HUMAN RIGHTS AND ECONOMY: FINANCIAL STANDARDS

G. NICCHIA 11th November 2010 Human Rights and Economy Discussing the Research-Objectives and Program: Designing the Roadmap

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HUMAN RIGHTS AND ECONOMY: FINANCIAL STANDARDS

As it has been stated in previous speeches, the globalization of the economy challenges the

effectiveness of human rights protection. Large multinational corporations have been

criticized for violations of human rights especially in developing countries. Among them

banks and financial institutions are charged of the accusation of financing directly and

indirectly economic activities which continuously endanger human rights protection.

Over the past few decades a number of frameworks and toolkits have been adopted at the

international and European levels in an attempt to define the responsibilities of business,

principally based on the concept of “corporate social responsibility”. CSR is “a concept

whereby companies integrate social and environmental concerns in their business operations

and their interactions with their stakeholders on a voluntary basis”.

These frameworks and toolkits contain the so called “financial standards”: a set of principles

adopted voluntarily by governments, transnational corporations and financial institutions

which includes human rights respect and promotion. Adhering institutions commit themselves

to endorse sustainable investments‟ policies in their activities.

Why should companies and, in our specific case banks and financial institutions, adopt these

standards which are sensitive to reduce their business and profits? Has the “profitability”

criteria been replaced by the “responsibility” criteria in business?

First of all, it can be advantageous to the companies themselves to create social policies and

practices that go beyond their legal obligations and responsibilities as it can have a positive

impact on the company‟s reputation and profitability. Consumers, for instance, are more

likely to buy goods and services from companies with a reputation for good ethical behavior.

Other benefits might include an increased sense of loyalty and pride in the company‟s

workforce. Social irresponsibility, such as environmental damage or complicity in human

rights abuses, on the other hand, can lead to bad publicity and a consumer backlash, thereby

undercutting profitability. The adoption of CSR policies is presented as being the rational

economic choice for businesses. As stated by Jon Williams, CEOs of HSBC “no client and no

one piece of business is worth risking the reputation of the bank for”.

Secondly, these standards are essentially soft law instruments or voluntary codes of conduct

which lack effective judicial or other legally binding mechanisms to protect victims of abuses

by business, do not usually provide adequate guidance to business on measures that should be

taken to avoid human rights abuses, do not foresee implementation monitoring or compliance

procedures.

***


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The aim of the present analysis is to list and classify the existing financial standards,

underlying strengths and weaknesses of such set of principles.

The most adequate classification to the today intent, is based on the standards‟ extent in terms

of economic activities towards which they are pointed. There can, in fact, be sector-wide

initiatives endorsed by or indirectly addressed to financial institutions and sector- specific

guidelines for financial industry (Table 1).

The list is not exhaustive and I would spend few words on each standard trying to be concise

considering the limited time at our disposal.

As for the first list is concerned (Table 2), it includes:

The OECD Guidelines for Multinational enterprises (1976). These guidelines are the

only comprehensive, multilaterally-endorsed code of conduct for multinational

enterprises. The guidelines are voluntary principles and standards that adhering states

undertake and are meant to represent good practice for companies operating both

nationally and internationally. They were updated in 2000 and cover a broad range of

issues in business ethics, including sustainable development and respect for human rights.

Once adopted by the States, the Guidelines are essentially recommendations addressed by

governments to multinational enterprises which aim to ensure that the operations of these

companies are in harmony with government policies, and to enhance the contribution to

sustainable development made by multinational enterprises. Thus, the Guidelines both

complement and reinforce private efforts to define and implement responsible business

conduct even promoting an intense social dialogue on what constitutes good business

conduct among States, OECD and all the stakeholders concerned.

The ILO’s Tripartite Declaration of Principles Concerning Multinational

Enterprises and State Policy (1977). This declaration brings together States, businesses

and employers in an attempt to address concerns about the role of multinational

corporations. The Principles are an important exception to the usual practice of the

Organization which usually promotes international agreements among States with no

provisions that can be applied to businesses themselves. The Principles have been updated

in 2000 and their aim is to encourage positive contributions from multilateral corporations

to economic and social progress. The Declaration calls upon multinational corporation to

respect the Universal Declaration of Human Rights, the International Covenant on Civil

and Political Rights and the International Covenant on Economic and Social Rights.

The United Nations Global Compact (2000). Companies are expected to make a general

commitment to support, respect and promote internationally recognized human rights.

The Global Compact will be the core issue of a following speech, so I would just point


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out that it introduced the concept of “sphere of influence”, whereby companies are

encouraged to promote respect for human rights to other companies that they may work

with including suppliers, contractors and sub-contractors. It sounds particularly

interesting for financial institutions since, by definition, their activities foresee the

interaction with other companies. By adopting strict loans‟ criteria, such as the respect of

human rights and the environment, they can influence companies‟ conduct and activities.

By 2008, 4 000 companies had signed up to it.

The United Nations Norms on the responsibilities of transnational corporations and

other business enterprises (the Norms, 2003). The Norms, which have never been

adopted by the UNGA, were drafted with strong language, placing an obligation on

businesses “to promote, secure the fulfillment of, respect, ensure respect of and protect

human rights”. This effectively would have given businesses the same duties as states in

certain areas of human rights in the sense that they are required to positively ensure that

rights were realized in their sphere of control. The Norms indicate both businesses‟

general obligations towards their employees and/or partners and more specific obligations

such as those related to the environmental protection. Businesses were expected to

“refrain from any activity which supports, solicits or encourages states or any other

entities to abuse human rights” and to ensure that the products and services that they

created did not contribute to human rights violations. As already stated, the Norms were

never adopted by the United Nations General Assembly, due to strong opposition from

states and business leaders, and for some time no progress was made on the international

arena. Recently the debate moved on with the discussion in the “Protect, respect and

Remedy” policy framework, proposed by Professor John Ruggie, appointed as Secretary

General‟s Special Representative. The new framework rests on three pillars:

- the state duty to protect against human rights abuses by third parties

- the corporate responsibility to respect human rights

- greater access by victims to effective remedies, judicial and non-judicial.

Finally, “doing no harm” is not merely a passive responsibility for firms but may entail

positive steps - for example, a workplace anti-discrimination policy might require the

company to adopt specific recruitment and training programmes. Similarly, a positive step

for financial institutions is seeking to ensure and monitoring the compliance with human

rights standards in the conduct of the projects they support.

As for the second list is concerned (Table 3), it includes:

The Equator Principles (2003). They were originally drafted by four banks – ABN

Amro, Barclays, Citigroup, and WestLB – and were based on the policies and guidelines

of the World Bank Group‟s International Finance Corporation (IFC). The Equator

Principles target one financial instrument, project finance, and set minimum standards for


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human rights, transparency and environmental compliance of investment ventures in

developing countries. These Principles are today adopted by over sixty five financial

institutions (they were already over forty during a three-year implementation period)

which are together responsible for over 80 per cent of global project finance. In 2006 the

Principles were revised and their scope is really widening. They now apply to all project

financings with combined project capital costs above US$10 million, and across all

industry sectors. A number of Equator Banks apply the Equator Principles to projects

with a capital value of less than US$50m whereas others have extended a form of Equator

Principle assessment („Equator-Lite‟) to other areas of banking, such as credit finance, or

incorporated it into their general sustainable banking programmes. The Equator Principles

require the Equator Banks to categorize projects according to social and environmental

impacts (category A = most vulnerable; category C = least vulnerable) and to screen

projects according to a number of social and environmental criteria. Where the project is

based in middle or low income countries, there is also a requirement to an additional

screening in accordance with the IFC Safeguard Policies. Depending on categorization,

there are requirements on borrowers for environmental and social impact assessment,

environmental management plans („EMP‟) and decommissioning plans, compliance with

the EMP and periodic reporting on compliance.

The Global Reporting Initiative (GRI), Financial Services Sector Supplement (GRI

FSSS). The GRI Reporting Framework is intended to serve as a generally accepted

framework for reporting on an organization‟s economic, environmental, and social

performance. It is designed for use by organizations of any size, sector, or location. This

initiative has been the frontrunner in setting the standard for corporate reporting and

transparency, by providing businesses with a model of full disclosure that has been agreed

by a wide range of stakeholders around the world to be generally applicable for reporting.

This Reporting Framework contains general and sector-specific content and a set of

sustainability reporting guidelines adapted to the financial sector have been recently

established in the Financial Services Sector Supplement. The organization‟s sustainability

performance is assessed in terms of human rights, environmental, labor, social and

economic indicators.

The Carbon Principles and Enhance Diligence Process (2007). The adopting financial

institutions have come together to advance a set of principles for meeting energy needs in

the United States that balance cost, reliability and greenhouse gas concerns. The Carbon

Principles represent the first time that financial institutions, advised by their clients and

environmental advocacy groups, have jointly committed to advance a consistent approach

to the issue of climate change in the US electric power industry. The Enhanced Diligence

Process evaluates the ability of the proposed financing to meet financial requirements

under a range of potential GHG emissions assumptions and parameters. These

assumptions will include policies regarding CO2 emission controls and potential future


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CO2 emissions costs as well as the costs and feasibility of mitigating technologies or

other mechanisms. Financial institutions that adopt the Principles implement them with

the accompanying Enhanced Diligence Process, while consulting with environmental

groups and energy companies. In order to expand the range of investment decision, the

adopters (Bank of America, CITI, Credit Suisse, JP Morgan Chase, Morgan Stanley,

Wells Fargo) commit to encourage clients to pursue low carbon generation, evaluate the

financial and operational risk to fossil fuel generation financings, educate clients,

regulators, and other industry participants regarding the additional diligence required for

fossil fuel generation financings, and encourage regulatory and legislative changes

consistent with the Principles.

The UN Principles of Responsible Investment (UNPRI, 2005). The UNPRI were

developed by an international group of institutional investors reflecting the increasing

relevance of environmental, social and corporate governance issues to investment

practices and the entire process was convened by the United Nations Secretary-General.

These are a set of voluntary principles, endorsed by signatories in the financial sector,

which commit their institutions to integrating Environmental, Social and Governance

(ESG) issues into all aspects of their operations, in order to act in the best long-term

interests of their beneficiaries. Institutional investors are the primary target group, and the

initiative provides both a framework and a forum (the UNPRI Clearinghouse) for

investors to guide their efforts toward integration of ESG in their decision-making and

share experiences in the field.

The United Nations Environmental Programme Financial Initiative (UNEP FI

1997). UNEP FI is a global partnership between UNEP and the financial sector. Over 190

institutions, including banks, insurers and fund managers, work with UNEP to understand

the impacts of environmental and social considerations on financial performance. The

UNEP FI Statements represent the backbone of the Initiative. By signing up to the

Statements, financial institutions commit to the integration of environmental

considerations into all aspects of their operations. They firstly, openly recognize that

sustainable development depends upon a positive interaction between economic and

social development, and environmental protection, to balance the interests of this and

future generations and, secondly, officially state that sustainable development is a

collective responsibility of government, business, and individuals.

***

Codes and standards related to Business/Financial business and human rights have

proliferated in recent years. Despite the huge importance of these standards, the current

international framework for governing businesses in relation to human right is extremely

weak. It is almost entirely based on a mixed bag of soft law principles, voluntary corporate


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social responsibility initiatives and toolkits, without any effective judicial mechanisms or any

adequate sanctioning or reparation system to ensure that businesses respect human rights.

This ordinary remarks opens dramatically the doors to permissive environment and social

abuses by companies of all kind.

If we do investigate, for instance, on the “sustainability” policies of three of the leading banks

in Europe, we can state that these financial institutions have formally adopted most of the

tools above analyzed (Table 4).

At the same time, the three banks are involved in projects and activities considered

“problematic” in terms of “sustainability” (Table 5).

A number of criticisms have thus invested the standards above mentioned. Especially NGOs

operating in the environmental and human rights protection, pointed out the wide range of

weaknesses affecting the effectiveness of such standards. It has been criticized, for instance,

the lack of transparency and accountability of the Equator Principles and the vague

terminology and the lack of specificity in the case of the OECD Guidelines for MNEs. The

only instrument providing strong and unambiguous terminology are the UN Norms, and it is

not by chance that they have never been adopted.

As assessed by the Corporate Responsibility Coalition of the major environmental, human

rights and humanitarian NGOs in the publication “A big Deal?” “ none of the current array of

international CSR initiatives in the financing sector, ranging from the UN Global Compact‟s

Financial Institutions Initiatives to the Equator Principles has proved capable of preventing

serious problems and abuses they purport to address”.

Voluntarism and non binding mechanisms are still the basis of financial standards‟

implementation and compliance. Implementation and monitoring systems are not widespread

and, where provided, they are ineffective and can be easily eluded. The credibility of some

initiatives, such as the Global Compact, the UN Norms and the Carbon principles, is

questioned by the absence of an effective non-compliance mechanism. In other cases, where

reporting and monitoring systems are provided, these are weak not binding instrument

partially fulfilled by the institutions they are addressed to (Table 2 and 3)

The OECD Guidelines, for instance, considered the most developed monitoring mechanism

that assesses business and human rights, oversee the National Contact Points (NCPs)

established by adhering states. The NCPs are tasked with promoting the Guidelines and

producing an annual report on their implementation. But not all adhering states have

established NCPs and their function and effectiveness varies from state to state. In states

where they do exist, they are often placed in the government department tasked with

promoting business, trade and investment which means there can be a significant conflict of

interest. Finally, the NCPs have little power to take action where they find that a company has

been involved in human rights abuses.

Moreover, the ILO also calls for a periodic survey on the implementation of the principles

stated in the Tripartite Declaration and no further mechanisms to ensure compliance are

provided. As with the OECD Guidelines, the submission of periodic survey is entirely


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voluntary. It is only a declaration of principles, and it lacks the legally binding status of an

international treaty.

Finally The UNPRI charges participants with reporting on how they implement the

Principles, or provide an explanation where they do not comply with them.

Slightly different is the Equator Principles’ requirement. They require annual reporting but

also detailed environmental and social impact assessment (ESIA) studies, and, where

appropriate, mitigation and management plans, disclosure and consultation with affected local

communities, grievance mechanisms, and independent monitoring. Moreover, the EPs have

formally adopted new Governance Rules from 1 July 2010. The Rules are the result of several

years‟ intensive work by the Equator Principles Financial Institutions (EPFIs) and form the

basis of the newly created Equator Principles Association, established to confirm the purpose,

operation and management structure of the Equator Principles formalizing a public reporting

on EP implementation in order to ensure that EPFIs meet their responsibilities. As it has been

stated by Shawn Miller, Chair of the EPFI Steering Committee and Citi‟s Environmental and

Social Risk Management (ESRM) Director "The Equator Principles have had deep and lasting

positive impact on the global financial services sector: the Principles are now one of the most

successful voluntary environmental and social risk diligence frameworks in the sector, with

the number of adopting institutions growing every year since their launch in 2003. The Rules

significantly strengthen the Equator Principles, and the new governance framework ensures

that there are effective decision making procedures for the enlarged group of adopting

institutions. The Rules will make us more efficient as we continue to grow, and members will

be held accountable to them. We believe that the Rules are an important step forward in a

broader strengthening of the Association‟s governance and EP implementation."

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To conclude, I just want to launch few questions: is there a step forward for business, NGOs,

International Organizations and civil society on the bumpy road towards the full integration of

social, environmental and human rights issues into financial activities? Considering the

importance and the increasing acceptance of sustainability and responsibility principles in all

economic activities, is it possible to switch from the voluntarism to regulation?

Arguably, these questions could represent the starting points of future analysis on Financial

Standards.


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Table 1. Standards' classification

Standard's extent

Sector-Wide Sector-specific

Sta

nd

ard

s

OECD Guidelines for Multinational enterprises

UNEP FI

ILO's Tripartite Declaration of Principles Concerning Multinational Enterprises and State Policy

UNPRI

UN Global Compact Equator Principles

UN Norms The Carbon Principles and Enhance Diligence Process

Global Reporting Initiatives GRI Financial additional supplement


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Table 2. Sector-wide Standards

Standard Year Promoter Nature Addressees Adhesions/Adherence Monitoring mechanisms and non - compliance

procedures

OECD Guidelines for MNEs 1976

updated in 2000

OECD Voluntary principles, reccomandations to

MNEs

Governments and indirectly MNEs

42 States National Contact Points and annual report on

the implementation

Tripartite Declaration of Principles Concerning Multinational

Enterprises and State Policy 1977 ILO

Declaration of Principles

States, businesses and employers

Adopted by the ILO's governing body

Periodic survey on the implementation of the principles

Global Compact 2000 UN Code of conduct Companies, governments,

labour, civil society organizations

40,000 companies NO

Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with

regard to Human Rights

2003

UN (Commission on Human Rights, Sub-Commission on the

Promotion and Protection of Human

Rights)

Norms (never adopted by the United Nations

General Assembly)

MNEs - NO


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Table 3. Sector-specific Standards

Standard Year Promoter Nature Addressees Adhesions/Adherence Monitoring mechanisms and non-

compliance procedures

Equator Principles 2003

(revised in 2006)

World Bank IFC Voluntary Principles Financial institutions over 65 FIs

Detailed environmental and social impact assessment (ESIA) studies, mitigation and

management plans, disclosure and consultation with affected local

communities, grievance mechanisms, independent monitoring, annual reporting

and, from 1 July 2010 new governance rules and newly established Equator

Principle Association formalizing a public reporting on EP implementation

GRI ans GRI Financial Services Sector

Supplement

GRI 1997/GRI

Supplement 2002

Global reporting initiatives

Sustainability reporting guidelines

Corporations, governments, NGOs, consultancies,

accountancy organizations, business associations, rating

organizations, universities and research institutes

financial institutions within the broad GRI network

- -

Carbon principles 2007

Signatory financial institutions advised by

their clients and environmental

advocacy groups

Voluntary principles Financial institutions

Bank of America, CITI, Credit Suisse, JP

Morgan Chase, Morgan Stanley, Wells Fargo

Enhance diligence process but framework does not set new rules or compliance

standards

The UN Principles of Responsible Investment

(UNPRI). 2005 UN Secretariat Voluntary principles Financial institutions

835 signatories three major cathegories:

asset owners, investment managers

and professional service partners

Periodic reports on implementation or explanation of the lack of compliance

Statement by FIs on the Environment and

Sustainable Development and

Statement of Environmental

1997 UNEP FI

Statement voluntarly signed by

Fis

Institutions, including banks, insurers and fund managers

Over 190 Institutions, including banks,

insurers and fund managers

The UNEP FI is itself a leading provider of reports, information and guidance tools for

investment actors


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Commitment for the Insurance Industry


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Table 5. Banks and Project

Projects

Banks

ING Group Netherlands

Deutsche Bank Germany

BNP Paribas France

Kashagan oil project - Kazakstan

+ - +

Cluster Munitions producers -

International + + +

Patagonia Dams: HidroAysén -

Chile + + +

Nam Theun 2 hydropower project

- Laos + - +

Table 4. Banks and Standards

Standards

Banks

ING Group Deutsche Bank BNP Paribas

UN Global Compact + + +

Equator Principles + - +

UN PRI + + +

UNEP FI + + +

GRI + + -


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John Ruggie, Promotion and Protection of All Human Rights, Civil, Political, Economic, Social and

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John Ruggie, Report of the Special Representative of the Secretary-General on the issue of human

rights and transnational corporations and other business enterprises, UN Human Rights Council, 9

April 2010.

Paul Watchman, Banks, Business and Human Rights, Butterworths Journal of International Banking

and Financial Law, February 2006.

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Web sites

BankTrack: http://www.banktrack.org/

Campagna per la Riforma della Banca Mondiale: http://www.crbm.org/

EP Governance Rules: http://www.equator-

principles.com/documents/EP_Governance_Rules_June%202010.pdf

Les Amis de la Terre: http://www.amisdelaterre.org/

The Carbon Principles: http://carbonprinciples.org/

The Economist: www.economist.com

The Equator Principles: http://www.equator-principles.com/

http://www.banktrack.org/

http://www.crbm.org/

http://www.equator-principles.com/documents/EP_Governance_Rules_June%202010.pdf

http://www.equator-principles.com/documents/EP_Governance_Rules_June%202010.pdf

http://www.amisdelaterre.org/

http://carbonprinciples.org/

http://www.economist.com/

http://www.equator-principles.com/

Documents

HUMAN RIGHTS AND ECONOMY: FINANCIAL STANDARDS