Until the last decade, ‘corporate social responsibility’ was mostly a ‘tick-box’ exercise for investors,many of whom followed the doctrine of Milton Friedman that a company’s social responsibility is to maximize profits and returns to its shareholders. But, there has been a gradual shift in attitude and practice amid rising societal expectations of business – whether on carbon emissions, worker safety or diversity. Recent events such as the emergence of the Black Lives Matter movement, the COVID-19 pandemic and Russia’s invasion of Ukraine have all forced business to recognize and grapple with the links between values, reputation and profitability.
Business and civil society operate in, and benefit from, a shared space defined by the rule of law and the civic freedoms of expression, association and assembly that are essential to the realization of all human rights, to good governance and accountable institutions. A healthy ‘civil society space’ is one in which public decision-making is transparent, and in which non-governmental organizations (NGOs), human rights defenders, the judiciary and the media can operate independently to scrutinize government and corporate power. These elements of accountability are all critical to stable, profitable and sustainable business environments in which companies thrive and economies prosper. Progress on issues such as fair wages, equality and combatting corruption is intimately linked to full respect for the rule of law and civic freedoms, in which shareholders and all stakeholders should recognize a shared interest. Yet, the crucial relationship between investors and civic freedoms remains a relative blind spot.
Investors therefore need to adopt a more comprehensive approach to environmental, social and governance (ESG) issues that recognizes the importance of the rule of law, strong civic institutions and civil society space to business. This wider focus is even more important and urgent at a time when civic freedoms are under threat around the world, and when investors are becoming increasingly influential as geopolitical stakeholders.
The ecosystem of global governance is expanding and rebalancing to reflect the inclusion of a much wider range of stakeholders, including business. The last decade has seen an evolution towards ‘stakeholder geopolitics’, with business both facing increasing expectations of action and exerting increasing influence. A 2022 survey conducted in 14 countries with 14,000 respondents found that 77 per cent of respondents saw improving societal issues as a primary business function, and 59 per cent regarded addressing geopolitics as a top priority for business.
The Sustainable Development Goal (SDG) 16 Business Framework, launched by the UN Global Compact in 2021, encourages businesses to embrace ‘transformational governance’ by supporting peace, justice and strong institutions, strengthening multilateralism and ‘reimagining the social contract’. Investors have joined companies at the forefront of discussion and action on global issues, and have launched initiatives with the UN to tackle climate change (for example, through the Glasgow Financial Alliance for Net Zero).
The last five years have seen a huge increase in investor engagement with ESG issues, with asset managers globally expected to increase ESG-related assets under management to $33.9 trillion by 2026, up from $18.4 trillion in 2021. But investor approaches to these issues are in practice often siloed and fragmented. Even as the ‘S’ in ESG has gained traction and momentum, investors usually focus on a subset of niche social topics such as child labour, forced labour and modern slavery, as well as diversity, equity and inclusion, rather than situating these issues within a broader framework, in which the rule of law, accountable governance and civic freedoms form the crucial underpinning.
This research paper analyses three issues in particular: (i) the case for investors to adopt a more comprehensive approach to their business activities, one that considers civic freedoms as a fundamental part of a stable and sustainable business environment; (ii) barriers to investor engagement in achieving this; and (iii) positive trends and opportunities for investors to explore in this area. The paper then concludes with recommendations for further action on the part of investors, regulators and civil society organizations.
For the purposes of this paper, the term ‘investors’ covers asset owners and managers in relation to public equity and debt, sovereign wealth funds and private equity. Each type of investor will have different ways of exerting influence, different degrees of leverage, and will face different constraints in their ability to engage on ESG issues. But all have a common stake in the underpinnings of the rule of law, accountable governance and civic freedoms.
