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01 August 2019

Human rights in the financial sector

What do human rights have to do with financial institutions?

At first glance, one may think nothing. Originally, the protection of human rights was considered as the duty of governments only. However, it is becoming clear that those universal rights may be violated, but also protected by private sector actors. Recently, multiple international initiatives have started to develop regulations regarding human rights in the private sector, including the financial sector. The most meaningful are:

  • the UN Guiding Principles on Business and Human Rights ("UNGPs");
  • the OECD Guidelines for Multinational Enterprises;
  • the UN Global Compact;
  • the Equator Principles ("EPs");
  • the Thun Group; and
  • the Dutch Banking Sector Agreement.

The main human rights risks the financial sector faces link to project finance (e.g. abuse of land rights, displacement, forced relocation), trading and investing in commodities (environmental issues, rights of indigenous population), data protection, corruption and bribery, equal pay in the financial sector, discrimination by gender, race, sexuality, a risk of contributing to child labour, slavery or human trafficking somewhere in the supply chain.

In 2011 the UN Human Rights Council adopted the UNGPs consisting of three pillars, the state duty to protect human rights; the corporate responsibility to respect human rights; and access to effective remedies to victims of abuses of those rights. The UNGPs state that all kinds of companies should examine their relationships, also with their customers, for potential human rights effects (and they apply both to the parent company and its subsidiaries and suppliers).

In the same year a new section on human rights was introduced to the OECD Guidelines for Multinational Enterprises that asks companies to respect human rights and prevent their violation with respect to business activities. Based on the OECD framework, there are national contact points where the complaints about companies violating such rights may be filed (for instance the recent action against ING in the Netherlands with respect to environmental infringements).

Many banks and financial institutions also participate in the UN Global Compact, which is a voluntary pact among companies and the UN that undertake to show commitment to human rights, labour conditions, environmental protection and anti-corruption measures (ten principles, e.g. abolition of child labour).

In addition, the financial sector itself has created voluntary initiatives to address human rights. In 2003, the EPs, a risk management framework, was established by a group of banks, applicable to all industry sectors and the following financial products: project finance, related advisory services, project-related corporate loans and bridge loans. The EPs were adopted to assist banks in determining, assessing and managing environmental and social risks (including human rights) in projects. Currently 96 financial institutions in 37 countries have officially adopted the EPs covering most of the international project finance globally.

Another initiative is the Thun Group, an informal group of banks which has been meeting since 2011 in Thun, Switzerland. This year's annual meeting took place on 8-9 July 2019. The purpose of the group is to work on understanding, respecting and promoting human rights across different banking activities and deepening the knowledge and application of the norms regarding business and human rights, i.e. the UNGPs, OECD Guidelines. The Thun Group has published two papers setting out their goals (in 2013 and 2017).

One of the local initiatives is the Dutch Banking Sector Agreement on International Responsible Business Conduct regarding Human Rights effective as of 7 December 2016 signed by the Dutch Banking Association (NVB) (majority of Dutch banks are members thereof), trade unions, civil society organisations and the Dutch Government, by which the banks agreed to respect human rights principles under the OECD Guidelines and UNGPs in two areas of banking activity: corporate lending and project finance. The goal is to increase the leverage the banks have over companies in high-risk sectors in order to mitigate or prevent adverse the human rights impact, and to analyse the supply chain in particular sectors, i.e. palm oil, cocoa, gold value chain. The banks are required to be transparent about investment portfolios, do client screening and maintain a grievance mechanism for human rights cases.

Even though most of these regulations are only soft law, the works on the binding treaty on business & human rights are ongoing within the open-ended intergovernmental working group on transnational corporations and other business enterprises established by the UN Human Rights Council (the latest draft from 19 July 2019). Moreover, on the national level new mandatory regulations are being introduced, for example the Modern Slavery Act 2015 in the UK, French Corporate Duty of Vigilance Law. It is more than likely that one day a hard law treaty will enter into force. Despite the lack of binding legal framework, ignoring human rights issues will probably lead to the negative publicity of financial sector institutions at some point when the public becomes more aware of, and sensitive to this topic.

Author: Weronika Kapica


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