Making human rights a factor in the cost of doing business
The shift to sustainable business practices is already underway. ESG investing is expected to reach $53 trillion by 2025, and this has been accompanied by an increasing use of data, indexes, ratings, benchmarking, and funds labelled as “ESG”.
We know that investors want to be informed about environmental, social, and governance risks identified by companies and that comprehensive reporting drives trust in those companies. Risk assessments and robust reporting assure investors that companies not only can identify these risks but have plans to address them.
But it is still very much a work in progress and just as much for companies as it is for all types of their financiers.
““Most financial actors fail to connect human rights standards and processes with ESG criteria and investment practices because of a prevailing lack of understanding on how human rights issues should be reflected in social criteria, environmental and governance indicators,.”
The UN Working Group on Business and Human Rights is drafting practical guidance on how to align better ESG approaches with the UN Guiding Principles on Business and Human Rights (UNGPs) in the context of financial products and services due to be published in June 2024. In fact, a session at this year’s annual Business and Human Rights Forum (BHR Forum) in Geneva was dedicated to an open consultation where stakeholders raised issues and questions for the Working Group to consider when drafting the guidance.
It is a vital and timely piece of work as entrepreneurial financial services providers are seeking to exploit the good will and years of hard work some in the industry have committed to developing socially responsible business and investment practices. Their progress has been hard earned—at the most basic level, metrics to measure human rights impacts and progress are evolving and can be harder to measure than for environmental indicators.
A case in point is how to define what constitutes meaningful engagement - a topic of discussion at the Working Group’s open consultation at the BHR Forum. How does the financial services sector ensure that the companies that they are invested in are in fact engaging meaningfully, especially when operating in conflict zones, remote rural areas, or among other marginalized populations.
Similarly, the UNGPs advise that businesses prioritize salient human rights impacts—their most severe human rights issues based on their scale, scope, and remediability, in addition to the likelihood that they will occur or are occurring. That means – in theory at least - those human rights that are at risk of the most severe negative impact through a firm’s activities and business relationships.
But importantly, what safeguards are there to ensure that severity is measured from the perspective of impacted rightsholders, rather than the business. How can one know how a company integrates its findings about salient human rights issues into its decision-making processes and actions.
Access to and provision of remedies is also extremely uneven. While non-legally binding forums are still the norm, profits take precedence over local community, and there is little action on complaints made by communities.
The record of national governments in being proactive in investigating, punishing, and delivering redress for business-related human rights abuses connected to financiers is complicated and must be further assessed.
The difficulties in passing solid business and human rights legislation have been underscored by the European Union’s (EU) attempts to pass a new Corporate Sustainability Due Diligence Directive (CSDDD). The European Commission published its proposal in February 2022, based on international standards from the United Nations and the Organization for Economic Cooperation and Development (OECD), and the national laws and initiatives in some Member States.
Under the bill, large companies would be required to prevent, mitigate, and end adverse human rights and environmental impacts in both their own and subsidiaries’ operations and throughout their value chains inside and outside the EU.
However, the French government wants to exclude the entire financial sector from the legislation, and the German government wants to block obligations to enforce climate transition plans. Other governments want to add thresholds to liability requirements that will make it tougher for victims to pursue remedy.
For example, French banks Société Générale and Crédit Agricole, are among a group of financiers that remain committed to providing a large chunk of the finance for a major gas project in Northern Mozambique even though it has already displaced local communities and threatens to cause serious damage to the environment. This is just of many many examples.
The OECD and the UNGPs both expect financial institutions and other corporate actors alike to conduct downstream due diligence on their investments.
The complaint by these corporate entities that robust engagement and reporting requirements are too resource intensive does not hold water. Things like comprehensive saliency risk assessments are being done and reported on. They may not be perfect, but it is possible. A Nestlé executive speaking at the BHR Forum, for example, pointed to the company’s updated assessments and plans that were approved at board level.
This is not a case of firms, particularly multinationals, being overburdened by regulation. The culture change that is underway, but which must become embedded in business practice, is that meaningful human rights risk assessments, action plans, and reporting should be factored into the cost of doing business. And financial services providers can no longer dodge their role and responsibilities for the harm that all types of their financing is causing to people and the planet.