In an increasing number of sectors, companies’ operations and disclosures are publicly evaluated by “benchmarks” that compare their performance on human rights and recognized environmental, social and governance (ESG) issues.
Human rights and ESG benchmarks are public rankings or analyses—typically based on publicly available information—produced by civil society or non-governmental organizations (NGOs), foundations, investor groups and others, notably civil society organizations with funding from governments and investors. Benchmarks such as the Corporate Human Rights Benchmark (CHRB), KnowTheChain (KTC) and Ranking Digital Rights (RDR) aim to provide transparent data on corporate performance and disclosures to enable better decision-making, including by the investment community. The benchmarks consider specific human rights and ESG issues, review how companies respond to perceived human rights and ESG risks, help businesses identify gaps in their compliance efforts and provide information to a range of stakeholders, including some who may use this data to pressure companies to change their business approaches.
To many businesses, human rights and ESG benchmarks can seem onerous, overly confusing and thus highly tempting to ignore. But given the trend toward greater corporate transparency—and the growing use of these benchmarks in assessing corporate performance—ignoring them is rarely a viable option.
Several different audiences, including investors and financial managers,1 pay attention to human rights and ESG benchmark rankings. By understanding more about benchmarks and working with inside or outside counsel, companies may exercise some control over benchmark results.
In addition, businesses can benefit from thoughtful engagement with benchmarking organizations for both research and methodology. Company engagement may help create methodologies that better reflect business realities, and the benchmark methodologies themselves may provide useful frameworks for internal use, even for companies that are not being ranked.
“Even if benchmarks do not yet directly impact your business, they signal important changes for all businesses, with increasing implications for legal risk, corporate brand management and access to capital.”
The business case for understanding human rights and ESG benchmarks
Benchmarks are expanding to include ever more companies and industries. Understanding them can support internal business management, improve access to capital and differentiate the business from competitors among shareholders, consumers and other audiences.
If one or more human rights and ESG benchmarks review—or could soon review—your industry, it may make business sense to participate thoughtfully and/or disclose additional information on current practices, provided that your company has fully explored the impact on its legal or reputational risk profile. Although some aspects of the current benchmarks don’t necessarily match actual corporate realities, generally no company wants to end up on the low end of the listings purely as a result of not engaging with benchmarking.
You can potentially improve your benchmark scores simply by ensuring that benchmarks focus on information your company may already be disclosing publicly. Some companies have reported that benchmarks may miss or fail to appropriately take into account information that is, in the company’s view, responsive.
Most benchmarks are transparent about the specific documents that will form the basis for their review, and most engage with companies to some degree before they release benchmark scores. Importantly, your company controls which policies, procedures, reports and statements it chooses to implement and publicize. This means you can make sure the benchmarks know what you are doing and thereby exercise some degree of control over your benchmark results. And communication and follow-up with the benchmarks are advisable, where possible.
Identify the relevant benchmarks for your company and conduct an internal assessment
Start by finding out which benchmarks are currently reviewing or may soon review your business.
Learn the specific criteria these benchmarks use. Then assess your own operations against these criteria, perhaps also conducting relevant competitor, customer and user analyses.
Benchmarks can only analyze what a company is seen to be doing. They cannot assess or provide a score based on what a company may be doing but chooses not to disclose. According to Amy Brouillette, Research Director at RDR, “We focus on transparency because it is central to accountability: Without a basic level of transparency, neither companies nor the governments that regulate them can be held accountable when violations happen."
Your assessment should focus on priorities such as:
Identifying salient human rights risks for your company and/or industry
Improving commitments to respect human rights
Identifying necessary due diligence and putting this into operation
Engaging with affected stakeholders (rather than passively acknowledging allegations with respect to corporate practices)
Introducing remediation mechanisms
Increasing transparency in response to reporting and compliance regulatory obligations that complement existing compliance systems
Unpacking due diligence
Developing and implementing a program to identify, address and manage human rights risk in a company’s operations and supply chain starts with human rights due diligence. Like other types of due diligence, human rights due diligence must be conducted in a properly considered way. Outside counsel may be needed to protect sensitive materials under applicable legal professional privilege, thus enabling deep-dive investigations and carefully reasoned conclusions.
Understand how benchmarks may share your information
The CHRB and KTC have established a Memorandum of Understanding, whereby any information a company shares with one benchmark may be used by the other, which the KTC states may not be known to some companies they assess. Note that the CHRB and KTC base all of their research on publicly available data. They are not sharing confidential information, but rather links to publicly available sources and their interpretations of whether corporate policies and actions meet certain criteria. Doing this speeds up the research process.
You may be able to improve your benchmark scores by focusing on the self-reporting your business already conducts.
Much current benchmarking is based on publicly available information in jurisdictions with mandatory reporting, such as UK MSA and California CATSCA reports required by legislation and Duty of Vigilance reports required in France.
Benchmarks also collect and assess information from a company’s website, publicly available policies and codes, regulatory and stock exchange filings, and financial and non-financial reporting. The CHRB conducts additional diligence on corporate responses to allegations regarding human rights violations using media and NGO reports, among other sources.
You can potentially improve the quality of self-reported information with respect to corporate programs and practices, and the disclosure statements that you provide to regulators, through careful, meaningful and strategic transparency, and in so doing improve benchmarks’ assessments of your programs, practices and disclosure statements.
Participate in conversations with groups that evaluate your operations
Some benchmarks, like ratings agencies, collect non-public information by engaging with companies before scoring them.
There are benefits to engaging with benchmarks at different stages. For example, a discussion may help to explain specific issues or convey a need to adjust aspects of benchmark methodologies so that the results better reflect business realities. Several benchmarks invite companies to participate in conversations with their research teams at the outset of the process and/or once they award preliminary scores but before they publish the scores. The benchmarks also enable companies to better understand global expectations and how their current approaches may not yet fully align with developing standards.
Authenticity is critical
It is important to mean what you say for benchmarking purposes, including when discussing difficult or problematic areas, such as corporate responses to allegations of negative human rights impacts. Disclosing metrics that demonstrate forward progress can help bolster your company’s credibility. However, any statement you make must be verifiable. So, carefully consider whether your company can demonstrate that it has the systems in place to deliver globally on any statements it makes, in order to avoid exposure to liability. Legal counsel can help ensure that benchmark submissions are robust, verifiable, aligned to best and/or market practices and take full account of relevant legal risks.
Harness the results for action
Corporate rankings, particularly when picked up by media outlets, investors and consumers, are helping legal and compliance teams to raise human rights and/or sustainability agendas internally, especially with leadership teams. Ultimately, benchmarking is one aspect of a larger movement to convince companies to respect human rights and address their human rights risks as a business and compliance priority. If a company is benchmarked against its peers and found wanting, this may impact its reputation, attractiveness to investors and ultimately share price or enterprise value. Like antitrust and anti-bribery concerns, a human rights “compliance” issue easily may become a board-level issue.
So what specific steps should a company take as a legal, compliance and business management priority? Here are some tips to keep in mind:
Leadership from the top is crucial to help your company deliver sufficiently robust and consistent human rights risk management mechanisms globally
Structured governance is essential to ensure effective implementation and accountability at operational levels
Policies and procedures should anticipate developments in industry best practices, put in place measures designed to prevent human rights violations linked to operations and furnish a substantive defense to human rights-related claims
Meaningful stakeholder engagement should take into account and manage diverse sets of perspectives and concerns
It is critical to set up effective, prompt and appropriate channels for receiving complaints or concerns, to assess the effectiveness of any remedy provided and to embed those findings into a company’s overall compliance system
Understand external factors—including litigation and regulatory enforcement trends, stakeholder expectations and new types of human rights-related claims—so that your business keeps pace with developments in human rights practice
Mainstream human rights issues into your business decision-making flows and develop goals that are clear-cut, unambiguous, repeatable and achievable at scale across your entire business operations
Make sure your company fully understands the legal consequences of all compliance and diligence systems that it designs and may choose to make transparent
Looking ahead to the next stage of benchmarking
Human rights and ESG benchmarks look like they are here to stay. However, the field is crowded, and the current landscape can be confusing, with different approaches and standards being applied.
The future of benchmarking could include investors and others melding the data in different ways to inform short-, medium-, and long-term decision-making by a variety of stakeholders, and perhaps even the downstream creation of an “index of indices.” A 2019 MIT Sloan School of Management report showed that different rating agencies aggregate different ESG data for companies in the same sectors.30 The upshot may be that investors, and ultimately regulators and exchanges, adopt uniform human rights and ESG disclosure standards to solve the problems of data comparability.
In the near-term, benchmarked companies should prepare for the increased scrutiny that benchmarking will inevitably yield and consider their options to engage thoughtfully with benchmarking groups, with a full understanding of the legal, operational, reputational and financial implications of the information they choose to share. Companies that do not have human rights policies and processes in place, are not working to identify and analyze their human rights risks, and/or are not reviewing how they do business and engage in disclosure would be well advised to consider the potential benefits in changing their approach. Companies that do all of this are to be commended, but still need to understand the full ramifications of their choices in disclosing information.
Even if benchmarks do not yet directly impact your business, they signal important changes for all businesses, with increasing implications for legal risk, corporate brand management and access to capital.