Investors urged to step up due diligence on Xinjiang links - Just Style
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Investors urged to step up due diligence on Xinjiang links

By Michelle Russell 12 Aug 2020

Investors are being urged to take steps to identify, prevent and mitigate risks in portfolio companies to ensure they have no direct links to human rights abuses in China's Xinjiang region.

Investors urged to step up due diligence on Xinjiang links

Investors are being urged to take steps to identify, prevent and mitigate risks in portfolio companies to ensure they have no direct links to human rights abuses in China’s Xinjiang region.

In a just-released report on ‘Human Rights Risks in Xinjiang Uyghur Autonomous Region – Practical Guidance for Investors‘, the Investor Alliance for Human Rights says companies with business activities or business relationships in, or connected with, the Uyghur region are at significant risk of causing, contributing, or being directly linked to actual or potential negative human rights impacts.

This can include employing forced labour in their factories and fields, providing government authorities with surveillance technology, or buying products or services from Chinese companies directly complicit in human rights violations in the region.

According to the report, more than 80% of China’s cotton is produced in the Uyghur region, representing around 22% of the global market in 2018-19, much of which is made into yarn used in textile and apparel produced in the region, and other factories globally.

Since 2017, the Chinese government has placed an estimated 1.8m predominantly Turkic and Muslim-majority peoples, including Uyghurs, Kazakhs, Kyrgyz and Hui, in detention camps, prisons, and factories. This mass detention goes hand-in-hand with other systems of repression, in which business enterprises are involved, including widespread forced labour, mass surveillance through technology, and the elimination of the expression of Turkic cultural and Muslim religious practices.

The Alliance offers guidance split into three sections: human rights due diligence, assessing exposure and engaging with portfolio companies, and the power of collective action.

Human rights due diligence

  • Companies and investors must undertake a process of enhanced human rights due diligence to assess and address the risks of actual and potential negative human rights impacts in such a high-risk environment. If they cannot eliminate the possibility that their business activities and relationships cause, contribute, or are directly linked to forced labour or other egregious human rights abuses, and they are unable to cease, prevent, or mitigate these harms, then they must decide on an appropriate course of action including divestment.
  • A number of key concepts in the UN Guiding Principles are important to consider when deciding the appropriate action to take. According to the framework, a “company’s salient human rights issues are those human rights that stand out because they are at risk of the most severe negative impact through the company’s activities or business relationships.” Severity is defined using three indicators: scale, scope, and remediability. Severe human rights impacts must be prioritised for risk management.

Assessing exposure and engaging

  • It is critical that prior to making any investment, asset owners and managers conduct human rights due diligence on each potential investee company to identify whether they are connected with adverse human rights impacts on ethnic minority populations in the Uyghur Region and other parts of China.
  • Investors should assess whether companies have appropriate processes for managing human rights risks in conflict-affected and high-risk operating environments like the Uyghur region, including a human rights policy commitment, enhanced human rights due diligence and disclosure processes, and a grievance mechanism.
  • Many investors rely on ESG data providers and ESG scores to select their portfolio holdings and ensure a positive ESG contribution. Investors need to request information from these data providers regarding the extent to which human rights risks, in particular these risks in the Uyghur region, have been factored into their data analysis and scoring. Investors should also look to other sources of information from civil society and independent research reports to supplement their investment decision-making.
  • The most immediate form of leverage an investor has is to dialogue with portfolio companies. In the event that a company will not participate in dialogue or dialogue has proven to be ineffective, depending on the local securities regulations, an investor can file a shareholder resolution that goes to a vote at a company’s annual general meeting.

Collective action

  • Investors, companies, civil society organisations, and other stakeholders must maximise collective leverage to influence governments, international institutions, suppliers and sub-suppliers, and global multi-stakeholder initiatives to take action and prevent these harms.
  • This can include engaging with government officials and business associations to raise human rights issues ahead of bilateral and multilateral dialogues with China, or participating in joint investor letters calling on governments to take action to address human rights crises.

High risk investment

“The Chinese government’s involvement in human rights violations, evidence of wide-spread forced labour, lack of transparency, and the inability to implement credible audits make the Uyghur region a high-risk investment, production, sourcing, and business environment,” the Investor Alliance for Human Rights says. “Standard efforts, such as traditional social auditing, to identify and address human rights risks will not suffice.

“Ongoing, enhanced human rights due diligence must be undertaken to determine whether a business relationship directly links an investor through its portfolio companies to severe human rights impacts. Investors will need to determine whether identified potential or actual harms can be ceased, prevented, or mitigated. Otherwise, steps need to be taken to end business relationships responsibly, limiting any additional human rights harms to the greatest extent possible,” it adds.

“In addition to ongoing engagement with companies, the complexity of the situation in the Uyghur Region points to the benefits of innovative, collaborative approaches to tackling human rights risks. No one investor or company can affect significant change on its own.”

Calls for action

Concerns that clothing supply chains are tainted by forced labour in China’s Xinjiang region have prompted human rights campaigners to call for apparel brands and retailers to end all sourcing – from cotton to finished garments – from China’s Xinjiang region within 12 months.

The US Department of Homeland Security (DHS) has pledged increased enforcement action against US firms that continue to trade or conduct business in Xinjiang. While the US Department of Commerce’s Bureau of Industry and Security published a list of 11 Chinese entities allegedly implicated in human rights abuses in Xinjiang, three of which are textile and garment factories: Changji Esquel Textile, Hetian Taida Apparel and Nanjing Synergy Textiles.

In March, the Better Cotton Initiative suspended its activities in Xinjiang on the back of concerns over the prevalence of labour abuses in the region.