The Financial Sector, Business and Human Rights: International Voluntary Human Rights Standards for Business and Finance

The importance of the financial sector for the global economy and general well-being is undeniable. It plays a central role in contributing to the reduction of poverty and inequality, and to economic growth. Conversely, its potential negative impact has been proven by the financial crisis that began in 2007/08. The financial sectors importance to economic and social development means that the companies in the sector are key players when it comes to business and human rights. PLMJ aims, in this series of articles, to contribute to the debate on the financial sectors role in business and human rights.

This first article will review the application of the most significant international voluntary standards affecting business and human rights with regard to finance: the United Nations Guiding Principles on Business and Human Rights (UNGP) and the OECD guidelines, in particular the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) and the Due Diligence for Responsible Corporate Lending and Securities Underwriting report (the OECD Report) Despite not being hard law, the UNGP and the OECD Guidelines have served as the basis for policy requirements and even national and European binding law. One example of this is the proposal for an EU Directive on Corporate Sustainability Due Diligence (DCSDD), published in February 2022.

In June 2011, the UNGP were endorsed by the UN Human Rights Council (UNHRC), based on the Protect, Respect and Remedy Framework. The UNGP provide that companies are required to comply with the applicable legal framework and to respect human rights, regardless of the governing law requiring them to do so. For that purpose, companies should, among other obligations, adopt a human rights due diligence process to identify, prevent, mitigate and account for how they address their impact on human rights. The due diligence process should consider the human rights impact that the company may cause or contribute to through its own activities, as well as those actions which through its business relationships may be directly linked to its operations, products or services, even if they did not cause or contribute to those impacts directly. Additionally, companies should provide for or co-operate in the remediation of adverse human rights impacts that they have caused or contributed to.

The application of the UNGP to the financial sector, however, was not evident. Following the publication of the UNGP, an informal group of banks the Thun Group of Banks gathered for the first time to establish a consensus about the application of the UNGP to the banking sector. Two discussion papers have been released, one in 2013 and another in 2017. Under the latter, the Thun Group limited the application of the UNGP to the financial sector by, among other things, arguing that, in general, banks would not be causing or contributing to adverse human rights impacts other than from their own employment practices. Hence, the Thun Group considered that a bank could, in general, be directly linked to an impact arising from clients' operations but should not be held to be contributing to that impact. Thus, it did not have a responsibility to provide a remedy, but only to prevent or mitigate the impact. Moreover, the Thun Group introduced the concept of proximity to the impact to establish the degree of the direct link.

These claims were widely contested. Of particular note was the position of the Office of the United Nations High Commissioner for Human Rights (OHCHR). The OHCHR's position is that, if it is necessary to prioritise the banks due diligence efforts, the due diligence process should provide for a minimum level of screening for all types of activities and a more focused analysis for high-risk clients and transactions. The OHCHR rejected the proximity criteria. In addition, it detailed how banks may cause, contribute to, or have a direct link to adverse impacts, and it clarified that banks can contribute to or be directly linked to an adverse impact caused by their clients' activities.

The OECD Guidelines were revised in 2011 to include due diligence recommendations in accordance with the UNGP and are applicable to the financial sector. Moreover, in 2019, the OECD published the OECD Report, in which it presented a recommended common global framework addressed to financial institutions for the implementation of the due diligence recommendations of the OECD Guidelines in the context of corporate lending and underwriting activities. In these recommendations, a similar position to the United Nations High Commissioner for Human Rights was adopted as regards risk-based due diligence. There is no mention of the proximity criteria. Furthermore, it is argued that banks may contribute to the adverse impacts caused by their clients activities, even though the majority of cases can be classified as a direct link. A description of factors that should be considered by the bank to determine whether it substantially contributed to that impact is provided.

The position of the Thun Group as regards the application of the UNGP and, consequently, the OECD Guidelines was contested, both by the UN bodies and the OECD. Considering that the UNGP and the OECD Guidelines served as basis to draft the proposal for the DCSDD, this discussion is likely to be revived throughout the coming year. In the next article in this series, PLMJ will analyse how the proposal for the DCSDD imposes due diligence obligations on banks.