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Human rights due diligence (HRDD) allows financial institutions to identify, prevent, and mitigate potential and actual adverse human rights impacts. 


These could be impacts relating to their own activities or directly linked to their financial operations, products, services, or business relationships. As stated by the UN Working Group on Business and Human Rights, HRDD ‘involves a bundle of interrelated processes’ that can be included within broader enterprise risk management systems, provided that this integration results in a focus on human rights impacts on people (i.e. beyond material risks to the company itself) and is aligned with the UNGPs. It can be divided into four main steps:


    

  • Human rights screening and risk assessment
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  • Taking action
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  • Monitoring
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  • Communicating and disclosing
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What is the scope of HRDD?


Under the UNGPs, HRDD should cover ‘all adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products, or services by its business relationships’. For a bank, this means looking at potential and actual adverse human rights impacts in all its roles, including:


    

  • Own business operations and consumer banking: this includes an FI’s role as an employer, as a purchaser of goods and services, and as a provider of banking services to individuals (e.g. consumer credit & overdraft, home loans and other housing-related credit).
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  • Lending and investment operations: this includes institutional banking activities such as corporate banking (lending and project finance) and investment banking (primary capital markets, debt (bond issuances) and equity (IPOs) among other services. This also includes the bank’s role as an investor. For more information, see the definitions of banking activities in the UNEP FI Impact Protocol.
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In cases where FIs have a large number of business relationships, such as very large portfolios of clients involving complex value chains, the UNGPs considers it reasonable to initially identify general areas where the risk of adverse human rights impacts is most significant. Impacts might be significant due to a client’s operating context, operations, products or services involved, or other relevant considerations based on context including geography, industry, and business model. Significant risk areas should be prioritised for human rights due diligence.


To be effective, due diligence needs to be owned at the executive and board levels, and performance should be measured and communicated to all levels of the organisation. Strong senior buy-in is important since this defines the scale and scope of human rights and environmental risk that a company will tolerate in an environment of rising legal and regulatory risk to the FI and client company.




What are some key HRDD principles?








Ongoing
Financial Institutions are expected to conduct ongoing due diligence, including before the transaction and throughout the lifecycle of the investment, loan, and/or business relationship. This also entails considering changes to the operating or relationship context.




Preventive and people centered
Financial Institutions should consider risks to both people and planet.




Dynamic
Financial institutions need to adjust HRDD based on emerging risks, portfolio composition, transactions and operating context, and lessons learned.




Risk-based
If multiple actual or potential impacts are identified, financial institutions should first seek to prevent and mitigate those that are most severe or where delayed response would make them irremediable. Prioritisation is not mandatory; the expectation is to address all the impacts.




Tailored
Financial institutions should tailor HRDD based on the size, composition and complexity of their portfolio and operational context.




Informed by meaningful stakeholder engagement
HRDD needs to be based on meaningful engagement with stakeholders, including affected or potentially affected right-holders, civil society organisations, human rights experts, trade unions etc.






 


How does HRDD relate to E&S Due Diligence?


In the financing context, policies and procedures, including environmental and social management systems (ESMS), often describe an overarching approach to environmental and social (E&S) due diligence which is typically applied to a client or on a transaction-by-transaction basis and which integrates E&S considerations at key stages of the financial process. This process often complements other transaction due diligence processes, including commercial, business integrity, and legal due diligence.


‘Due diligence’ is therefore commonly understood to primarily cover those actions taken by banks up to the point where the transaction takes place. The UNGPs encompass a broader process. Therefore, while in many cases, HRDD can be implemented through the improvement and supplementation of existing ESG due diligence systems, it is important to note that HRDD as envisaged by the UNGPs cannot be achieved through traditional ‘transactional’ due diligence alone.