Why human rights due diligence is important for investment decisions

Why human rights due diligence is important for investment decisions

Would you invest in a company that does not pay attention to human rights due diligence in its growth and business model development?

It cannot be denied that in the past (and to some extent even today), large-scale investments have flowed into companies that derive the success of their business model precisely from the fact that human rights violations constitute part of their value creation. However, we are currently at a turning point where investment decisions are increasingly being aligned with the human rights compliance of entities.

The relevance of human rights for companies is continuously increasing, as the expectation for responsible action in the business world grows. With the increasing legalisation of corporate responsibility and a heightened interest from customers, business partners, media, consumers, employees, and civil society, it is becoming increasingly important for companies to engage with the issue of human rights. This increases the importance of human rights due diligence for investments continuously, regardless of whether they are investments in startups, established companies, joint ventures, or investments for the purpose of restructuring or reorganisation.

Regulation in this area is still in its infancy, but we currently see the relevant aspects in many sets of rules, e.g., in the Europe-wide supply chain laws, in the discussion about a “social taxonomy” or in the EU Critical Raw Materials Act.

Especially in complex value chains, a distance arises between the companies responsible for marketing a product or service and the people involved in the production, transport, sale, or consumption of their products and services. This makes it difficult to capture the impact of one’s own company on these people and their rights.

At the moment, public interest in human rights due diligence is mainly focused on large, globally operating companies with strong brands. However, these issues are increasingly affecting SMEs – initially as part of affected supply chains, but increasingly also as a direct addressee of corresponding requirements.

Through a proactive due diligence approach, companies can not only fulfil their social responsibility but also achieve long-term successes and positive effects on society and the environment:

  • They prepare for growing legal requirements and future regulatory measures,
  • Minimize operational risks in difficult contexts,
  • Strengthen their relationships with suppliers,
  • Work to best meet the requirements of their customers, and
  • Strengthen their creditworthiness.

Thus, companies that already understand human rights as an important factor for their economic success stand out positively from the competition. A commitment to human rights and sustainability can also improve customer service and product quality management, as well as strengthen employee satisfaction and loyalty to the company.

The way a company deals with human rights risks has now become a significant factor for the investment decisions of third parties, e.g., banks, funds, etc. A proactive due diligence process thus enables companies to become attractive to potential investors and reduces the risk for investors of subsequently having to finance an unexpectedly required realignment in the area of human rights.

Image: Adapted from https://mr-sorgfalt.de/de/einstieg/ / UN Global Compact Learning Platform for Swiss SMEs, Working Paper 1, 2008.