Notwithstanding the intensifying institutional investor focus on sovereigns, cities are a critically important piece of the ESG landscape.

Investment strategies that ignore social risks can impact the lives of millions by perpetuating negative human rights outcomes. And nowhere more so than in cities, which are often beacons of growth and progress.

Whether it’s regional headquarters, tech hubs, finance centres, manufacturing hotspots or key real estate markets, banks, institutional investors and multinationals have a footprint in many of the world’s major urban hubs.

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.

A surging focus on ESG risks, alongside new and emerging legislation governing human rights, supply chains and the sustainability of investments, is putting financial institutions in particular more closely under the microscope, on top of the focus on multinationals/corporates.

Using our subnational data to assess the social risk landscape of the world’s 575 cities with a population over 1 million, our analytics team 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.

Our Cities@Risk - Social Index, part of the Human Rights Outlook 2021, 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.

Of these 426 major cities, Asia is home to 240. But the risk is spread globally, with investors and companies widely exposed to social risks in the metropoles of nearly all regions (see chart of the week).

Looking at the top 100 cities for FDI in 2020 (data courtesy of fDi Markets, the foreign investment monitor of the Financial Times), we’ve examined the relationship between these 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. Just focusing on human rights issues, where poverty is excluded, the number jumps 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.

Whether investing in/financing 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 decision making.

Screening for social risks is the first step in understanding risk exposure – otherwise investors (including banks and institutional investors) are flying blind and open to unwelcome surprises.