human rights, and the civil society organization Ranking Digital Rights evaluates and ranks digital companies in relation to online freedom of expression, information and privacy. The rapid changes in the regulation of corporate disclosures described in this paper will also help plug some data gaps for investors.
Investors in government debt and index providers featuring country funds need specific data on the country concerned. There is now a wealth of such information available to investors, but current human rights due diligence efforts often overlook civic space issues. As part of their evaluation of risks to human rights and society, investors should have regard to well-reputed data sources on the state of civic freedoms in each country, such as Freedom House, the Varieties of Democracy Institute (V-Dem) and CIVICUS Monitor. Social media analysis on controversies, discussions with affected stakeholders and country reports by certain governments are also important sources of information on the state of civic freedoms and rule of law in a particular country.
Data are typically less available and less reliable in authoritarian or politically turbulent societies, precisely because of the shrinking of civil society in those countries. In such countries, human rights defenders have a particularly significant role as the ‘canary in the coalmine’, alerting investors and companies to the situation on the ground. Platforms such as the IAHR and PRI can help investors by highlighting reports from human rights defenders and exploring practical ways to strengthen risk assessments in areas where civic space is restricted.
The PRI cites as a model of best practice Sweden’s Andra AP-Fonden (AP2) pension fund, which has developed a country framework to systematically identify any financial, operational or human-rights-related reasons not to invest in certain countries. This framework involves AP2 using third-party quantitative analysis of multiple datasets to screen all countries for human rights violations to identify those ranked lowest for protecting human rights. The data draw on many sources recommended by the PRI, as well as on press articles and information from country-specific non-governmental organizations. For each country flagged, a deeper qualitative analysis is carried out to better understand the human rights situation. This step often entails discussions with experts at think-tanks, specialized data providers and political analysts. This methodology has the advantage of being scalable over time by other investors.
Implementation of such systems takes time and resources, but increasing support is available to investors from civil society organizations. Over the longer term, the additional time and resources devoted to proper due diligence will lead to lower financial and legal risks, as well as the reputational benefits of being considered a responsible stakeholder.
Difficult dilemmas require strong governance
Even with more useful and comprehensive data in place, making the link between investment and shrinking civic space can be difficult, not least because it touches on host government discretion over social and political issues. Investors may not want to risk their position in a particular market by taking a public stance on civic freedoms, which can appear more politically contentious than, for example, carbon emissions. Investors will also be conscious of the need to work with different political systems and values, and to comply with local law.
Insofar as investors can exert leverage, they will sometimes need to make trade-offs or difficult choices about whether to speak up, divest or try to influence change in other ways. While divestment can be appropriate in some circumstances, it can increase political tensions, as well as involve the loss of influence in the company or country concerned. In January 2022, for example, Total Energies and Chevron withdrew from the Yadana offshore gas project in Myanmar due to the human rights situation and the deteriorating rule of law. But many companies remain in that country, with some arguing that pulling out would do more harm than good to communities on the ground, because exiting takes investment out of the local economy.
In some cases, investors may be prepared to make public statements about threats to civic freedoms, especially if acting in alliance with others.
In response to the Russian invasion of Ukraine in February 2022, many investors and companies withdrew from Russia, some at huge financial cost. In June 2022, a group of 59 investors issued a statement condemning Russia’s invasion and calling on companies with business relationships in Belarus, Russia and Ukraine to align their operations with the UN Guiding Principles on Business and Human Rights. However, as of February 2023, 1,717 international companies were still operating in Russia, while only 644 companies had committed to fully withdraw from the country. B4Ukraine, a worldwide coalition of civil society organizations, has appealed to those companies still present in Russia to terminate or suspend their business operations and relationships in light of Russia’s violations of international law, and to carry out due diligence on exiting responsibly. But in practice, many entities trying to sell Russian assets have been obstructed by new Russian legislation that makes such deals subject to Kremlin approval.
In some cases, investors may be prepared to make public statements about threats to civic freedoms, especially if acting in alliance with others. For example, some major institutional investors and banks joined a coalition of business leaders to call publicly for the peaceful transfer of power after the 2020 US presidential election. In 2019, major Dutch institutional investors appealed to Shell to bring pressure on Brunei Darussalam over a proposed law mandating the death penalty for homosexuality. Leading investment banks such as JP Morgan also boycotted hotels owned by the Sultan of Brunei; the legislation was eventually abandoned. But supporting civic freedoms does not always have to mean stark choices or overt public messaging. In some cases, investors and companies can exert influence discreetly. Private negotiations may enable organizations to continue operations while balancing civic values and business interests.
While investor engagement on civic freedoms will sometimes be complex and challenging, there will also be more straightforward situations. For example, all investors should pay close attention to direct or indirect efforts by companies to stifle opposition to their operations through ‘strategic lawsuits against public participation’ (SLAPPs) and other tactics used to silence NGOs and human rights defenders. In 2021, the IAHR coordinated an investor statement on SLAPPs, in which 44 institutions with combined assets of more than $270 billion called on companies to take broad, systemic action to protect human rights defenders, and immediate action to ensure that they do not use or support SLAPPs against individuals, organizations, or communities peacefully promoting or protecting human rights and the environment.
To navigate the dilemmas involved in being a responsible geopolitical stakeholder, corporate and investment CEOs and directors need strong public policy judgement, the ability to take a long-term view and to balance stakeholder expectations against the reactions of host governments they may be compelled to challenge. From a governance perspective, it is important that those working on sustainability and ESG issues include the rule of law and civic space in their analysis of both human rights and geopolitical risks, and that they report to senior leadership on these issues. Investors should also join reputable industry bodies and collaborate with civil society organizations that can help investors to identify and navigate the dilemmas and risks posed by shrinking civic space.
In this respect, the ABN Amro-led report cited earlier in this paper recommended the development of working groups that bring together financial institutions, ESG data providers, academics and civil society organizations to regularly discuss human rights concerns in various geographies with civic space restrictions. Platforms such as the PRI, IAHR and the Business Network on Civic Freedoms and Human Rights Defenders, as well as independent think-tanks such as Chatham House, are well placed to promote greater cooperation and trust among investors and other stakeholders through multi-stakeholder dialogue, which can also help reduce the risk of different actors talking past each other.
