DPAM joins new pilot project: Investor Engagement on Conflict-Affected and High-Risk Areas

DPAM has recently joined a pilot project Investor Engagement on Conflict Affected and High-Risk Areas (CAHRA) launched by the Investor Alliance for Human Rights, PeaceNexus Foundation and the Heartland Initiative to build institutional knowledge and capacity to address the impact of doing business in these areas. It supports heightened human rights due diligence in CAHRA.

Purpose of the project

The Engagement on CAHRA project aims to build institutional knowledge to address the impacts associated with business activities and relationships in CAHRA, in accordance with DPAM’s commitment to sustainable business practices and respect for human rights and international humanitarian law.

The project focuses on a subset of companies with activities in CAHRAs, such as The Western Sahara region, Xinjiang Uyghur Autonomous Region in China and specific Mexican regions to better understand the mitigating factors that the companies have put in place. This project also comes with shareholder expectations with regards to the application of the UN Guiding Principles on Business and Human Rights, adopting a CAHRA policy, carrying out an extended due diligence and building up board level expertise on CAHRAs.

A bleak picture of the world when looking at conflicts worldwide

In the last decade, the world has witnessed a significant increase in conflict areas, with geopolitical tension, resource disputes and internal strife leading to instability. The Stockholm International Peace Research Institute has mapped conflicts since 2000 and the figure below provides a grim illustration of 2022 (please note—only conflict-related deaths are mapped, not those in high-risk areas). Unfortunately, the picture for 2023 will not be better due to an increased number of conflicts in the Middle East and Asia. These conflicts were a major catalyst for a very steep increase in the number of people forcibly displaced worldwide, which has reached a staggering 108 million (UNHCR global trends forced displacement in 2022).

In 2022, UN Secretary-General António Guterres stated that the world was experiencing the highest number of violent conflicts since 1945 with one quarter of humanity living in conflict-affected areas: around two billion people.

Armed conflicts by number of estimated conflict-related deaths, 2022

source: Stockholm International Peace Research Institute

Delineation of CAHRA

Currently there is no universal list of areas constituting CAHRAs. Therefore, companies need to include a geographical focus in their due diligence exercises and conduct an extended due diligence if active in a CAHRA. The Responsible Minerals Initiative has developed an overview of procedures to identify CAHRA’s for corporates. The EU has also developed a non-exhaustive list of CAHRA’s in the context of responsible mineral sourcing. As an investor, having a clear overview of a company’s geographical scope is vital to understand the risks it is exposed to.

The need for an extended due diligence when active in a CAHRA

The initiative calls for heightened human rights due diligence in CAHRAs recognising that these areas are characterised by human rights abuses and violations of national, regional, and international law and therefore present heightened human rights, conflict-related, and other risks for companies operating and investing in these contexts. This approach is also endorsed by the UN Guiding Principles on Business and Human Rights.

The project recognises that the intricate relationship between business activities and conflict zones necessitates a comprehensive understanding of the local socio-political environment, as well as an assessment of the impacts of investment. In conflict areas, the local government(s) might be unable or unwilling to protect human rights or could itself be involved in human rights abuses or party to the conflict. Parties involved in value chain relationships may therefore become participants in the conflict.

Heightened human rights due diligence in conflict affected areas aims to identify these extra risks, by analysing the conflict causes, drivers, dynamics and actors, as well as the way the company’s activities impact the conflict and vice-versa. The due diligence also seeks to assess the company’s capacity to prevent or mitigate negative impacts. Companies should implement this due diligence, as clear-cut steps and details exist in the OECD guidelines. The OECD Guidelines for Multinational Companies solidified the concept of human rights due diligence with clear-cut steps depicted in the figure below.

OECD Guidelines for Multinational Companies

Source: OECD, 2024

The UN Working Group on Business and Human Rights (OHCHR) states that “Businesses are not neutral actors, their presence is not without impact. Even if a business does not take a side in the conflict, the impact of their operations will necessarily influence conflict dynamics.” The same message is echoed by the European Union in the adoption of the Conflict Minerals Regulation. The catalyst in setting up this regulation was the tight link between the trade in specific minerals, and the financing of armed groups, leading to forced labour and other human rights abuses, and the support of corruption and money laundering in politically unstable areas.

By adopting a more rigorous approach to due diligence, companies and investors can navigate the complexities of conflict-affected areas more effectively, ensuring that their investments contribute to peace and stability rather than perpetuating cycles of violence. The financial materiality for companies is increasing, as noted by the Heartland Initiative. “Whether it’s corporate financing of the military junta in Myanmar, the solar industry’s work with rights-violating partners in China’s Xinjiang Uyghur Autonomous Region or tech companies indicted in French courts for selling surveillance technologies to repressive regimes in Libya and Egypt, the corporate world is waking up to a reality in which human rights saliency increasingly translates to financial materiality in countries impacted by conflict.”

Extended due diligence in CAHRA – a few bumps along the way

These last couple of weeks were marked by an uphill battle in assessing a company’s exposure to CAHRAs.

In the US, a set of ESG data data providers announced that they will omit all data on occupied territories in their research. These territories tend to be characterised by widespread human rights abuses and therefore present heightened human rights risk. The reason for this omission is the anti-BDS (Boycott, Divestment, and Sanctions) laws in some US states. The adoption of these laws has mainly been fueled by lobbying organisations, funded by the Israeli government and the anti-ESG lobby. ESG data providers with headquarters in these US states, afraid of lawsuits under the anti-BDS laws, prefer to adapt the services to all of their clients (including European investors). This creates a worrying precedent, as regional US laws impact European investors ability to conduct due diligence on their investments.

A second set-back took place, when the European council postponed a vote on the Corporate Sustainability Due Diligence Directive (CSDDD) again. The window of opportunity to find an agreement for the directive before this European Parliament’s last plenary session in April 2024 is closing fast. The legislation would require companies to conduct human rights and environmental due diligence and introduce a liability scheme in case of non-compliance with the obligations. This mandatory sustainability due diligence legislation supports companies to assess risks and address their sustainability impact, which includes due diligence of value chain actors active in CAHRAs.

Conclusion

By joining forces with likeminded investors and civil society actors, DPAM believes that it will be able to fill the regulatory vacuum that has been created. Moreover, it will be able to better understand the safeguards put in place by its investee companies, to mitigate risks related to CAHRA.