Mind the Impact Investment Gap: Measuring and managing human rights impact

INSIGHT by Isobel Alice O’Connell, Strategic Partner, Metagnosis

After years of making progress on environmental issues – or the E part of ESG – businesses are increasing their attention on the S: social issues and in particular in the area of human rights.

While some of the Social (“S”) issues are clear-cut, other aspects of its impact are broad, contextual, and qualitative. For example, what constitutes “fair” treatment of workers? A company might provide a living wage and a safe work environment according to what is customary in a given region, or it might go above and beyond regional standards. The same company can be both a good and bad neighbour in the communities where it operates while simultaneously driving out small businesses and turning a blind eye to corruption among its local business partners.

Although impact investment is not driven by a human rights mission, it can be a tool to channel investments that affirm human rights. Available data on impact investing shows that investors have a growing bias in favour of social impacts. The recent annual impact investor survey by Global Impact Investing Network (GINN) and JP Morgan observed that most respondents seek to achieve impact by investing in organisations that either sell products or services that benefit target population(s), or provide employment to target population(s), especially women.

However, simply defining the scope of what’s included in “human rights impact” can be problematic. There is no standard definition. This lack of clarity shows up in developing regulations as more governments try to regulate businesses’ human rights impacts, creating a patchwork of differing regional requirements. Another one of the challenges is how to respond to investors’ uncertainty about balancing risk, return, and broader impacts.

Faced with these complications, companies struggle to get a handle on their human rights effects. While most of the 2,000 senior executives surveyed by Economist Impact in 2023 agreed that all three aspects of ESG are important, the survey found that companies haven’t made as much progress on social issues. Only 36% had incorporated social impact into corporate strategy, compared with 47% for environmental impact.

However, the question remains, how can funders support the sustainability of human rights? I propose human rights funders can boost investee sustainability by using impact investments to complement grant making and other forms of philanthropic support.

I recognize that grant making and advocacy will always be critical in the fight to ensure the basic rights of all people, and that impact investing isn’t suited to every situation. But human rights impact investing could build a track record of helping to address certain types of challenges across the ESG spectrum that can make it a valuable addition to broader human rights efforts – both regulations and philanthropic.

Making investments into for-profit and nonprofit entities that have an explicit social or environmental impact goal can enable funders to pursue their missions while recycling their capital—since impact investments often yield at- or below-market financial returns. By making investments alongside grants, funders can retain and even grow a portion of their resources, which they can then channel into additional impact. At the same time, impact investments can supplement the funds available to sustain human rights organizations. I have already seen this happening in multiple ways, including the following:

1. Human Rights Impact investing to seed programs and services that have significant potential to advance human rights.

When an organisation with a revenue-generating model demonstrates potential for human rights impact, a seed investment can often increase the organization’s capacity to innovate. Seed investments from impact investors are particularly useful when an organisation needs to test a product, concept, or service that is perceived as too risky to attract traditional capital—as is often the case in human rights work, which deals with the world’s most underserved populations. Seed funding can also attract additional capital.

2. Human Rights Impact investing to help scale organizations that are advancing human rights.

Investing in an organisation with a proven human rights-advancing concept, adequate revenue sources, and a demonstrated financial track record can help that organisation scale to serve significantly larger numbers of people and achieve increased impact and sustainability. While grants can also help human rights organisations scale, grant dollars are limited and funders tend to prefer to channel them to programs and direct services rather than operations.

3. Human Rights Impact investing in the form of bridge financing to fill short-term funding gaps.

Using grants to meet urgent needs can be difficult, as many grant cycles are fairly rigid. Bridge financing, often in the form of loans, can provide a flexible way for funders to support organisations that urgently need capital to seize time-sensitive opportunities to promote human rights.

4. Human Rights Impact investing provides underserved populations with access to finance that enable them to exercise their rights.

Human Rights impact investing can be a tool to increase access to finance for individuals who are denied traditional financial services because of their income level. Funders can invest in organisations that provide financing for underserved populations to purchase products or services that empower them to exercise their rights.

5. Human Rights impact investing can involve both debt and equity, and from the public and private sectors.

This might involve a private equity taking up a stake in a social enterprise. A more complex example would be social impact bonds (SIBs), also known as “social innovation financing” and “pay for success” financing.

6. Human Rights impact investing is a familiar concept with multilateral financial institutions.

Corporate Human Rights Benchmarks (CHRB) ranks 100 largest listed companies on their human rights performance across the agricultural products, apparel, and extractives sectors. It proposes key performance indicators around human rights policies, processes and performance in line with the UN Guiding Principles on Business and Human Rights (UNGPs) – a signal that the investment community is willing to be guided by a human rights framework as a way to support rights and measure impacts.

In summary, Human Rights Impact investing can increase the range of solutions available to funders, enabling them to better respond to the complex problems facing the world’s most vulnerable populations. While introducing an explicit human rights-based approach to impacts measurement will not immediately help with the volume of impact investment per se, it may help bring sharper focus on impacts and enhance the quality of impact investing portfolio. This could draw in new investors eager to demonstrate positive effects of their investments, which is, after all, at the heart of investing.

| brief bio

As a global ESG leader, Isobel focuses on impact, strategy, disclosure and change management. For the past 20 years, Isobel’s work experience has spanned senior leadership roles in the energy and infrastructure industries and international consulting companies. She has contributed to various national and international sustainability dialogues. She is known for building strong working relationships and fostering open communication with diverse stakeholder groups to address both shared value and risk management. Of note, in 2020 Isobel was appointed Research Fellow at Columbia University’s Center for the Study of Business and Human Rights Summer Session.