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criteria been replaced by the “responsibility” criteria in business?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."
***
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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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/
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The Equator Principles: http://www.equator-principles.com/