Rethinking investing: human rights in venture capital
The growing media coverage of surveillance and spyware technologies used to hunt down ethnic and racial minorities and immigrants and monitor journalists, human rights activists and others has highlighted the role of private equity firms, including venture capitalists (VCs), in funding human rights violations in the United States and abroad.
By providing essential funding to tech start-ups, venture capital firms play a crucial gatekeeper role, deciding which companies make it to market and, ultimately, which technologies shape our lives. This has far-reaching consequences for human rights. While digital technologies offer opportunities for economic growth, environmental protection and the realization of human rights, such innovation may be associated with widespread invasions of privacy and freedom of expression, enable the proliferation of hate speech fueling offline violence and exacerbate inequalities, including through ‘discrimination’ – affecting people in the labor market, access to loans and public services, and in the justice system criminal.
Despite this societal damage, a report released in July by Amnesty International found that “the vast majority of the world’s most influential venture capital firms operate without considering the impact of their decisions on human rights.” The report concludes that “the lack of human rights policies and due diligence processes among venture capital firms has important human rights implications”, citing a range of examples, such as than investing in companies that support the repression of the Uyghur population in China.
These findings run counter to the global expectation that companies of all sectors and sizes, including venture capitalists, take the necessary steps to ensure that their businesses and value chains adhere to internationally recognized human rights. Unanimously endorsed by governments at the United Nations Human Rights Council in 2011, the United Nations Guiding Principles on Business and Human Rights (UNGP) provide the authoritative global framework outlining accountability companies to respect human rights.
Managing human rights risks is not only good for people, it is also good for business.
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 risks to human rights, including digital and labor rights, and the material costs in return (SASB standards, investor statement on corporate responsibility for digital rights and digital rights resolutions in 2019). A 2019 Harvard venture capital study found a link between failing tech start-ups and poor performance in managing environmental, social and governance (ESG) risks. IPO valuations have also been threatened due to business models that violate human rights. Companies may even be exposed to legal risks associated with their investments in companies that develop high-risk technologies, while reputational risks increase due to the growing focus of NGO advocacy on private capital and rights. humans.
Tech companies themselves are realizing it, too. Growing pressure from regulators, civil society, employees and shareholders regarding human rights violations related to their business models, products and services has led many publicly traded technology companies to adopt human rights policies and to take due diligence measures to deal with the risks.
Venture capital firms can live up to 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 political commitment to respect internationally recognized human rights. The policy should define the human rights expectations of start-ups, which should be clearly communicated, including during pitch sessions and on the VCs website.
- Demonstrate human rights due diligence. Venture capital firms should update their core business activities to manage human rights risks. Known as human rights due diligence, this means that venture capital firms should be aware of the risks that people face in their investment portfolios and show how they manage those risks. It involves evaluating how the business invests and putting in place structures that identify and address the risks to people in the course of doing business. This includes processes and mechanisms to engage stakeholders, including civil society, with the necessary knowledge and expertise, to identify the real risks and impacts associated with investment portfolios. To show the constructive role they play in boosting the human rights performance of start-ups, venture capital firms should also disclose their approach to managing human rights risks, including through formal reports.
- Provide space and resources for entrepreneurs to do their due diligence: A critical aspect of VC’s due diligence is using leverage to empower and support start-ups in their efforts to uphold human rights. This may include providing training and tools for start-ups that support their ability to manage human rights risks, connecting entrepreneurs with businesses and human rights experts. human rights and their encouragement to assess business models, products and services to identify human rights risks. When a VC sits on the board, they should also seek to shape and embed a culture of respect for rights within the company and ensure that the board provides appropriate oversight.
By supporting business founders in their mission to grow their businesses responsibly, VCs can play a transformative role in shaping the behavior and culture of emerging businesses and the associated outcomes for society. UNGPs provide a roadmap for venture capital firms to reinvent the way they make their investments, helping to ensure that managing risk to people is a fundamental part of their core business.