40% of world’s top FDI destinations rated ‘high’ or ‘extreme’ risk for human rights

Whether it’s regional headquarters, tech hubs, finance centres, manufacturing hotspots or key real estate markets, multinational companies and investors are going to have a footprint in many of the world’s major cities. Most organisations will have assessed their exposure to climate-related or political risks, but not enough will be paying close attention to the human rights environment, which could be just as damaging to their interests if they are caught up in abuses against citizens or workers.

Using our subnational data to assess the social risk landscape of the world’s 575 cities with a population over 1 million, we’ve found that the human rights of citizens in 38 of the top 100 locations for foreign direct investment (FDI) – including Shanghai, Beijing, Abu Dhabi, Dubai and Jakarta – are at ‘high’ or ‘extreme’ risk.

The Cities@Risk Social Index measures risk across three pillars – civil and political rights, labour rights and poverty – and covers human rights issues such as the right to protest, security force abuses, child labour, modern slavery, and health and safety. The index identifies Somalia’s Mogadishu as the worst performing city globally overall, while Pyongyang in North Korea has the world’s highest levels of state oppression and the worst labour rights. However, more importantly for business, 75% of the cities assessed, 426 in total, sit within the two highest risk categories, bringing into question the ESG credentials of a swathe of important commercial hubs that are home to 1.4 billion people and at least one in every ten dollars of FDI.

FDI into major cities presents reputational risks

Looking at the top 100 cities for foreign direct investment in 2020 (data courtesy of fDi Markets, the foreign investment monitor of the Financial Times), we’ve examined the relationship between top FDI destinations and their social risk.

In all, 33 of these cities, representing USD71 billion of inward investment, are classified as ‘high’ or ‘extreme’ risk in the Cities@Risk Social Index. However, when just focusing on human rights issues, where poverty is excluded, we see that number jump to 38, nine of which are rated ‘extreme’.

This doesn’t mean that organisations investing in these locations will be complicit in any human rights abuses, but it does raise their risk exposure and the chances of reputational, legal and financial damage if violations are linked to their investments, operations or suppliers.

Out of the top 100 FDI locations, it is Turkey’s Izmir and Istanbul that pose the greatest risk to human rights. While this might seem surprising, their performance on labour rights is especially dire, with the exploitation of refugees and migrants a major problem that should be noted by firms with manufacturing supply chains there.

In contrast, the Chinese capital Beijing, which comes in a close third, poses the highest risk among the group for civil rights. Elsewhere in the country, the commercial hub of Shanghai, which is the 8^th highest recipient of FDI globally at around USD8 billion, also poses an ‘extreme’ risk to the civil rights of its citizens and a ‘high’ risk for labour rights. That picture is similar, if not worse, across other Chinese investment hotspots, including the important manufacturing hub of Guangzhou.

When including poverty alongside the human rights indicators, the five riskiest cities within the top 100 FDI destinations are India’s Hyderabad, Pune and Mumbai, Izmir and Nigeria’s financial centre, Lagos. Together, these cities attracted 1.15% or USD10 billion of global FDI in 2020. At the other end of the scale, London, the world’s most attractive investment destination according to the fDi Markets data, is also among the lowest risk cities globally, ranking 544^th in the study.

No region free from social risks

Zooming out to look at the overall ranking of 575 cities shows that 26 are classified as ‘extreme’ risk, meaning there are widespread violations across multiple human rights issues, alongside pervasive poverty. Outside top-ranked and highest risk Mogadishu, the worst performing cities include Damascus, Aleppo and Homs in Syria, followed by Pyongyang, Yemen’s Sanaa, the Pakistani hubs of Quetta, Karachi and Lahore, and Hyderabad in southern India.

Of the 426 major cities that fall into the ‘high’ or ‘extreme’ risk categories, Asia is home to 240. But as Figure 2 shows, the risk is spread globally, with investors and companies widely exposed to social risks in the metropoles of nearly all regions.

The exception is Europe and Central Asia, which doesn’t feature at all in the global top 100. Kharkiv, Ukraine, is the region’s worst ranked city at 182^nd, while Kyiv and Moscow come in at 327^th and joint 422^nd respectively. Their ‘high’ risk categorisation is largely due to a poor performance on the civil rights and labour rights pillars.

Our data shows that over 98% of residents in major African cities live in locations where poverty, exploitation or oppression are present in varying degrees, with South Africa’s Durban the region’s sole metropolis in the ‘medium’ risk category, and even then, only just. Africa’s population is expected to rise by 70% by 2035 and, along with Asia, will be responsible for most of the growth in global population in the coming decades. By 2035, if nothing changes, a further 120 million people in Africa and 270 million people in Asia could be living in cities with significant levels of social risk.

Civil rights under threat

While Minsk is ranked 334^th in the overall index, it is rated as 38^th highest risk in the section of the study measuring civil rights – the worst of any major city in Europe and Central Asia (see Figure 3). Look no further than the Belarusian state’s response to recent anti-government protests, where hundreds were injured and tens of thousands arrested, to see why. Azerbaijan’s Baku comes in second place in Europe and Central Asia, and 56^th globally.

Like Minsk, Beijing’s apparently strong showing of 303^rd on the overall Cities@Risk Social Index masks a worrying performance on the civil and political rights pillar, where it is the 9^th highest risk city globally.

China’s civil and political rights landscape has the potential to affect local and foreign employees. Extreme measures, such as arbitrary arrest, are still rare but do pose a risk for the staff of Western companies from countries embroiled in geopolitical disputes with China. Other actions, such as politicised investigations, which can include breaches of privacy, are becoming an increasing threat, while the curtailing of freedom of speech poses a widespread risk to the rights of domestic and international residents.

Within China, only Urumqi performs worse than Beijing for civil rights. The provincial capital of Xinjiang, and home to a host of Uyghur detention camps, is the 5^th highest risk major city globally behind only Syria’s Homs, Aleppo and Damascus, and the global capital of oppression: Pyongyang.

Supply chain hubs present pervasive labour rights risks

Across 10 major sourcing economies, mostly located in Asia, we rate 248 out of 250 major cities as ‘high’ or ‘extreme’ risk for labour rights (see Figure 4). Cities in Pakistan and India, as well as Bangladesh’s Dhaka and China’s Urumqi, make up the top 20. We’ve identified child labour, migrant worker exploitation and modern slavery as persistent problems across all the region’s 250 major cities, and every single one performs poorly in our occupational health and safety ranking.

These risks are not confined to the major sourcing countries though. Overall, 441 out of the 575 cities assessed are rated as ‘high’ or ‘extreme’ risk for labour rights, including almost half the cities in Europe and Central Asia.

Cities an important piece of the ESG landscape

Cities are often beacons of growth and progress, but investment strategies that ignore social risks can impact the lives of millions by perpetuating negative human rights outcomes. A surging focus on ESG risks, alongside new and emerging legislation governing human rights, supply chains and the sustainability of investments, is also placing companies and financial institutions under the microscope.

Whether you are investing in infrastructure or real estate, sourcing from a local supplier, or bringing a new office or factory online, social risks are going to have to play an increasingly prominent role in your decision making. Screening for social risks is the first step in ensuring you understand your risk exposure – otherwise you are flying blind and open to unwelcome surprises.