Kindra Mohr, Human Rights and Financial Services Manager for BSR, and colleagues explain how financial institutions can prevent and address harm in their value chains.
The year is off to a rapid start, bringing with it a continued need to focus on the unique role of the financial sector in advancing respect for human rights. Conversations at the 2024 World Economic Forum Annual Meeting, the 12th UN Forum on Business and Human Rights, and COP28 all demonstrated the urgency for the sector to fulfill its human rights responsibilities given the outsized influence it has on the rest of the economy and its potential to put people at the center of climate change solutions, drive inclusive and equitable growth, contribute to conflict mitigation, and foster civic space and democratic freedoms. Mounting regulatory pressure, litigation risk, and stakeholder scrutiny on human rights also highlight the need for consequential action by financial institutions.
While the sector’s progress in implementing the UN Guiding Principles on Business and Human Rights (UNGPs) – the authoritative global standard on the business responsibility to respect human rights – is encouraging, financial institutions are in the early stages of their human rights journeys and have yet to contemplate how to address negative impacts, such as infringements on workplace rights, land grabbing, and harm to vulnerable groups, when they occur, particularly when it involves their products, services, and relationships with clients and investees. This is reflected in the 2023 results of the Principles for Responsible Investment’s (PRI) reporting framework, which indicate that, while 41% of reporting signatories have publicly available guidelines on human rights, and around a third use the UNGPs to identify sustainable outcomes, just 11% are enabling access to remedy (the majority of these indirectly through exercising their leverage on invested companies). This results in an unsparing remedy gap, where those harmed in connection with the institution’s activities too often bear the brunt of the risk and rarely receive remedy or recompense. Rather than internalising human rights risks and attributing them to the institution’s lending, investment, or other activities, many financial institutions dismiss them as negative externalities for everyday people to absorb.
The access to remedy provisions of the UNGPs are specifically designed for these situations. When financial institutions cause or contribute to harm through their operations or value chains, they have the responsibility to provide for and contribute to remedy. As a matter of common sense, this should be relatively uncontroversial. For example, if a financial institution ignores human rights risks and benefits financially from negative impacts in its portfolio, it should undertake efforts where feasible to halt further harm and remedy the negative impact. However, the responsibility does not stop there. When financial institutions are directly linked to harm that occurs as a result of their products, services, and business relationships, the UNGPs establish that they should actively use (and if needed build) leverage, on their own or with other stakeholders, to mitigate the impact, prevent future harm, and ensure that the responsible party provides remedy.
A tailored approach
Because these situations can be complex, and the relationship to harm may depend on the type of financial institution, undertaking a tailored remedy ecosystem approach can help institutions align with the UNGPs and potentially avoid costly regulatory, reputational, and financial fallout due to unaddressed impacts and disruptions on the ground. This approach involves case-by-case assessments of the situation and the institution’s involvement to determine an appropriate response, as well as contributions to a broader system that comprises government, business, civil society, and other stakeholders to ensure there is remedy for harm.
While the remedy gap remains concerning, some institutions within the sector started adopting the ecosystem approach, building on over 30 years of practice in this area within development finance. For example, in 2021 ANZ became the first commercial bank to launch a human rights grievance mechanism to address complaints associated with corporate lending clients. There are also recent examples of financial institutions using leverage to urge companies in their portfolio to address harm and improve human rights performance. Furthermore, some investors are engaged in cultivating worker-driven complaints and remediation processes at the investee level.
These examples illustrate not only how financial institutions are responding to increased attention on human rights, but also how they can take practical measures to close the remedy gap. As a start, they can consider the following to incorporate an ecosystem approach and equip themselves to deal with adverse impacts associated with value chains:
- Establish and assess grievance mechanisms at the institutional level to ensure they align with the UNGP effectiveness criteria.
- Communicate clear expectations on access to remedy to clients and investees and assess their performance on meeting these expectations, including through their own operation of effective grievance mechanisms.
- Engage with affected stakeholders or their representatives to understand how to address human rights issues tied to the institution’s products, services, and portfolios, including on the appropriate form of remedy when harm occurs. Transparently share any limitations that the institution has over the client or investee.
- Identify and foster points of leverage through engagement, stewardship, contractual provisions, and other tools in order to encourage respect for human rights and facilitate access to remedy when harm occurs.
- Design tools and financial instruments, such as escrow and contingency funds, which are common in construction and infrastructure sectors, to adequately capture human rights risks and secure resources up front for remedial action when necessary.
- Develop a rights-respecting, responsible exit strategy and formal process to terminate business relationships after efforts to address and prevent future harm have failed.
- Engage governments to support measures that foster access to remedy and accountability and strengthen the rule of law, such as mandatory human rights due diligence, including civil liability provisions for cases of causation and contribution to human rights impacts.
As more regulators and stakeholders scrutinise the links between human rights impacts and finance, it will only become more imperative for financial institutions to act on human rights and close the remedy gap. Those that adopt practices that center on people and their rights will be more likely to navigate this terrain effectively and avoid the costs and consequences of failing to do so – all while making the world a more just and sustainable place.
This article was co-authored by Davide Cerrato, Senior Policy Specialist, Human Rights and Social Issues for the Principles for Responsible Investment, and Rebecca DeWinter-Schmitt, Associate Director for the Investor Alliance for Human Rights.