Authors: Robin Trenbath, Senior Advisor of Human Rights in Supply Chains, Slave-Free Alliance & Rachel Hartley, Consultancy Director, Slave-Free Alliance
Shein, the world’s largest fashion retailer, is preparing for a potential listing on the London Stock Exchange (LSE). With an estimated valuation of £53 billion, it would be one of the largest IPOs in London’s history, representing both a significant milestone for the Chinese brand, founded in 2008, and substantial potential returns for the financial institutions considering investment.
While the opportunities for investors may be attractive, the company’s human rights record, which includes allegations of forced labour, poor working conditions, and failing to make required public disclosures under the UK Modern Slavery Act, raises considerable concerns. Investing without due diligence could exacerbate those concerns and expose investors – including their own shareholders and clients – to reputational, legal, and financial risks.
On the other hand, a human rights-focused approach to investment, with rigorous Environmental, Social, and Governance (ESG) due diligence, active ownership, and proactive engagement, could enable long-term profitability, reassure stakeholders, and drive ethical improvements in corporate practices in a high-risk market.
Given the complex investment landscape this case represents, SFA reviewed the ESG challenges for potential investors into higher-risk businesses and how they could be navigated.
What are the benefits of responsible investment centred on ESG?
- Increased Transparency and Accountability: Listing on the LSE subjects a high-risk business to stringent regulatory requirements, including comprehensive disclosures on its operations. This heightened scrutiny can compel them to adopt more transparent practices, particularly concerning labour rights and ethical sourcing.
- Enhanced Monitoring and Reporting: Being a publicly traded company in a major financial hub like London can facilitate better monitoring by independent auditors and non-governmental organisations (NGOs). This oversight can drive improvements in labour practices and ensure compliance with international human rights standards.
- Stakeholder Engagement: Investors and stakeholders will have more influence and can leverage their positions to advocate for more robust human rights practices. Shareholders’ resolutions and proactive engagement can push such businesses towards more ethical practices that protect workers.
- Long-term social value: Investors who focus on responsible investing recognise that addressing human rights risks is essential for creating long-term social value. Businesses that effectively manage social risks are likely to be more resilient, attract and retain top talent, and enjoy stable long-term growth, which are attractive qualities for investors.
- Economic and market stability: Human rights violations can contribute to social unrest and instability, which can have broader economic implications. Investors have a stake in maintaining stable markets and economies. Therefore, by encouraging businesses to address human rights risks, investors enable a more stable business environment.
What is at stake without an ESG-centred approach to investment?
- Compliance Costs: For businesses, ensuring compliance with international labour standards and rectifying any existing human rights issues in its supply chain could entail significant costs. These costs might impact profitability, affecting shareholder returns and the value of the business.
- Legislative non-compliance: The legislative and regulatory landscape is constantly evolving and there is a shift towards mandatory human rights due diligence. With the EU CSDDD coming into force, businesses unable to evidence solid human rights agendas are at risk of non-compliance and could face legal consequences, which would impact investors.
- Risk of recurring allegations: Firms investing in businesses that face historical allegations relating to labour rights abuses and who do not proactively showcase improvements and change, face an uphill battle without an ESG-centred approach to investment. The historical context poses a risk for investors and potential further allegations that could damage the value of the business. Furthermore, firms could miss an opportunity to reset expectations and drive ESG related improvements.
- Reputation Risks: An association with a company under scrutiny for human rights violations can affect the reputation of financial institutions that invest in higher-risk businesses. This reputational risk is significant, especially for firms committed to ESG criteria.
Recommendations for Investors
1. Pre-Investment Due Diligence: While the IPO presents substantial financial opportunities, balancing these with ethical considerations is crucial. Financial institutions must weigh the long-term benefits of investing in a company against the actual and potential human rights risks. Integrating ESG factors into investment decisions can foster long-term value.
When investing, financial institutions should assess a business’s current human rights practices and any steps taken to address risks. Using tools like the MSCI Screener to identify controversies related to forced labour or other human rights issues, teamed with comprehensive research into industry, geographical and business-specific risks, enables informed decisions, increases visibility, and can minimise exposure to unethical practices. A comprehensive screening is essential for making responsible investment choices.
2. Active Ownership: Investors should engage businesses to promote better labour practices by setting clear human rights expectations and supporting worker rights initiatives. Continuous post-investment engagement drives ethical progress for affected workers and safeguards long-term profitability. Key actions for investee businesses could include:
- Governance: Evaluate and ensure a demonstrable ESG commitment and policies that uphold human rights and labour standards.
- Transparency: Probe supply chain transparency to verify ethical sourcing and prevent human rights abuses, fostering accountability.
- Due diligence: Promote the implementation of a due diligence framework that aligns with the OECD Guidance for Responsible Business Conduct.
- Verification: Encourage third-party certifications and regular audits, such as Fair Trade or ISO standards, to validate compliance with ESG standards. These verifications also serve as a baseline for investors to build their own due diligence framework.
- Normalisation: Integrate human rights risks and activities into routine business discussions to promote a culture of awareness and accountability. Making human rights a standard part of decision-making ensures risks are consistently addressed.
By engaging with businesses, investors can help integrate ethical practices into business operations, ensuring sustainable and responsible growth aligned with long-term investor interests and societal expectations.
3. Internal capability building: Financial institutions should empower their employees through training and development programmes focused on ESG and responsible investment. Providing employees with the necessary tools and resources, coupled with a well-defined internal strategy, is essential for enhancing the sophistication and effectiveness of ESG-centred investment. This approach improves compliance and performance and fosters a culture of responsibility and accountability, aligning with long-term business sustainability and ethical practices.
4. Escalation Process: Investors should establish a clear process for escalating identified risks and engaging businesses in remediation efforts. Encouraging businesses to have effective mechanisms for employees to anonymously raise concerns prevents human rights issues from going under the radar and protects against reputational damage when issues eventually surface in the public domain.
5. Expert partners: Leveraging external expertise can provide valuable insights and support. Therefore, engaging with organisations specialising in human rights and ESG in the finance sector, like Slave-Free Alliance, can help investors better understand and navigate the complexities of investing in higher-risk businesses. These partnerships can offer independent verification of efforts and advisory services to maintain a stable investment portfolio that balances profitability and ESG.
Conclusion
These considerations are not only applicable to any institution considering investing in businesses with significant ESG risk factors but should also form a consistent approach to investing in any business. Human rights have a tangible impact on the bottom line, and investment institutions that prioritise long-term profitability should take them seriously and actively engage for meaningful progress. A human rights-focused investment strategy protects against reputational, legal, and financial risks and helps to raise the bar of business practices across industries – the potential impact of which is enormous.
By conducting rigorous human rights due diligence, engaging in proactive advocacy, and integrating ESG principles, financial sector stakeholders can navigate these complexities and contribute to a more sustainable and just global supply chain.