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Environmental, Social, and Corporate Governance (ESG) is all the rage in finance.

Investment portfolios deemed ESG-compliant now amount to聽聽worldwide. That鈥檚 around 40 times the value of the world鈥檚 richest corporations. The global social bond market (where returns are measured against beneficial social outcomes) in now worth $163 billion聽, having increased by a factor of 10 in just 12 months.

And the聽聽of BlackRock鈥檚 Larry Fink鈥檚 totemic letters to CEOs talks of companies with better ESG profiles as enjoying a 鈥渟ustainability premium鈥� in investment returns. According to Fink, a remarkable 81% of 鈥渁 globally-representative selection of sustainable indexes鈥� outperformed their parent benchmarks throughout 2020.

Yet, the fact remains that while the E and G are relatively well understood, the S is not. Nowhere is this more evident than in the finance sector. 鈥淲hat does the 鈥楽鈥� really mean?鈥澛犅爄n one of its recent sustainability analyses of investment trends.

We believe the findings of our new research help reach an answer.

In a world first for the sector, my colleague Kym Sheehan and I have compiled a聽Financial Services Human Rights Benchmark聽to measure the sector鈥檚 compliance with the human rights standards that lie at the heart of the 鈥榮ocial鈥�. We recently released our first聽Annual Report.

The 鈥楽鈥� is commonly misunderstood. Good corporate social responsibility is not just about charity 鈥� donations to artistic or sporting events, or to political or civic causes. Rather, a truly meaningful social profile is one that recognises the impact of a corporation鈥檚 core business on a range of social issues including employee relations and diversity, health and safety, privacy, and freedom of expression. In other words, respecting human rights.

A big part of why corporate social responsibility is such an elusive and malleable concept lies in the continuing confusion over what this or ESG have to do with human rights. On this point, the Bloomberg report put it well: it nominates 鈥渢he human experience of day-to-day life鈥� as the 鈥渆ndpoint of 鈥楽鈥欌��.

Kym and I argued much the same in聽, where we noted that in the vast majority of ASIC misconduct cases involving financial services entities, the human rights of customers or clients were adversely affected, even if neither ASIC nor the financier recognised as much.

These findings formed the basis for the development of our Benchmark, which examines the human rights policies and practices of the 22 largest ASX-listed financial institutions, across the breadth of their operations, for the financial year 2019.

Using human rights categories that reflect intuitive, everyday interpretations of what they mean in a financial services context, we found that people鈥檚 rights to privacy and information, non-discrimination, economic security, health and safety, voice and participation, and adequate remedies were all at risk across the full range of business operations.

Predatory workplace cultures in wealth management entities and lax supply chain management practices are also problem areas. And while recent modern slavery legislation in the聽听补苍诲听聽has caught the attention of risk managers, this is the exception that proves the rule of human blindness and neglect throughout the sector.

Overall, the 鈥榯raffic lights鈥� system of measurement we use in the Benchmark yielded mostly red and amber with only a smattering of green in respect of stated human rights policy positions (NB. the green-free graphic below reflects聽overall聽company results after factoring in levels of performance which, tellingly, did not match up to the biggest policy promises).

For many financial institutions the problem is not a lack of awareness 鈥� we found that many in our sample made references to human rights policies of some sort. Rather, the problems lie in ownership and understanding of what these policies mean in practice.

Simply put, human rights are seen as peripheral, non-financial risks that fit loosely within an ESG framework, and聽not聽as material risks to institution鈥檚 core business.

Our Report underlines this point by revealing that none of the 22 firms we examine 鈥渁llocate a role to the board or to its key committees to consider human rights in the sense envisaged in the聽.鈥�

Not only is this a risk management problem, it is also an opportunity missed. As demonstrated by the banks accommodating approach toward pandemic-stressed debtors, financiers can be active promotors of social goods including human rights.

The tide, however, may be turning.聽, for example, can be fairly summed up in the words: 鈥渙f course human rights risk is a material risk to any business!鈥�

And further,聽聽highlights the fact that financial firms see ESG factors as by far the most pressing risk they face, ahead of cybersecurity and credit, and nearly three times more pressing than conduct, culture and reputation.

The time is therefore ripe for the sector to get serious from the top down about how human rights fit into the 鈥楽鈥�, and what they mean for finance. Our Benchwork bears this out, but also, importantly, it signposts a path towards catching more green lights and running fewer reds.

Prof David Kinley is a Human Rights Law expert and co-lead designer of the benchmark. Follow David on Twitter at @dwkinley and聽read more about his research interests and curriculum vitae.

Photo by聽听辞苍听.