This month, we interviewed Dorothée Baumann-Pauly, director of the Geneva Center for Business and Human Rights, about the ability of financial institutions to advance human rights and challenges to capture human rights performance. She also explains the influence of the new CSDD Directive on these questions.
Finance plays a crucial role in advancing human rights by providing the necessary resources and support for social and economic development, but how can financial institutions leverage their influence to address human rights violations in their portfolio companies?
Financial institutions are key players for advancing human rights in corporate practice. Through lending and investing activities, they are centrally involved in companies’ business operations.
In a case study of the Dutch bank ABN AMRO, for example, we documented how human rights can be integrated in lending practices. In the context of the bank’s commodity trade finance business with palm oil producers in Indonesia, the bank made compliance with international labor standards on palm oil plantations conditional for loans. The palm oil producers had to join the Roundtable on Sustainable Palm Oil (RSPO) and report on progress towards the RSPO’s standard. Producers that were able to demonstrate good progress were offered more favorable interest rates. Despite ABN AMRO’s indirect involvement, this conditional lending practice created leverage that enabled them to directly affect conditions on plantations.
For investments in Europe, considering ESG (Environmental, Social, Governance) data of companies has become mainstream. However, the S indicators in ESG need to improve dramatically to capture human rights performance and empower investors to reward the best performing companies.
Last year, the critique of ESG peaked with an article in The Economist which concluded that ESG ratings are broken. A main reason for the broken ESG system is the aggregate measures of all E, S, and G factors, which are incoherent and self-canceling. To address this, the main solution that has been put forward is to create more targeted sustainability funds, focused on one particular aspect of ESG.
The Economist summarily dismisses the S, urging an exclusive focus on climate – but I would like to see funds targeting many specific aspects of the E, and especially the S!
In conclusion, the solution is not to abandon ESG but to fix it.
Better indicators for S are possible. Earlier this year, we conducted a BHR Clinic with our students at UniGE to develop S indicators for security-related human rights risks in collaboration with the International Code of Conduct Association (ICoCA). The project demonstrated that industry-specific human rights indicators for investors can be developed, based on the premise that ESG has the potential to channel investments to companies that promote responsible private security arrangements and human rights.
What are the existing challenges and opportunities for investors in integrating human rights objectives? And how can investors become positive social contributors by using human rights as a lens?
A key challenge is the quality of existing ESG data. Investors currently don’t have good data on the S in ESG. In a 2017 report of the NYU Stern Center for Business and Human Rights at New York University, where I serve as the research director, we pointed out that S indicators are currently measuring what’s convenient and not what truly matters, namely actual outcomes and impact. Current S data also solely relies on company-own reporting, which does not provide the foundation for an objective company assessment. After all, investors don’t want to measure how well a company communicates but how well it is performing on a set of substantial indicators!
Admittedly, the S is harder to measure than the E or the G. Improving the lives of workers and communities may require the integration of qualitative indicators which don’t fit neatly into existing frameworks and rating methodologies.
However, diversifying data sources and including data from industry-specific multi-stakeholder initiatives are a way to substantiate outcome- and impact- oriented company assessments.
What are the key frameworks and guiding principles investors should be looking at when doing human rights due-diligence on the companies in which they invest or to which they lend?
There are many initiatives that have issued guiding principles for companies and investors. The UN Global Compact, the UN Guiding Principles for Business and Human Rights, or the Principles for Responsible Investments, provide a general compass for what is expected from companies and investors – but they all do not offer concrete industry-specific indicators that allow measuring performance as well as progress over time.
Currently the two dominant frameworks for corporate ESG reporting across the full range of topics are the GRI standards (more prevalent in Europe) and the SASB standards (more prevalent in the US). Moving forward, the EU is developing the European Sustainability Reporting Standards on a sector-by-sector basis and under the principles of “double materiality”, pursuant to the Corporate Sustainability Reporting Directive (CSRD). Double materiality ensures that companies focus on sustainability issues that are relevant for both, their financial performance, and their stakeholders. This also means that investors need to assess the material impacts of corporate operations comprehensively on shareholders and stakeholders.
One of SFG’s priority themes is Peace Finance, which is inherently linked to human rights questions. How do you see these themes as intertwined?
Respect for human rights and fundamental freedoms underpins democracy.
Democracies support the freely expressed will of the people and they create a climate that is favorable for international peace.
By respecting human rights, business can contribute to development, democracy, and peace.
Peace Finance is an entirely new field and more research is needed to better understand how companies can create peace-positive impacts. Existing ESG indicators that are related to peace, such as anti-discrimination, rule of law, and anti-corruption, need to be contextualized and assessed further to assure that they contribute to peace and development. Good practices such as proper stakeholder management or responsible supply chain management need to be tested in the field.
Given the urgency for understanding the role that responsible re-investments could play for stabilizing economies post-conflict, this is an important field for further research.
Recently, the European Parliament voted in favor of a new piece of legislation that would require EU companies to risk assess and prevent harm to human rights, the climate and the environment in their global value chains (Directive on Corporate Sustainability Due Diligence (CSDD Directive)), why it is important and how it can improve working and living conditions along global value chains?
The CSDDD changes the regulatory landscape for companies based in Europe and for companies that want to do business in Europe.
Covered companies will be obliged to conduct due diligence on actual or potential adverse impacts in their value chain (how far in the value chain is still under negotiation). “Adverse impacts” include core labor standards such as child or forced labor, but they also cover a wider range of social impacts, including violations of the right to a fair wage and a decent living; the right to safe and healthy working conditions; the rights to organize, strike and collectively bargain; and the right to enjoy traditional lands. Violating companies are subject to both administrative penalties in a member state’s supervisory authority (in Germany’s case, up to 2% of revenue and 3 years of disbarment from public contracts), and civil liability for actual damages in a member state’s court.
The devil is in the details – and the details have yet to be finalized, let alone litigated, but in principle the CSDDD will to some degree make human rights due diligence enforceable. The EU “trilogue” negotiations this summer over the final text of the CSDDD between EU commission, EU parliament, and EU Council will determine whether the financial sector will be included in the CSDDD.
What are the implications of the CSDD Directive for Swiss investors?
The CSDDD will also affect Swiss investors. Non-compliance with the CSDDD now creates financial risks for companies that investors need to consider.
The Commission projects that the CSDDD will cover about 4000 non-EU multinationals that have either 150 million euros in EU revenue; OR 40 million euros, with half of that revenue linked to the high risk sectors of food, apparel, or minerals (including derivative products).
The CSDDD draft also foresees a more expansive and active role for investors. Instead of simply disinvesting from environmentally or socially problematic companies, institutional investors and asset managers are expected to engage in stewardship and engagement strategies.
Does Switzerland have frameworks or initiatives in place to guide financial institutions in incorporating human rights into their investments and operational activities?
Swiss Sustainable Finance, Sustainable Finance Geneva, Building Bridges, and the Thun Group of Banks are important Swiss-based networks that can serve as platforms for financial institutions to develop sustainable finance strategies that are not just green but also just.
Geneva is a financial center and the world’s capital for human rights. This makes Geneva the ideal place to take on a leadership role for the development of more robust and industry-specific S indicator