PRI Warns Sovereign Debt Investors on Human Rights

UN body encourages engagement, due diligence; World Bank outlines sustainability bonds framework.

Two new reports provide sovereign debt investors with guidance on factoring human rights and climate-related risks into investment decisions.

The UN-supported Principles for Responsible Investment (PRI) released its ‘Human rights in sovereign debt: the role of investors’ report that highlighted the potential discrepancies between the attractiveness of a country’s sovereign bond and its human rights record. The report said that sovereign nations are the ultimate guarantors of human rights so the bonds they issue are a “logical focus for responsible investors” but this required more attention from investors.

PRI said despite the UN Guiding Principles on Business and Human Rights (UNGPs) clarifying links between business and human rights, there is no specific guidance that addresses the role of investors, including those who fund sovereign debt. This means that investors must often make judgement calls on where to place capital.

The report gave examples of where the political stability and human rights records of sovereign issuers’ could be seen as too toxic for investors, including Venezuela and Belarus.

The PRI report said there were numerous barriers to investor consideration of human rights including the lack of leverage compared with investors in corporate bonds and the potential knock-on effects of reduced public funding.

Other issues included the difficulty of finding an alternative asset to buy in a variety of situations.

“The PRI recognises that signatories are at different stages of embedding human rights as a component of responsible investing,” said the report. It recommended a three-step process to ensuring adherence to human rights principles when investing in sovereign debt, starting with the adoption of policies that show commitment to respecting human rights. Step two was completing due diligence, including data collection and analysis to make informed decisions, and engagement efforts.

The third step was to enable access to remedies when business-related human rights abuses take place within a sovereign’s territory. “Remedy could involve apologies, financial or non-financial compensation or punitive sanctions. States can also implement measures or adopt policies to address a broader range of human rights issues,” it said.

Human rights in focus

The PRI paper goes on to tell investors to “lend with strings attached” and improve communication and scale-up engagement with sovereign issuers.

“Investors in sovereign debt face unique challenges when considering human rights,” said PRI’s statement on its report. “Like all fixed income investors, they do not own a stake in issuers, making engagement more challenging than for equity investors. Additionally, pressing a state on human rights violations can raise political sensitivities around issues of sovereignty.”

Last month, the PRI announced the launch of an initiative to help investors address human rights and social issues through stewardship activities. It will follow steps laid out in its recent paper Why and how investors should act on human rights.

The Global Reporting Initiative’s (GRI) also launched sustainability reporting standards in October 2021, which were aimed at human rights-related information flows to investors while simultaneously improving overall transparency and governance of corporate impacts on the environment and society.

Climate-related exposures

Separately, the World Bank has provided institutional investors with guidance on how to assess the contribution of sustainability-linked bonds (SLBs) issued by sovereigns to tackling climate change and biodiversity loss in its new ‘Striking the Right Note: Key Performance Indicators for Sovereign Sustainability-Linked Bonds’ report.

“Governments globally are looking for new financial instruments to address the triple crisis of unprecedented debt levels, climate change, and nature loss,” said a blog post accompanying the launch. “Sovereign bonds – representing almost 40% of the US$100 trillion global bond market – are the largest asset class in many institutional investors’ portfolios,” it added.

The World Bank highlighted SLBs, which incentivise borrowers to achieve key performance indicators in sustainability, as a growing part of the corporate debt market now being considered as a key area for sovereign issuers.

Last year the Assessing Sovereign Climate-related Opportunities and Risk (ASCOR) framework was launched to help investors manage their ESG exposures in the sovereign space. ASCOR was designed to “enable investors to measure, monitor and compare sovereign issuers’ current and future climate change governance and performance fairly and appropriately”.

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