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Finance & banking sector

The finance and banking sector plays a vital role in the world’s economy. For example, the world gross domestic product is valued at $79 trillion. (2017 figures, IMF), while the value of shares trading on stock exchanges is $78.2 trillion, almost equating the total amount of goods and services provided around the world. These numbers demonstrate that the finance and banking sector can exert substantial influence over the global economy, including the protection, or lack thereof, of human rights.

Finance and banking institutions can contribute both directly and indirectly to adverse human rights impacts. Examples of direct impacts include: a pension fund investing in a food and beverage company that systematically buys produce from farms using child labour; the management of assets belonging to a corporate or individual client involved in human rights abuses; or investing in a company that buys or uses prospected minerals in countries undergoing conflict. Financial instruments may also cause human rights violations indirectly by lending money to agricultural companies involved in land grabs and funding infrastructure projects that displace indigenous populations. (UN Working Group on the issue of human rights and transnational corporations and other business enterprises).

An informal group of bank representatives called the “Thun Group of Banks” has published two discussion papers on their interpretation of the UN Guiding Principles and what they mean for banks in practice. While these voluntary efforts have been applauded, their 2017 discussion paper on UN Guiding Principles 13 and 17 in a corporate and investment banking context has been criticised for misconstruing the central Guiding Principle regarding the corporate responsibility to respect human rights (Comments by Professor John Ruggie) by asserting that “banks, by definition, do not “contribute to” harm except through their own activities.”

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Guiding Principle 13 states that “the responsibility to respect human rights requires that business enterprises:

(a) Avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur;

(b) Seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relationships, even if they have not contributed to those impacts”.

This implies three categories of business involvement in adverse human rights impacts: a) through a business’s own activities, b) by contributing to harm caused by a third party, and c) where a business ‘neither causes nor contributes but its operations, products or services are directly linked through its business relationships to the harm’. The Thun Group’s position collapses the last two, which fails to recognise that each relation implies different responsibilities for banks, including in relation to providing remedy.

The responsibility to respect human rights also extends to international development financing organisations such as the World Bank, International Finance Cooperation (IFC), European Bank for Reconstruction and Development (EBRD), European Investment bank (EIB), and investment funds operated by national governments. Consequently, the IFC Performance Standards on Environmental and Social Sustainability to ensure that they comply with the corporate responsibility set out in the UNGPs in 2011.

The importance of engaging in stakeholder dialogue when financing projects has been reiterated when two European development banks exited the controversial Agua Zarca dam project on the Gualcaque river in Honduras, amid local and international tension stemming from allegations that they did not adequately consult the indigenous Lenca people. The dam is considered sacred by the Lenca people, and a number of protestors, including 2015 Goldman prize recipient Berta Caceres, were killed. The ensuing hostility and human rights abuse demonstrates why it is important that banking and financial institutions actively and regularly consider the human rights implications resulting from their direct and indirect activities.

Publications such as the OECD’s Responsible Business Conduct for Institutional Investors and Scope and Application of ‘Business Relationships’ in the Financial Sector Under the OECD Guidelines for Multinational Enterprises, and the Equator Principles III offer guidance on how financial institutions can integrate human rights into their business strategies. Guidance is also offered by NGOs such as BankTrack and BankWatch that monitor the activities of banks and funds.

The finance and banking sector relates to the following Sustainable Development Goals

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References

D. Kinley, Artful Dodgers: Banks and their Human Rights Responsibilities (March 1, 2017).
OECD, Scope and application of ‘business relationships’ in the financial sector under the OECD Guidelines for Multinational Enterprises
OECD, Responsible Business Conduct for Institutional Investors explains the application of the OECD Guidelines for Multinational Enterprises in the context of institutional investors. The paper highlights key considerations for institutional investors in carrying out due diligence that will help to identify and respond to environmental and social risks.
OHCHR response to request from BankTrack for advice regarding the application of the UN Guiding Principles on Business and Human Rights in the context of the banking sector
OHCHR response to request from SOMO and OECD Watch for advice, 2013

What National Action Plans say on Finance & banking sector

Belgium

On Action point 12, Poursuivre l’engagement de la Belgique et son rôle de pionnier en matière de droits de l’Homme au niveau international [Pursuing Belgium’s commitment and its pioneering role in the field of human rights at the international level] the NAP briefly mentions that the Ministry of Foreign Affairs will ensure, through its various coordination mechanisms in the preparation of the positions of Belgium and EU in organizations or international assemblies, including the World Bank, to ensure that the latter take into account the respect for and promotion of human rights in the exercise of their activities.

Action point 11, Assurer une meilleure coordination entre les autorités fédérales et régionales afin d’intégrer des critères relatifs aux droits de l’Homme et à l’entrepreneuriat socialement responsable dans les aides publiques [Ensure better coordination between federal and regional authorities in order to integrate criteria relating to human rights and socially responsible entrepreneurship in public aid] the NAP explains that Finexpo, an inter-ministerial consultative committee managed by the Administration of Foreign Affairs, studies the files of companies and/or banks requesting public support for an export credit and issues an opinion to the Council of Ministers, which takes the final decision on the granting of the aid. The NAP states that “regarding Finexpo, it will be necessary to modify the official questionnaire… in order to introduce references to the promotion of human rights, and to corporate social responsibilities that go beyond issues on the environmental impact, which are already included in the questionnaire…”

Chile

Colombia

Czech Republic

Denmark

Appendix 1, GP 4

Status in Denmark (initiatives implemented before the UN ratification of the Guiding Principles) [page 28]

“In 2008 the state financing fund, Vækstfonden, has committed to adhere to the UN Principles for Responsible Investment (PRI). The Export Credit Agency (EKF), the Investment Fund for Developing Countries (IFU) and Investment Fund for Central and Eastern Europe) (IØ) has committed to join the UN Global Compact.

[The Export Credit Agency (EFK)]’s Environmental & Social Due Diligence Policy states that EKF is committed to implementing the UN Guiding Principles on Businesses and Human Rights. EKF has also committed to the Equator Principles. These are binding international standards and frameworks for project funding. This ensures that private institutions and banks assess the environmental and social responsibility through a common set of guidelines. EKF works to promote the Equator Principles internationally, especially to institutions in the BRIC countries (Brazil, Russia, India and China). EKF uses International Finance Corporations (IFC) Performances Standards when rating a project which EKF participates in. The IFC Performances Standards mainly covers labor rights but human rights are also covered. …

As part of the approval process, Danida Business Finance analyses potential human rights related risks including local legislation and policies and other CSR issues. Access to finance is based on buyer’s and exporter’s compliance with ILO principles on human and workers’ rights. When Danida signs contracts with companies, it is a requirement that companies live up to Danida’s anti-corruption policy and to the UN Global Compact. A description of the applicant’s approach to quality assurance and how it will comply with Danida’s anti-corruption code of conduct and the principles of the UN Global Compact during implementation are requested from pre-qualified tenderers and form part of the tender evaluation.”

Appendix 1, GP 7

Status in Denmark (initiatives implemented before the UN ratification of the Guiding Principles) [page 30]

“Danida Business Partnerships provides financial support for the implementation of CSR partnerships and CSR initiatives in a range of Denmark’s partner countries. As part of the approval process, Danida Business Finance analyses potential human rights related risks including local legislation and policies and other CSR issues. Access to finance is based on buyer’s and exporter’s compliance with ILO principles on human and workers’ rights.”

Appendix 1, GP 9

Status in Denmark (initiatives implemented before the UN ratification of the Guiding Principles) [page 31]

“The EU adheres to principles and standards on responsible business conduct such as the OECD Guidelines for Multinational Enterprises, which is also reflected in negotiations for free trade agreements that includes the area of investment. The guidelines are considered the reference document on Corporate Social Responsibility, including human rights, intended to balance the rights and obligations between investors and host states. Furthermore, it is common practice to reference in the mandate the right of the parties to adopt and enforce measures necessary to pursue legitimate public policy objectives such as social, environmental, human rights, security, public health and stability of the financial systems in a non-discriminatory manner”

Appendix 1, GP 10

Status in Denmark (initiatives implemented before the UN ratification of the Guiding Principles) [page 33]

“… Denmark has been instrumental in the establishment of the World Bank’s Nordic Trust Fund which aims to promote the application of the human rights framework in World Bank policies and operations. Denmark has also been active in promoting that The International Finance Cooperation (IFC) actively supports its clients in addressing human rights risks and impacts. Furthermore, human rights are reflected in trade agreements.”

Finland

France

Part I, Financial sector, p37-38: The NAP provides key figures evidencing the importance of the financial sector through credit, asset management and project financing, and indicates that such volumes gives it considerable leverage. It recalls the Norwegian NCP decision of 27 May 2013 considering that an investor should, like companies, conduct due diligence as recommended by the OECD Guidelines, which also applies to minority shareholders, and the OECD’s work on responsible conduct in the financial sector which includes the development of guidelines (paragraph 2, p37). It indicates that France’s main measure in this regard was increased transparency through obligations of non-financial reporting (paragraph 2, p38). Finally it recalls that “while at the international level a number of voluntary commitments have been taken by the financial sector to promote respect for human rights (Ecuador Principles, United Nations Environment Programme – Finance Initiative (UNEP FI), development of Socially Responsible Investments, Global Compact), France has put in place a relatively pioneering regulatory framework which contains certain provisions specifically targeting this sector (Grenelle Act II of 12 July 2010)”.

Part II, section 3 on risk analysis and impact assessments (p43-46), the NAP cites the Ecuador Principles in the list of existing tools available at the sectorial level (paragraph 1, p46).

Actions

Part I, Proposed Actions n°1, Ongoing actions, p16:

“France actively contributes to the activities of the OECD on Responsible Business Conduct, including the work on due diligence (textile, finance) and on the strengthening of the Guidelines on the occasion of the 40th Anniversary (June 2016 and beyond).” (paragraph 5, p16)

Part I, Financial sector, Ongoing actions, p38:

“– Promoting investment policies in France and in Europe taking into account the duty of vigilance, emphasizing on the principles and practices of institutional investors.

– Promote initiatives and commitments made by the financial sector in particular those falling under the Ecuador Principles and the Thun Group of Banks.

– Consider the extension of environmental, social and governance (ESG) reporting to human rights issues for institutional investors in Europe.”

Georgia

Germany

III. Federal Government expectations regarding corporate due diligence in respecting human rights

Procedure for the identification of actual and potential adverse impacts on human rights [page 9-10]

“The consideration of potentially adverse impacts on human rights is a continuous task that accompanies work processes and, in particular, is performed with a sectoral focus. It should take place when new divisions, products or projects are launched as well as in the context of existing business activities. When potential risks are examined, a distinction must be made between the following types of impact: …

those connected indirectly with the enterprise through its business relations, its business activity or its products or services even though no direct contractual relationship exists, for example in situations involving numerous intermediary dealers. Granting loans, issuing credit lines and providing other financial services to other banks, insurers or other financial service providers do not in themselves constitute a relationship in the above sense if those transactions cannot be unambiguously attributed to a particular business activity in the real economy.”

1.1 Basic rules of economic policy

Development policy [page 19-20]

The current situation

“With their environmental and social standards, international financial institutions such as the World Bank and regional development banks set benchmarks for environmental and social regulation. The Federal Government will continue to track the reform processes in international financial institutions with a view to ensuring that their operations are even more sharply focused on human rights.”

Measures

“The requirements set out in the UN Guiding Principles and in the National Action Plan, in particular in its chapter III, on due diligence with regard to human rights, also apply to the organisations that implement development policy, including bodies that provide financing for development. They also serve as a basis for further assessment and monitoring and, where appropriate, further development of the grievance procedures that state implementing organisations, including financing bodies, have already established.
In addition, the Federal Government will continue to track the reform processes in international financial institutions with a view to ensuring that their operations are more sharply focused on human rights.”

1.3 State support

Export credits, investment guarantees and other instruments for the promotion of external trade [page 23]

“The instruments of external-trade promotion in Germany provide assistance for German enterprises in accessing and safeguarding foreign markets. The range of instruments includes the provision of advice by German diplomatic and consular missions, the network of German Chambers of Commerce Abroad and the Germany Trade & Invest (GTAI) agency. The Federal Government also supports participation in trade fairs abroad, arranges visits by delegations and funds hedging instruments such as export credit guarantees, known as Hermes guarantees, to insure export transactions, federal guarantees for direct investments abroad (DIAs) and untied loan guarantees as insurance for banks against the risk of default.”

Ireland

Italy

The Italian NAP refers to the finance and banking sector in a section outlining the State’s Actions with respect to Guiding Principle 27 [page 28]: “[a]n Italian non-judicial grievance mechanism is the Bank and Financial Arbitrator (ABF) created in 2009 and active since 2010 through its Panels in Milan, Rome and Naples (panels are likely to be established soon in other major towns). In the course of its mandate the ABF has extended the concept of ‘customers’ to cover individuals affected by the action of an intermediary even if the parties were not bound by contract. ABF expanded its functions to deal also with pre-contractual obligations in order to protect individuals claiming that intermediaries violated the obligations of good faith – which bind the parties to adopt fair behavior while negotiating.”

… Planned Measures [page 28]: “…The extension of the original mandate of the Financial Bank Arbitrator to include human rights-related claims of financial nature (such as mortgage and lending discrimination). “

As well as in Planned Measures under GP 3 [page 19] “…Support the National Dialogue on Sustainable Finance led by the UNEP Inquiry with the Ministry of Environment, and involving major banks, insurances and institutional investors as well as their associations and policy makers”.

Lithuania

Netherlands

3.1 An active role for the government

The OECD Guidelines Proactive Agenda [page 15]

“The Proactive Agenda was added to the OECD Guidelines in 2011 to elucidate the guidelines for specific sectors or situations, together with all the countries involved. In the context of the Agenda, the OECD is working with the financial sector on clarifying application of the guidelines.”

3.3 Clarifying due diligence

Landgrabbing in Brazil [page 25]

“Several Dutch financial institutions were recently linked through an investment partner to landgrabbing in Brazil. The Minister for Foreign Trade and Development Cooperation immediately contacted the Dutch and Brazilian institutions concerned, and had talks with high-level representatives of ABN AMRO Bank, the ABP Pension Fund, Aegon, the Entrepreneurial Development Bank (FMO), ING Bank, the Dutch Banking Association, the Federation of Dutch Pension Funds, PFZW pension fund and Rabobank. They discussed the need for greater transparency with regard to loans and investments, and had a constructive exchange of views on participation of Dutch financial institutions in multi-sector consultations on better land and land-use rights.”

Norway

The Norwegian NAP refers to the banking sector in section 2.9 International Cooperation on CSR on UN Guiding Principle 10 [page 27]: “[w]e also play an active role in the UN, the OECD, the multilateral financial institutions and the regional development banks.”

The NAP also refers to the Government’s own role as a financial investor through the Government Pension Fund Global and Government Pension Fund Norway in a section titled Responsible Management [page 22]. “Through the Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (GPFN), Norway has financial investments both in Norway and the world at large. The role of the Fund is that of a financial investor, and the overriding objective is to achieve the highest possible return at moderate risk.

[..]The operational responsibility for management of the GPFG and the GPFN lies with Norges Bank and Folketrygdfondet respectively, which operate in accordance with mandates decided by the Ministry of Finance. In the management mandate set by the Ministry it is stated that a good long-term return is considered dependent on sustainable development in economic, environmental and social terms, as well as well-functioning legitimate and efficient markets. [..] Norges Bank’s responsible investment management is, as a starting point, based on international principles and standards, such as those set by the UN Guiding Principles on Business and Human Rights and the OECD in the Guidelines for Multinational Enterprises. When the UN Guiding Principles were adopted, Norges Bank endorsed a campaign by investors in support of the principles.”

Poland

Spain

Guiding Principle 4:

Measure 1:

“Within one year after the approval of this Plan, a Working Group will be created within the framework of the Strategic Plan for the Internationalization of the Spanish Economy, which will develop a specific Action Plan to examine the coherence of policies to support business internationalization, and its alignment with the Guiding Principles. The Working Group, which will present its conclusions to the Government, will study how cooperation for development, official credit agencies, export credit and official insurance or investment guarantee agencies of all administrations are able to condition, modulate or revise its support for investment based on the exercise of the responsibility to respect human rights by the beneficiary companies, both inside and outside of Spanish territory.”

Measure 4:

“The Government will support the inclusion of human rights considerations in financial institutions for regional and international development.”

Guiding Principle 8:

Measure 1:

“The Ministries of the Treasury and Public Function; Foreign Affairs and Cooperation; Economy, Industry and Competitiveness; Energy, Tourism and Digital Agenda will train and provide support on the Guiding Principles through their dependent agencies, to departments, government agencies and other state institutions that encourage and support the creation of businesses, business competitiveness and commercial and financial business practices in order to promote the coherence of policies and processes with the Guiding Principles and the international standards of human rights mandatory for Spain.”

Guiding Principle 10:

Measure 5:

“Spain will promote the European Union, international organizations and international financial institutions of which Spain is member to share best practices with a view to encourage policy coherence and technical assistance to member states where requested.”

Sweden

Annex: Measures taken [page 22]

The State as actor

“Following support from Sweden and other countries, the Board of Governors of the World Bank decided in 2011 that the regulations on social and environmental standards that the Bank applies to business loans provided via its private sector body the International Finance Corporation (IFC) should include a requirement that consideration must be had to the UN Guiding Principles on Business and Human Rights.”

Switzerland

The Swiss NAP refers to finance and banking in subsection 4.2 The Swiss Context, under section 4 which outlines the Position of the Federal Council on the UN Guiding Principles on Business and Human Rights [page 6]: “[n]owadays, increasing numbers of business enterprises are fulfilling their human rights responsibilities in a conscious way. Both business enterprises and civil society stakeholder groups are supporting and furthering respect for human rights with a wide range of programmes. Indeed, respect for human rights forms an integral part of many companies’ corporate social responsibility (CSR) activities.

A further example is the discussion paper on the implementation of the UN Guiding Principles on Business and Human Rights in the banking sector published by the Thun Group of Banks, a group of international full-service banks.”

The NAP mentions the federal government’s measures to support the financial sector in its explanation of policy instrument 18: Guidelines for business enterprises on implementing the UNGP, which falls under the section on UN Guiding Principle 3 [page 18].It states: “[i]n the financial sector, SECO [State Secretariat for Economic Affairs] is supporting the OECD with the drafting of guidance on due diligence in this industry. Planned for the end of 2017, one of the objectives of the guidance is to support financial institutions in Switzerland to mitigate the negative impacts of their business activities on the environment on society around the world, including developing countries.”

United Kingdom

The UK 2013 NAP makes no reference to finance and banking.

The UK 2016 Updated NAP refers to two state-based bodies mandated to address financial matters in section 4 Access to Remedy for Human Rights Abuses Resulting from Business Activity [page 20] where it states:

“We also provide a number of state-based non-judicial mechanisms, including: … a considerable number of Ombudsman, Regulators and other Government Complaints Offices in industry sectors that have various mechanisms to hear complaints, impose sanctions and award compensation. For example, the Health and Safety Executive, Financial Conduct Authority, Financial Ombudsman Service and Advertising Standards Authority.”

United States

Outcome 1.1: Promoting RBC Globally

Ongoing Commitments and Initiatives [page 9]

“Promotion of Robust Safeguards at the World Bank and other International Financial Institutions (IFIs): The U.S. government will continue to play a leading role in encouraging strong safeguard and sustainability policies across multilateral development banks and other IFIs. Over the course of the World Bank’s recently-completed Safeguards review, the U.S. government supported strong provisions in the Bank’s Environmental and Social Framework approved in August 2016, including a new safeguard on labor and working conditions, and encouraged the World Bank to incorporate human rights issues in its safeguards.” – Implementing Department or Agency: Treasury, DOL, State, USAID

Outcome 1.2: Utilize U.S. Law, Multilateral Agreements, and Diplomacy to Promote and Enforce High Standards

Ongoing Commitments and Initiatives

“Robust and Consistent Enforcement of U.S. Laws and Regulations: The U.S. government will protect the integrity of our financial system and combat money laundering and financial crimes by continuing to enforce its laws in order to protect human, labor, and civil rights. Laws whose enforcement advances key priorities relevant to RBC include those listed in Annex II.” – Implementing Department or Agency: DOJ, Treasury

Outcome 2.1: Enhance the Value of Multi-Stakeholder Initiatives on RBC

Ongoing Commitments [page 14]

“ILO-International Finance Corporation (IFC) Better Work Program: More than 60 American apparel brands are part of the Better Work program, implemented by the ILO in partnership with the IFC. DOL has funded Better Work programs in Bangladesh, Cambodia, Haiti, Jordan, Lesotho, Nicaragua, and Vietnam. The Better Work program is being implemented in 1,343 export apparel factories, supporting better labor conditions for approximately 1,750,000 workers worldwide.” – Implementing Department or Agency: DOL

Outcome 3.3: Capacity Building and Technical Support to Promote Enabling Environments

Ongoing Commitments and Initiatives [page 19]

“Financial Action Task Force (FATF): The United States is a founding member of the FATF and will continue to be actively involved in advancing the FATF’s global efforts in combating money laundering, terrorist financing, and other illicit financing threats that pose a risk to the integrity of the international financial system. The United States recently underwent a Mutual Evaluation Review to assess levels of implementation of the FATF Recommendations.” – Implementing Department or Agency: Treasury

Annex II: Key Domestic Executive Orders and Regulatory Efforts [page 26-29]

“Money Laundering and Bank Integrity: Treasury administers the Bank Secrecy Act (BSA), which, among other things, requires financial institutions to maintain effective anti-money laundering (AML) compliance programs. Effective AML programs include, among other things, the ability to detect and report suspicious activity, including corruption, and to conduct due diligence and enhanced measures when banks, broker-dealers, or other institutions deal with senior foreign political figures. DOJ prosecutes criminal violations of the BSA focusing on criminal violations by financial institutions whose actions threaten the integrity of the individual institution or the wider financial system, as well as professional money launderers and gatekeepers. These unique cases reinforce the obligation on U.S. businesses in the financial sector to harden their infrastructure against financial crime—including bribery, misappropriation, and theft—and reinforce the private sector’s role as a strong line of defense against the introduction of ill-gotten gains to the U.S. financial system. …

Transparency: The U.S. government is engaging in efforts to strengthen financial and corporate transparency to make our country even less attractive for the corrupt looking to spend the proceeds of their crimes. To that end, DOJ has submitted to Congress a package of legislative proposals that will improve the United States’ ability to combat money laundering, particularly when linked to foreign official corruption, and to locate and recover stolen assets and other criminal proceeds. Additionally, Treasury recently announced a final rule to increase transparency in the financial system. The final Customer Due Diligence rule, which was first noticed in 2014 and was subject to a public comment process, will require that financial institutions—including banks and other entities—collect and verify the personal information of the real people (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts. It clarifies and expands BSA obligations and will be fully implemented by financial institutions no later than two years after its effective date (i.e. May 11, 2018). Finally, Treasury, on behalf of the Administration, sent to Congress draft legislation that would require companies formed within the United States to file adequate, accurate, and current information on its beneficial owners with Treasury. The proposed legislation includes penalties for failure to comply and is necessary to prevent the misuse of companies formed under state law. To address potential vulnerabilities in the domestic real estate market, Treasury uses its authorities to require certain title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end real estate in six major metropolitan areas.”