01.10.2021  |  Menneskerettigheder

Reimagining Investment: Human Rights in Venture Capital

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Private equity firms, including venture capital (VC) firms, have come under scrutiny regarding the funding of human rights abuses as media attention has grown over the use of spying technologies to track minorities, journalists, immigrants, and activists.

By providing critical funding for technology start-ups, VC firms play a crucial gatekeeper role, deciding which companies make it onto the market, and ultimately, which technologies shape our lives. This has far-reaching consequences for human rights. While digital technologies present opportunities for economic growth, environmental protection, and the realization of human rights, such innovation can be associated with widespread infringements on privacy and free expression, enable the proliferation of hate speech fueling offline violence, and deep inequalities, including through " algorithmic discrimination "—affecting people in the job market, accessing loans and public services, and in the criminal justice system.

Despite these societal harms, a July 2021 report released by Amnesty International  found  that "the vast majority of the world's most influential venture capitalist firms operate with little to no consideration of the human rights impact of their decisions." The report concludes that “the absence of human rights policies and due diligence processes amongst VC firms has significant consequences for human rights,” citing a range of examples, such as investments in companies that provide support for the repression of the Uyghur population in China.

These findings run contrary to the global expectation that businesses of all sectors and sizes, including VC firms, take the necessary steps to ensure that their business activities and value chains respect internationally recognized human rights. Unanimously endorsed by governments in the UN Human Rights Council in 2011, the  UN Guiding Principles on Business and Human Rights (UNGPs)  are the authoritative global framework outlining the responsibility of businesses to respect human rights.

Managing human rights risks is not only good for people — it is also good for business. Public equity investors have already recognized the relationship between human rights risks, including digital and labor rights, and the material costs on return (eg,  SASB standardsInvestor Statement on Corporate Accountability for Digital Rights , and  digital rights-related resolutions in 2019 ). A 2019 Harvard  study  on VC found a link between start-up technology companies that fail and poor performance in addressing environmental, social, and governance (ESG) risks. IPO valuations have also been threatened due to business models that undermine human rights. Firms may even be exposed to  legal risks connected to their investments in companies that develop high-risk technologies, while reputational risks are increasing due to the growing focus of NGO advocacy on  private capital  and human rights.

Tech companies themselves are also realizing this. Growing pressure from regulators, civil society, employees, and shareholders over the human rights abuses connected to their business models, products, and services has led many publicly listed  tech companies  to adopt human rights policies and take due diligence measures to address risks.

VC firms can meet their human rights responsibilities, help shape a world where technology contributes to social progress, and increase their financial returns by deploying approaches based on the following three principles: 

  • Adopt a policy commitment to respect internationally recognized human rights . The policy should set out the human rights expectations of start-up companies, which should be clearly communicated, including during pitching sessions and on the VCs website.
  • Conduct human rights due diligence. VC firms should update their core business activities to manage human rights risks. Known as human rights due diligence, this means that VCs need to know the risks to people connected to their investment portfolios and show how they address these risks. This involves assessing how the firm invests and putting in place structures that identify and address risks to people as an inherent part of doing business. This includes processes and mechanisms for engaging stakeholders, including civil society with the relevant knowledge and expertise, to identify the risks and real-world impacts connected to investment portfolios. To show the constructive role they play in strengthening the human rights performance of start-ups, VC firms should also disclose their human rights risk management approach, including through formal reporting.
  • Provide space and resources for entrepreneurs to do their due diligence : A core aspect of VC's own due diligence involves using leverage to enable and support start-ups in their efforts to respect human rights. This may include offering start-ups trainings and tools that support their ability to manage human rights risks, connecting entrepreneurs with business and human rights experts, and encouraging them to assess business models, products, and services to identify human rights risks. Where a VC sits on the board of directors, they should also seek to shape and embed a rights-respecting culture within the company and ensure that the board provides appropriate oversight.

By supporting company founders in their mission to grow their businesses responsibly, VCs can play a transformative role in shaping the behavior and culture of emerging companies and the associated outcomes for society. The UNGPs provide a roadmap for VC firms to reimagine the way they conduct investment, helping to ensure that addressing risks to people is a fundamental part of their core business.

This article was originally published here:  Reimagining Investment: Human Rights in Venture Capital | Blog | BSR

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