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Supporting Financial Institutions to Implement the Guiding Principles

Beyond their own responsibility to respect human rights, financial institutions can play a critical role in helping to set expectations for virtually every other industry sector.

August 2016

PARTNERS: individual export credit agencies, development finance institutions and private banks

At Shift, we’ve noticed that when those with the money ask questions, companies pay attention.

“Those with the money” means both private and public sector financial institutions. Private sector financial institutions are institutions like banks, insurers and pension fund managers. These institutions have their own responsibility to respect human rights as private enterprises, according to the Guiding Principles. Public sector financial institutions, like national development finance institutions and export credit agencies, also have to respect human rights in their operations. In addition, states need to pay particular attention to the roles that such institutions can play as part of meeting their own duty to protect human rights (Pillar I of the Guiding Principles).

Beyond their own responsibility to respect human rights, financial institutions can play a critical role in helping to set expectations for virtually every other industry sector. For private sector institutions, their breadth of client relationships means they have connections to a huge amount of business activity going on around the world. And for public sector institutions, their practices can either enhance or undermine states’ duty to protect human rights.

For over two decades, a number of financial institutions have sought to address environmental and social risks through the adoption of risk management approaches. These approaches have been based on the International Finance Corporation’s Performance Standards, which have provided a recognized international reference point.

With the global endorsement of the Guiding Principles in 2011 however, leading financial institutions are now asking whether their existing approaches are sufficient, and how those approaches might need to evolve to meet the expectations of human rights due diligence. In other words, they want to understand how the Guiding Principles can help them manage risks to people arising from the projects and clients that they support. In addition, we increasingly see evidence that better management of risks to people can also help manage business risks to projects and clients, and to financial institutions themselves.

This shift in focus is likely to increase as a result of developments such as the 2016 revision of the OECD “Common Approaches,” which introduce new human rights expectations that apply to export credit agencies in all OECD countries, and the October 2016 agreement (covenant) reached by the Dutch banking sector as part of the Dutch government’s broader initiative to advance sectoral efforts to prevent and address human rights in global value chains.

At Shift, we think that financial institutions play a very important role in driving business respect for human rights. Examples of our work with public and private sector financial institutions include the following:

  • We have worked with national development finance institutions, including DEG (Germany), FMO (Netherlands), FinnFund (Finland) and CDC (UK) to understand the extent to which their existing due diligence policies and practices meet or can be adapted to meet the expectations of the Guiding Principles, including delivering workshops and supporting their development of guidance notes and tools for their investment managers;
  • We drew on our collaboration with the IFC on the topic of human rights due diligence in high risk contexts under the Performance Standards to inform a public report that has helped influence financial institution practice;
  • We have engaged with export credit agencies at the OECD level to build understanding of high risk screening for human rights impacts, as well as providing tailored support to Norwegian export credit agency GIEK on its human rights policies and practices;
  • We have worked with private banks including ABN AMRO, Citi and Wells Fargo through our Business Learning program on the implications of the Guiding Principles for their operations, including client relationships;
  • We have supported the independent Peruvian financial regulator to design new regulations for banks, insurers and pension funds in Peru that require heightened due diligence in relation to medium and high risk projects in the extractive sector;
  • We have led workshops with investors and pension fund managers in Europe, the US and beyond to explore the implications of the Guiding Principles for their efforts to integrate environmental, social and governance (“ESG”) factors into their investment decision making.

The kinds of questions that we have explored with these and other financial institutions include:

  • How does human rights due diligence differ from traditional environmental and social due diligence?
  • How can a focus on the severity of impacts help prioritize due diligence efforts across large numbers of transactions and relationships?
  • How can different financial institutions use and build leverage to address human rights risks in their portfolios?
  • How can financial institutions incorporate meaningful stakeholder engagement into their decision making processes?
  • What does appropriate transparency look like?
  • What roles can and should financial institutions play in ensuring remedy and the availability of grievance mechanisms for affected stakeholders?
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