Human RightsImplications for companies and their investors

March 2017This document is intended for institutional investors and investment professionals only and should not be distributed to or relied upon by retail clients.

Companies should ensure that their actions do not violate or infringe upon the human rights of their stakeholders. Failing to manage human rights risks in business may result in operational and reputational impacts.

Introduction

At Standard Life Investments, we evaluate corporate responsibility using the four pillars of the UN Global Compact: human rights, labour relations, bribery and corruption, and the environment. Each of these tenets is important and worthy of individual consideration. However, we believe it is human rights that underpin all other considerations. They are, after all, the foundation from which all environmental and social considerations have developed. Human rights have also become the lens through which investors increasingly view businesses and their practices around the world.

However, this was not always the case. As little as two decades ago, human rights in many parts of the corporate world were a vague concept based on moral considerations rather than legislation. Now, these rights – and the risk of violating them - have transformed into a major operational and reputational risk for companies. For investors, human rights have also become a key concern when it comes to assessing a company’s ability to deliver sustainable growth, maintain a licence-to-operate and uphold its reputation.

The Responsible Investment FunctionThe Responsible Investment function is dedicated to research and analysis of environmental and social issues that have a bearing on Standard Life Investments’ client portfolios. We place specific focus on four key areas: employment issues, human rights, environmental matters and anti-corruption. The function sits within the broader ESG Investment Team, which includes our Governance and Stewardship function. The two functions work closely together to ensure that sustainability and governance considerations are embedded throughout our investment process.

Amanda YoungHead of Responsible Investment

Sophie RahmResponsible Investment Analyst

Katharina LindmeierResponsible Investment Analyst

Andrew MasonResponsible Investment Analyst

Elizabeth MeyerInvestment Technical Analyst

Evolving generations of human rightsThe Universal Declaration of Human Rights, adopted by the UN General Assembly in 1948, lists the core rights to which all human beings are entitled. These rights are split into two generations. The first, dating back to the 18th century, covers civil and political rights, and includes the right to vote, the right to justice, freedom from torture and abuse, freedom of speech and the right to assemble. The second generation, initially articulated in the 19th century, is based on principles of social justice and public obligation. These include the right to education, housing, health, employment, an adequate income and social security.

These two generations of individual rights have subsequently been recognised through numerous conventions and treaties, and must be legally enforced by signatory states.

The UN Declaration of Human Rights, the International Covenant on Civil and Political Rights (with its two Optional Protocols (1966)) and the International Covenant on Economic, Social and Cultural Rights (1966) form what is called the International Bill of Human Rights. Along with the International Labour Organization’s core conventions, this bill is the basic reference point that all companies can use to analyse their activities in order to mitigate those practices that could adversely affect human rights.

Over time, however, the concept of human rights has evolved. The corporate world, as a result, has also had to evolve in order to implement these rights. This progression led to the proposal of a third generation of rights in the second half of the 20th century. These go beyond the social and civil, and are focused on collective and development rights. They include the right to prosperity, self-determination, social harmony and a clean environment. This third generation of rights lacks legal recognition on a global scale, but has been acknowledged in various international conventions and ‘soft law’ initiatives, such as the 1992 Rio Declaration on Environment and Development.

According to the UN Global Compact, adopted by UN member states in 2000, these three generations of rights are fundamental to making globalisation ‘fully inclusive and equitable’. This initiative — which also encompasses the International Bill of Human Rights, as well as collective and environmental rights —is the basis for how we assess corporate responsibility at Standard Life Investments.

Corporate responsibility to respect human rightsOur view is that companies have a responsibility to ensure that their actions do not violate or infringe upon the human rights of their stakeholders, including employees, business partners and civil society. While companies cannot be expected to take the role of public authorities when it comes to protecting those rights, they have the duty to ‘respect’ human rights. This means acting with due diligence to ensure that they avoid infringing the human rights of those stakeholders affected by their business operations1.

Cases of violations of human rights are diverse and dependent on a company’s activities. These include blatant violations, such as a mining company polluting the local drinking water or a garment company using forced labour. There are also more complex breaches of human rights, such as a telecoms company, at the behest of a government agency, infringing a person’s right to privacy.

However, as we have highlighted, human rights are not a static concept. They must change as the world changes around them. For example, the right to privacy has become increasingly important as the digital economy has grown. Companies must therefore adapt to ensure their practices and risk management systems are robust enough to meet these changes.

1 UN Guiding Principles for Business and Human Rights

The UN Guiding Principles for Business and Human RightsAt Standard Life Investments, we expect that companies in which we invest meet internationally recognised human rights standards or industry best practices — with businesses adopting whichever convention has the highest criteria. We also expect companies to report to shareholders regarding policies, practices and the performance of all the steps taken to address human rights issues.

The UN Guiding Principles for Business and Human Rights is the international framework that acts as the global reference point for all corporations. These principles, endorsed by the United Nations Human Rights Council in 2011, aim to establish a clearer breakdown of responsibilities between states and companies through the ‘Protect, Respect, Remedy’ framework, developed by Professor John Ruggie at Harvard Kennedy School of Government.

This framework rests on three pillars:¬ the state’s responsibility to protect against

human rights abuses by third parties, including business, through appropriate policies, regulation, and adjudication;

¬ corporations’ responsibility to respect human rights, including acting with due diligence to avoid infringing on the rights of others and to address adverse impacts that occur;

¬ and victims’ right to greater access to effective remedy, both judicial and non-judicial.

We believe that all businesses should attempt to adhere to this framework and the guidance set out by the UN Principles. Companies should also report on how these principles are implemented in their operations. Assessing human rights risk managementHuman rights have been recognised as universal by the 1948 UN Declaration of Human Rights. However, the extent to which these rights are infringed upon depends on context and the nature of a company’s activities. Indeed, the risks to an individual’s rights are strongly correlated with a company’s practices and the countries in which it operates. As such, we pay greater attention to businesses that are active in nations with a history of human rights abuses and in sectors that have long track records of human rights violations.

Country assessmentCountry-specific factors that tend to predicate the state’s ability to protect against human rights abuses include: a level of protection of civil and political liberties, the prevalence of the rule of law and the existence of an independent and efficient judiciary system.

The Human Rights Risk Index (see next page) is published each year by the research firm Maplecroft and measures some 31 factors to identify the best and worst nations for human rights.

Human Rights Risk Index 2016

CountrySyriaSudanDR CongoPakistanSomaliaAfghanistanIraqMyanmarYemenNigeria

Rank12345678910

Categoryextremeextremeextremeextremeextremeextremeextremeextremeextremeextreme

Legend

Extreme Risk0 - 2.5

High Risk>2.5 - 5

Medium Risk>5 - 7.5

Low Risk>7.5 - 10 No data

Human Rights Risk Index 2014 maplecroftrisk responsibility

™

reputation

© Maplecroft 2016 | The Towers, St Stephen’s Road, Bath BA1 5JZ, United Kingdom | t: +44 (0) 1225 420 000 | www.maplecroft.com | info@maplecroft.com

Sudan

DR Congo

Pakistan

Somalia

AfghanistanIraq

MyanmarYemen

Syria

Nigeria

Maplecroft’s Human Rights Risk Index (HRRI) quantifies the risk to business, both to employees and their global value chain, through possible association with and exposure to human rights violations at a country level. The HRRI indicates risk in 198 countries across 33 of human rights violation categories in four ‘rights groups’ (Human Security, Labour Rights and Protection, Civil and Political Rights, and Access to Remedy).

Sector assessmentThe risks to human rights are dependent on the kind of activities in which a company is involved. For many businesses, mapping these risks is a crucial first step towards developing a robust approach to human rights, including developing adequate due diligence systems.

Below are examples of sector-specific human rights risks. We have focused on sectors in which potential risk to human rights can have significant direct or indirect consequences on a company’s operations.

Sector Main human rights risks

Metals & Mining

¬ Workforce and supply chainForced labour/child labour. Health & safety

¬ Local communitiesSocial risks: security, land rights, displacement of population, indigenous & cultural rightsEnvironmental impacts: pollution, water stress

¬ Positive impactsFostering socioeconomic development: local content, education, infrastructures, access to healthcare

Oil & Gas ¬ Workforce and supply chainHealth & safety

¬ Local communitiesSocial risks: security, land rights, displacement of population, indigenous & cultural rightsEnvironmental impacts: pollution, water stress

¬ Positive impactsFostering socioeconomic development: local content, education, infrastructures, access to energy

Textile & Apparel

¬ Workforce and supply chainForced labour/child labour. Health & Safety

¬ Local communitiesEnvironmental impacts: pollution, water stress

Hotels & Leisure

¬ Workforce and supply chainForced labour/child labour. Health & Safety

¬ Local communitiesSocial risks: disruption of local economiesEnvironmental impacts: water stress, pollution

Food & Beverage

¬ Workforce and supply chainForced labour/child labour. Health & safety

¬ Local communitiesSocial risks: land rights, disruption of local economiesEnvironmental impacts: water stress, pollution

¬ Positive impactsAccess to nutrition

Pharmaceuticals & Healthcare

¬ SocietyImpacts of products: requirement for quality, safety and efficacyClinical trials on human being

¬ Positive impactsAccess to healthcare

Telecoms & Media

¬ SocietyData privacy and freedom of speech

¬ Positive impactsReduction of the digital divide

¬ understand the key risk to human rights and issues pertinent to the specific country

¬ adopt human rights policy guidelines for employees, contractors and suppliers in accordance with the UN Guiding Principles

¬ implement programmes for dissemination and training of these guidelines, and ensure management compliance

¬ take affirmative steps to ensure that they do not violate internationally recognised standards on human rights and do not benefit from or use the products of others that do

¬ facilitate victims’ access to effective remedy mechanisms, both judicial and non-judicial

¬ report on how human rights issues are being managed, including potential impacts.

Our approach: engagement and Focus on ChangeAs an active long-term shareholder, we believe we can create value by fostering change and encouraging better practices in the companies in which we invest. This lies at the core of Standard Life Investments’ Focus on Change investment philosophy. We favour direct engagement with companies on human rights issues, as we believe increasing companies’ awareness and fostering better practices will result in superior longer-term growth. This approach is particularly relevant to an issue like human rights where companies’ accountability has primarily developed through various ‘soft law’ measures, rather than binding legislation.

Many challenges remain, even for companies with the most advanced approaches to human rights. In order to see continuous improvement and provide greater assurance to their stakeholders, companies must seek to increase management’s ownership of human rights issues. They also need to develop meaningful key performance indicators to assess the negative and positive impact of various human rights policies. At an operational level, risks to human rights must be integrated into internal control systems. Companies will also need to address increasingly complex challenges, such as how to develop effective grievance mechanisms in countries lacking judiciary capabilities.

At Standard Life Investments, we believe in encouraging the companies in which we invest to adopt the necessary mechanisms and procedures to comprehensively address the impact their activities have on human rights. This commitment is ongoing and will continue to shape how we engage with businesses in the years to come.

Companies’ management of human rights risksWe expect that companies operating in sectors and countries where human rights are at risk to:

We view human rights as a reputational risk for companies, as well as a key component of theirlicence-to-operate. As such, we believe companies should go further than the traditional ‘do no harm’ approach and demonstrate how their activities have a positive impact on communities. In our view,companies that provide evidence of the role they play in fostering social progress and economic development are more likely to experience sustained long-term growth. We encouragecompanies to report on the programmes they are implementing in this regard. In addition, we alsolook for firms to detail the impact these activities have on local stakeholders.

Contact the Responsible Investment Team at:

esg_invetment@standardlife.com

standardlifeinvestments.com

Important InformationAll information, opinions and estimates in this document are those of Standard Life Investments, and constitute our best judgement as of the date indicated and may be superseded by subsequent market events or other reasons.

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