Investors must consider the human rights dimensions of climate risk

As investors look for the next ESG opportunity, they must turn their minds to the intersection of environmental and social risk. Regulations, court orders, fiduciary duties and evolving stakeholder expectations mean risks need to be assessed and addressed with ever greater nuance. Similarly, the opportunities to create value through decarbonisation are immense.

Close on the heels of COP26 we know people must be at the heart of any discussion about the planet. Climate change is not just an environmental issue – it is an urgent human rights issue. Global temperature rises, associated biodiversity loss, rising sea levels and extreme weather events negatively impact our security, food production, water supplies, health and the habitability of our homes and cities. Forced displacement and the increased risk of conflict due to competition for scarce resources threaten all human rights, including the right to life.

The human rights risks of climate change range from those impacts caused directly and indirectly by physical effects such as sea level rise, drought and extreme weather events, to those associated with the sustainable energy transition itself, such as impacts from the mining of minerals used in renewable technologies.

Understanding the intersection of climate risk and adverse human rights impacts is business critical for investors.

Research by the Responsible Investment Association of Australasia shows that 86 percent of Australian consumers expect super funds to invest their money responsibly and ethically. In November 2021 IFRS announced the formation of a new International Sustainability Standards Board which will put sustainability reporting on the same level as financial reporting, designed to support ‘[f]inancial markets… to assess the risks and opportunities facing individual companies which arise from environmental, social and governance (ESG) issues, as the affect enterprise value.’ The month before, the UN Human Rights Council formally recognised the ‘right to a safe, clean, healthy and sustainable environment’. Cascading legislation (particularly in Europe) mandating human rights and environmental due diligence makes this a compliance imperative. The courts are increasingly taking a dim view of big emitters, factoring human rights into the legal standard of care.

Beyond managing risk, investors have the opportunity to create deep value by capitalising on the decarbonisation transition in a way that emphasises new investment in renewable energy technologies (RET), while minimising harm to people. Being part of a ‘just transition’ will secure long-term investments, invite trust, and build social licence in the communities that have much to lose from an unmanaged transition. It also must be a pillar of sustainable procurement initiatives and the visibility investors seek over adverse human rights impacts in RET supply chains.

What leverage do investors have?

Institutional investors represent the interests of a vast number of stakeholders and collectively control trillions of dollars. This puts them in a position of unparalleled leverage and great responsibility.

Investors are uniquely placed to effect meaningful change by mitigating and addressing the risks and impacts associated with climate change. Investors can exercise their collective influence and significant leverage to pursue sustainable and socially responsible outcomes across the global economy.

However, our research indicates that institutional investors are still prioritising environmental impacts over harm to people when addressing climate change risk in their portfolios. Despite increasing attention being paid to ESG, environmental and social risk assessments are often siloed, meaning that climate-related human rights impacts are inadequately addressed.

This gap is a risk to institutional investor trustees that must be addressed as an urgent matter of prudent risk management.

Our commitment to supporting investors

Taking action by assessing, managing and mitigating climate-related human rights risk will be a new challenge for many investors. It will likely require capacity building, strategic realignment, and the development of robust, future-proofed strategies and processes.

To support investors to understand their responsibilities and embrace the opportunities that a just transition brings, KPMG, and the Responsible Investment Association Australasia (RIAA) have brought together our business, human rights, climate and financial sector specialists to produce Human Rights and Climate Change: A Guide for Institutional Investors.

The guide incorporates material from in-depth research interviews with institutional investors and other key stakeholders to give readers insight into leading practice and case studies of practical approaches. It offers practical steps and key first principles information to which investors can return as they shape and mature their response by focusing on risk to people and applying a human rights lens to climate risk assessments.

It also assists investors by incorporating an action plan including a series of recommended practical steps to help investors integrate the management of climate-related human rights risks into their existing frameworks.

The UN has made clear, ‘the worst impacts [of climate change] afflict those who have contributed least to the problem and who have the fewest resources to adapt to, or cope with, the impacts’.[1]

Investors are uniquely placed to act. Yes, because it is a moral imperative, but also because it makes business sense. Advancing current environmentally focused climate risk metrics to incorporate the risk of harm to people will lend sophistication and accuracy to investor analysis. Investing in reliable sources of RET, free from abusive practices in the value chain, is smart and geo-politically aware. Authentically aligning investment choices with shifting consumer values will keep investors ahead of reputational ruin if ‘ESG-lite’ is discovered by mandated enhanced measurement and transparent reporting. Acting now to integrate human rights into climate change analysis is the most sensible way to future-proof this domain of your ESG response.

[1] UN General Assembly, Human Rights Obligations Relating to the Enjoyment of a Safe, Clean, Healthy and Sustainable Environment, UN Doc A/74/161 (15 July 2019) [46].

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