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With human rights regulations expanding, investors need a broader approach to assessing risk and opportunity.

Guidelines on human rights have helped shape some of the key principles of corporate responsibility. Increasingly, however, governments are hardening guidelines into law. Penalties for companies that fail to comply may be severe-but the risks to investors can be mitigated, in our view, by the right approach to research.

The launch in July 2024 of the European Union's Directive on Corporate Sustainability Due Diligence (CSDDD) reflected a global trend for a tighter regulatory approach to ensure that businesses behave appropriately regarding human rights and the environment.

Previously, the regulatory regime had relied on persuasion, rather than enforcement. In 2011, for example, the UN Guiding Principles on Business and Human Rights (UNGPs) recognized that, under international law, companies have a duty to respect human rights. While not legally binding, the UNGPs formed the cornerstone of the business and human rights legal framework.

The CSDDD incorporates the standards of the UNGPs and other voluntary schemes but makes them mandatory for companies that meet certain criteria, such as net worldwide turnover of more than €450 million ($493 million) for EU companies, and net turnover generated within the EU of more than €450 million for non-EU companies. Financial penalties for companies that do not comply are steep, with the maximum penalty to be at least 5% of global turnover.

Compliance requirements and fines are not the only challenge for companies and investors. Like the voluntary frameworks, the emerging legally enforceable regulations are likely to differ across jurisdictions, exposing companies to multiple requirements. The new regulations are also pushing investors to think more broadly about how they account for human rights in their portfolios.

Investors often associate human rights with issues related to poor working conditions, such as inadequate wages, unsafe working environments or exploitative labor practices. Many companies address these issues by publishing modern slavery statements and by implementing labor-practice codes of conduct along their supply chains.

But the recognized range of human rights extends well beyond the workplace and modern slavery and includes such areas as health, Indigenous rights, equality and nondiscrimination. The shift from voluntary to mandatory regulation provides impetus for investors to incorporate these and other rights into their investment processes (Display).