Many of the direct human rights risks and issues faced by the finance sector are generic to all businesses, such as those relating to the treatment of employees, or to the development and communication of new products, or to labour relations in the supply chain when purchasing goods and services. A business can promote human rights by specifying contractual standards in these areas which ensure that human rights are met.
However, when providing funding or financial advice to a business client, a financial institution can be exposed to the human rights concerns which relate to that business and its sector. This is due to the provision of support being construed as an endorsement of the activities of the client, as well as facilitating the continuation and development of the business.
Although a bank does not have the same degree of influence and control over client activities as it has over its own workforce and suppliers, there is a risk it can be linked indirectly with human rights violations perpetrated by a client. For example, a financial institution may be implicated by association:
- If the security personnel of a mining company reacts violently to on-site protests from local residents opposed to a mining development project which the bank is funding
- If general corporate funding is provided to a manufacturing company which has a reputation for compromising health and safety standards to maximise profits
- If project finance is provided for a new dam which will lead to forced relocation of indigenous people.
Similarly, financial institutions may also have contractual relationships with states or state entities. If the state has a poor human rights record, any bank providing funding may be perceived as complicit in the related human rights abuses. Banking licences generally require a degree of active support for the state (for example, by purchasing government bonds) which may incur particular reputational risk to the bank. However, routine payment of taxes is generally less sensitive.
This tool does not specifically address retail customers and human rights issues. However in relation to retail customers, financial institutions should be aware of issues such as:
- Access to banking (eg provision for low-income or vulnerable customers/potential for discrimination in service provision)
- Financial literacy (eg support for financial education initiatives to assist customers in managing their money)
- Consumer indebtedness (eg prevention/management/advice for customers who experience financial difficulties)
- Customer service (responsible marketing and communications/provision of best advice/potential for mis-selling/complaints handling)
- Money laundering (banks may be used to move money between countries for illegal purposes,)
The tool may also be useful for asset management analysts and portfolio managers in considering issues such as:
- Investments in companies associated with human rights controversies
- Socially responsible investment (SRI) funds will take account of corporate approaches to human rights when making investments or deciding whether to retain or sell company shares. (Whilst many mainstream investors do not acknowledge there is a material correlation between corporate responsibility and financial performance, SRI is increasing at a steady rate.)
Asset Management example:
Public pension funds may apply human rights parameters to their portfolios, eg: the investment guidelines of the Norwegian Government Pension Fund [US$525 billion] preclude investments judged to carry unacceptable risk of association with human rights violations.
When evaluating the risks and opportunities of specific transactions, operational decisions or business relationships, banks can take reasonable steps to identify and assess material human rights aspects. Areas to take into account are identified below. Further information on many of the issues is included in the tool, and there are helpful references in the Resources section. It should be noted that banks can have positive as well as negative human rights impacts. For example, access to banking in less developed countries has a very positive impact for communities.
Region/geography
- Nature of government (democratic/undemocratic; stable/unstable)
- Presence of internal/external conflict or oppression
- Presence of abuses of internationally recognised human rights
- Indebtedness/capability of local infrastructure
- Endemic corruption
- Presence of international sanctions
- Capital flight
Business/sector
- Region of operation (eg: presence in areas demonstrating weak governance/poor human rights record)
- Potential for products/services to be associated with human rights abuses (eg: defence sector equipment)
- Working conditions(eg: health and safety/working hours/remuneration)
- Profile of workforce (eg: diversity/male-female ratio/minimum age)
- Management practices and governance (eg: staff training/transparency/identification and mitigation of significant adverse human rights impacts of the business/promotion of good practice)
- Relevant codes of conduct (specific to the business or sector)
Project/facility capital
- Reputation of project sponsors/government/lenders involved
- Relocation of people/impact on indigenous communities
- Potential damage to important historical/cultural/nature sites or community property or the environment
- Consultation with affected groups and communities
- Human rights impacts taken into account by project sponsors (particularly where local legislation is ineffective or below international standards)
- Compliance, where relevant, with environmental and social impact assessment standards and principles (eg: IFC Performance Standards/Equator Principles)
- Security of site, plant and equipment and access to site
General Corporate Finance
- Overall conduct and reputation of company
- Association with controversy or poor practice
- Existence of human rights related policies
- Existence of effective governance procedures
- Extent and transparency of reporting
