Coller Capital: Leveraging influence for human rights on private markets

The private capital secondaries market is becoming more influential, presenting an opportunity from an ESG perspective, including human rights promotion.

While secondaries investment often limits what is achievable at the portfolio company level, the notion that very little is possible is a false one. With private markets secondaries expected to record a transaction volume of $100 billion in 2021 (according to Coller Capital), our sphere of influence is increasing.

Why we consider human rights in our secondary investments

We believe that ESG integration is symptomatic of a well-run business and that human rights considerations are an essential part of ESG. Therefore, the response we receive to our queries from underlying general partners (GPs) during asset-level ESG due diligence is somewhat of a litmus test for our team and in part informs our view of a GP’s approach to ESG. We are happy to support GPs and their underlying portfolio companies on their ESG journey if they are not where they need to be.

We have invested in and formed relations with over 400 GPs globally. In this way we can influence and change GP and portfolio company behaviours.

Human rights are impacted by every business, wherever and however they operate, for example:

The United Nations Universal Declaration of Human Rights (UDHR)

• UDHR 24: the right to rest and lesiure, including reasonable limitation of working hours and periodic holidays with pay. For example, the contracted staff who clean a firm’s offices work long hours and do not receive paid holidays.
• UDHR 12: the right to privacy. For example, a customer of a portfolio company has their data stored or used against their wishes.

International Covenant on Civil and Political Rights: in no case may a people be deprived of its own means of subsistence

• The livelihoods of communities living around a portfolio company’s operations or its supply chain are disrupted, for example, through land acquisition, resource use or pollution.

ILO Core Convention 105: Abolition of Forced Labour

• A worker employed within the supply chain of a portfolio company cannot freely leave their job as they owe a debt to their employer.

Convention on the Elimination of All Forms of Discrimination against Women

• A female employee at a firm is paid less than a male colleague doing the same role.

How we consider human rights in our secondary investments

We work with GPs to develop and enhance their ESG policies and programmes to prompt change at the underlying portfolio company level.

The ESG function and deal teams draw upon several resources, including our internal ESG integration expertise, the best ESG research for our asset class and our network of external specialists and human rights practitioners. This leads us to understand what to ask during diligence, and how to interpret responses and best engage post deal.

Post investment, our ability to exercise meaningful influence or control is often restricted but our role is still important. Simply asking pertinent questions during due diligence often prompts a conversation, and there are some investments that present us with the opportunity to make a more meaningful contribution to the ESG programmes of GPs and underlying portfolio companies.

We implement a mature human rights due diligence approach which involves:

• A strong policy commitment that applies throughout the business;
• Identification and ongoing proactive assessment of risks;
• Actions and decisions that are informed by risk assessment findings;
• Ongoing monitoring to measure actions’ effectiveness;
• Establishment of grievance mechanisms for affected groups to seek remedy for harm they have experienced; and
• An established process to remediate any abuses found.

Our decision to undertake enhanced due diligence (EDD) is likelier where risks are more severe or where the entity in question is more closely related to the potential issue. More severe risks include those which have a catastrophic or severe impact (e.g. forced labour), affect large numbers (e.g. droughts leading to crop failures), are difficult to put right (e.g. fatal injuries).

Increasingly common EDD practices include:

• Deeper checks into human rights risks in the pre-deal stage (may for example involve the use of open source intelligence, deep web and dark web to uncover an individual and company’s complete background, network, character and behaviours);
• Formal integration of this risk information into decision-making processes (equally weighted alongside other factors);
• Integration of expectations for improvements into contractual agreements;
• Ongoing human rights monitoring;
• Increased human rights capabilities within their own teams; and
• The linking of bonuses and remuneration packages to human rights performance of portfolio companies.

Example: Developing thematic notes on human rights

Thematic ESG notes are developed and issued to more than 100 underlying GPs each year. These notes represent our observations on issues, sometimes including links to further information, suggested approaches and questions for the GP to ask themselves and / or their portfolio companies. They are designed to prompt conversation and initiate a work programme at the underlying GP or portfolio company. We cannot engage with all managers on all companies. Still, these notes are one way for us to reach out to GPs in a pragmatic manner outside of a specific transaction we might be evaluating. The below links to a set of questions we provided to major underlying GPs regarding human rights due diligence in 2019.

Click below to download a list of questions GPs may ask themselves and / or their portfolio companies.