I. Interrogating Business Reactions to War in Europe

Following the Russian annexation of Crimea in 2014, many investors responded by unloading their Russian sovereign debt holdings. However, data from Bloomberg show that at the time of the 24 February Russian invasion of Ukraine, ESG funds – investment funds pursuing environmental, social and governance goals – still held at least $8.3 billion in Russian assets;Footnote ¹ and while more than a thousand companies have curtailed their Russian operations and over 500 are holding off on new investments in the wake of Russia’s invasion,Footnote ² investors have been accused of being ‘missing in action’.Footnote ³

Through market closures and laws allowing the seizure of foreign assets, the Russian government has made divestment increasingly complicated and numerous investors are still exposed to the country’s economy via various asset classes, including through holdings of multinational portfolio companies with direct or value chain activities in Russia. This raises the question, what does rights-respecting investor conduct entail? What must, should and can investors do in response to Russia’s war of aggression against the territorial integrity of another sovereign nation? After briefly examining how businesses have justified their various responses to the invasion, we explore each of these questions in turn, beginning with a discussion of recommendations derived from international legal and normative frameworks and concluding with an examination of investor actions to date.

The business response has been described more as a ‘haphazard scramble for the exit’ than a ‘calculated mass exodus’.Footnote ⁴ Companies have provided a wide array of justifications for both departing and staying, ranging from BP selling its shares in the sanctioned Russian oil company RosneftFootnote ⁵ to Koch industries remaining to avoid the Russian government seizing its assets and putting employees ‘at greater risk’.Footnote ⁶ Beyond the imperatives of regulatory compliance with sanctions and export controls, some claim their decision to exit was driven by their purpose and values,Footnote ⁷ which has been described as ‘moral-’ or ‘self-sanctioning’.Footnote ⁸ Others offer geopolitical reasons with the goal of contributing to the punishment and economic isolation of Russia.Footnote ⁹ Meanwhile, some companies and investors provide an economic argument, pointing to the financial, operational and reputational risks, and associated costs entailed by remaining in Russia.Footnote ¹⁰

Corporate justifications to stay include the humanitarian responsibility to provide essential goods and services and avoid harming innocent Russian consumers and workers,Footnote ¹¹ strategic considerations not to allow the transfer of assets to the Russian regime, Footnote ¹² and economic arguments related to the financial costs of exiting.

What has been almost universally absent from corporate statements, whether defending their decision to stay or leave, is grounding that decision in the company’s global human rights policy or human rights due diligence (HRDD) process, as called for by the UN Guiding Principles on Business and Human Rights (UNGPs). Despite companies’ public expressions of support for the people of Ukraine and opposition to Russian aggression, such sentiments have not been operationalized with the same degree of research, rigor or resources as other aspects of company decision-making.

II. Investment Activities in Conflict-Affected Areas: The Imperative of Heightened Human Rights Due Diligence

The various arguments provided by companies to explain their response to the Russian invasion do not have equal footing, which is why it is useful to distinguish between what investors must, should and can do. Given that the actions of portfolio companies can have financial, reputational, and even legal implications for investors, shareholders are prudent to conduct heightened HRDD of their holdings to limit exposure to harms. At the same time, given the interlinkages between investor and company responsibilities to respect human rights, investors are well-placed to encourage their portfolio companies to conduct their own HRDD and use the process to prevent and mitigate harms.

Investors must ensure that they and the companies they hold comply with the unprecedented number of sanctions and export controls imposed on Russia in the wake of the invasion. However, a growing number of investors have made clear that they ‘do not consider legal compliance a sufficient response to the urgency of this crisis’.Footnote ¹³ Rather, companies and investors should take a principled approach when formulating a response, one that is grounded in international human rights and humanitarian law as applied to business and investment activities in conflict-affected and high-risk areas (CAHRA). Such an approach advises companies and investors to undertake a process of heightened HRDD and provides a framework for decision-making that simultaneously recognizes the financial imperatives of business and the need to avoid doing harm.

The UNGPs detail how all companies and investors should undertake HRDD to ‘identify, prevent, mitigate and account for’ their adverse human rights impacts, and further emphasize that the complexity of a HRDD process depends on factors such as the operating context and risk of severe human rights impacts.Footnote ¹⁴ Built around the concept of proportionality, the UNGPs note that because ‘the risk of gross human rights abuses is heightened in conflict-affected areas’,Footnote ¹⁵ companies’ due diligence activities should be ‘heightened accordingly’.Footnote ¹⁶

Heightened HRDD involves the following key steps: understand the conflict using tools such as conflict analysis, understand the connection between business activities and the conflict using tools such as actor mapping, and act on the findings by identifying and mitigating adverse impacts on both human rights and the conflict.Footnote ¹⁷ Companies should undertake heightened HRDD in the event of widespread armed violence, international armed conflict between two states, internal armed conflict, post-conflict, military occupation, gross human rights violations, pervasive instability, and/or any early warning signs of conflict.Footnote ¹⁸

In all CAHRA, there is a conflict build-up phase, which requires businesses to be aware of the triggers that drive armed conflict, such as the amassing of weapons, imposition of emergency laws, and hate speech.Footnote ¹⁹ Similar to traditional HRDD, heightened HRDD is an ongoing process that should respond to constantly shifting conflict dynamics and human rights risks.Footnote ²⁰ Robust stakeholder engagement and grievance management systemsFootnote ²¹ are key to effective heightened HRDD, enabling companies to understand the positions of different stakeholder groups involved in the conflict (including vulnerable groups), mitigate information vacuums, and create multiple feedback loops to ensure a balanced understanding of the conflict.

In the case of a war between two states, businesses should exercise heightened due diligence of their activities, products and services in both states to identify and mitigate negative impacts.Footnote ²² Businesses should pay particular attention to their connections to the aggressor country,Footnote ²³ and in addition to respecting international human rights and humanitarian law, avoid and mitigate connections to the ‘war effort of the aggressor country’Footnote ²⁴ to ‘ensure that they do not exacerbate the [conflict] situation’.Footnote ²⁵

Conflict-sensitive, heightened HRDD can help companies prioritize which impacts to address first. The UN Working Group calls on companies to prioritize salient risks that exacerbate conflict and human rights impacts ahead of salient conflict-related issues not directly linked to human rights issues and salient human rights risks that are unlikely to exacerbate conflict.Footnote ²⁶ In the case where a business contributes to adverse impacts, it should remedy its contribution and exercise leverage to prevent remaining impacts. The Working Group notes the need for clear corporate exit strategies in situations where human rights harms cannot adequately be addressed,Footnote ²⁷ while cautioning that companies should weigh such decisions against the possibility that exiting may exacerbate the conflict or severity of the harms.Footnote ²⁸

Investors’ due diligence responsibilities are intertwined with those of their portfolio companies. In order to meet their responsibility to do no harm through their investment activities, they need to ensure that they are scrutinizing the actual and potential impacts of their investment decision-making throughout the investment life cycle, including pre-investment screening, ongoing investment stewardship and, if need be, responsible divestment.Footnote ²⁹ Specifically in CAHRA, investors should conduct heightened HRDD to identify companies connected to individuals or entities that may be causing, contributing to, or directly linked to human rights harms in a conflict situation. They should engage companies with exposure to human rights harms to encourage them to use their leverage to prevent, mitigate and remediate those harms. Finally, they should consider divesting from companies that are unwilling or unable to mitigate their exposure to human rights harms, while conducting due diligence to ensure that such a decision is not outweighed by potentially adverse impacts.

The bottom line is that investors should ensure that their investment activities are not contributing or directly linked to human rights harms, regardless of how financially beneficial they may be. Although conducting heightened HRDD can be more challenging for investors that may hold thousands of companies, compared with individual companies that are using the process only for their direct and value chain operations, there are resources to assist them in this process. One such heightened HRDD process involves the identification and prioritization of severe risks in CAHRA based on a company’s geographical, relational and operational proximity to human rights harms, which can be used for individual company engagements or reviewing entire portfolios.Footnote ³⁰

III. The Investor Response to War in Ukraine: The Need for a Systematic Response

The Russian war against Ukraine has brought investor responsibility into stark relief and civil society has reinforced the importance of focusing attention on due diligence from the earliest days of the war. In terms of a rapid reaction, on 3 March the Investor Alliance for Human Rights issued an investor alert condemning the invasion as an act of aggression, reminding investors and companies of their responsibility to undertake heightened due diligence and urging investors to use their collective leverage to push for humanitarian and human rights law protections.Footnote ³¹ As an expression of a collective investor position and means to exert leverage over portfolio companies, Heartland Initiative coordinated an Investor Statement on the Crisis in Ukraine.Footnote ³² Signed by 60 investors representing over $1.7 trillion in assets, it delineated investor expectations of portfolio companies to assess and address their human rights risks related to the crisis as well as develop policies for business activities in CAHRA more broadly. Additionally, Business for Ukraine (B4Ukraine), a recently launched coalition of Ukrainian and international civil society organizations, including organizations working with investors, has called on companies to undertake heightened HRDD as part of their responsibility to respect human rights.Footnote ³³

There are also a number of demonstrated examples of what investors can do to address human rights harms in CAHRA. A few investors, such as BMO Global Asset Management, have publicly released papers outlining the actions they have taken as responsible investors on companies in high-risk industries in response to developments in Ukraine.Footnote ³⁴ State Street Global Advisors published its stewardship approach to the Russian invasion of Ukraine describing how it would engage with companies with material exposure to the conflict and laying out its expectations that ‘management teams of impacted companies take meaningful action to mitigate and manage relevant risks, and for boards to provide robust oversight of these efforts and ensure public disclosure of relevant information’.Footnote ³⁵ They also stated that they would not engage with Russia-domiciled companies ‘due to the lack of quality information available to investors and the considerable reputational and regulatory risks to our clients’. Relatedly, the SEC Division of Corporation Finance released a sample letter regarding disclosures pertaining to Russia’s invasion of Ukraine and associated supply chain issues, reminding companies that they may have disclosure obligations related to the direct or indirect impacts the invasion and the international response to it have had or may have on their business.Footnote ³⁶

Although the timing of the invasion did not allow investors to file Ukraine-specific shareholder resolutions, the 2022 proxy season did see a group of investors file a shareholder proposal with Caterpillar requesting that the company ‘assess and report to shareholders … on the company’s approach to mitigating the risks associated with business activities in conflict-affected and high-risk areas as called for by the UN Guiding Principles on Business and Human Rights’.Footnote ³⁷ Such proposals can encourage company management to be more responsive to investor requests for dialogue and action. For example, a similar resolution filed by a group of investors in 2020 asking Chevron to report on how it manages risk in CAHRA was withdrawn when the company agreed to a series of dialogues to discuss the company’s need for conflict-sensitive policy, practice and reporting.Footnote ³⁸ Without investors making it clear to companies that engagements focused on their need to take rights-respecting action are time bound, investors’ leverage is severely constrained.

Divestment must also remain an option. According to ESG Investor, 36 asset owners around the world have made a commitment to divest, impacting 5.2 billion Euros of Russian investments.Footnote ³⁹ However, civil society organizations have criticized divestment decisions made without first undertaking proper due diligence to ensure there are no related human rights harms.Footnote ⁴⁰ Indeed it is important that investors’ use of leverage is also based on a heightened HRDD process and that divestment decisions be made in a responsible, rights-respecting fashion.Footnote ⁴¹ This will help minimize unintended second-order consequences of ill-considered responses including against Ukrainian and Russian civilians, irrespective of the financial and non-financial justifications given to legitimize those decisions.

In responding to the Russian invasion of Ukraine, investors stand accused of being ‘missing in action’. While we have provided anecdotal evidence of positive investor conduct, there is little indication of a systematic investor response given the unquestionable violations of international law committed by the Russian government. For example, the Business and Human Rights Resource Center has written to over 400 companies and investors to seek information about their due diligence efforts and received responses from less than a third, with only 39 providing full or partial answers to the questionnaire.Footnote ⁴² Furthermore, the Investor Statement on the Crisis in Ukraine failed to garner the same level of support as the similar Investor Statement on Human Rights and Business Activities in Myanmar, signed by 86 investors with over $4 trillion in assets.Footnote ⁴³

At a time when investors are increasingly (and rightly) citing the UNGPs during company engagements as the gold standard for responsible corporate behaviour, they must simultaneously recognize their own responsibilities under this framework. In the absence of decisions being made through heightened HRDD, investors run the risk of failing to meaningfully respect human rights or worse, inadvertently funding the Russian war machine.