Thursday, January 28, 2021

Brief Consideration of the Report: "How are European financial institutions addressing human rights in their activities?" Prepared by the Geneva Center for Business and Human Rights and Team Löning


The Geneva Center for Business and Human Rights and the Löning Consultancy  have recently released a report: How are European financial institutions addressing human rights in their activities? (January 2021) which they describe in their January 2021 Newsletter this way:

We completed a baseline study on human rights in the finance sector together with Team Löning. The study was supported by Luxembourg for Finance (LFF). Our findings were summarized in this report and we presented them at LFF’s Sustainable Finance Forum.

The Report strikes a hopeful note--a strategically necessary choice. Writing the Report's foreword, Nicolas Mackel (Luxembourg for Finance, CEO) explains: "Finance is at a watershed moment. .  . . The study shows that while the ‘S’ in ‘ESG’ has not yet taken off fully, financial services’ awareness of these factors are growing and it is increasingly being incorporated into business decisions." (Report, p. 3).
The Report is quite welcome for at least two reasons.  The first is that, especially for both qualitative but especially quantitative projects, the development of a baseline study is essential for measuring.  That measuring can be qualitative--in the style of traditional human rights and sustainability analysis,.  It can also serve as  useful purpose for measuring quantitatively.  For data driven efforts this is essential--whether these efforts are directed at compliance measures, at developing models for purposes of predictive analytics, or for the purpose of developing ratings systems from which punishments and rewards systems may be created and imposed.  In the case of financial institutions and their clients, the punishments and rewards are likely pricing and market oriented--and it may well focus on using these measures to align the cost of capital with the quantum of harm measured.  The second is that it points to the regulatory trajectories of business and human rights.  These suggest the ways that an effective regulatory system for economic activity within global production is impossible relying solely on one governance actor, or targeting one factor (or one institutional element)  of global production.  Rather global production regulation is necessarily a composite of private law, of the embedding of delegated public governance objectives in the relations among institutions that function along the production chain but in different roles, and that such governance is ineffective in the absence of strong data based foundations. 

At the same time it provides a template for the development of conditions based lending that better aligns the practices of the private sector financial institutions with that of public sector international financial institutions--particularly the world Bank and IMF.  In this way, the GCBHR project nicely aligns with the general trajectory of convergence between public and private governance organs in their cultures and practices.  It also aligns with local cultural characteristics, the continuing movement toward social credit and data driven governance rounded in modeling against an ideal type and based on the regulatory effect of rewarding or punishing acts that are counted towards achieving or deviating from that ideal.  In this sense, then, the project also contributes to the greater alignment between Chinese social credit regimes and its liberal democratic markets driven privatized administrative compliance but analogues. 

Brief additional comments along with the Executive Summary, Key Findings,  and Recommendations of the Report follow.

1. Much of the Report covers ground well worn especially since the endorsement of the UN Guiding Principles for Business and Human Rights. A valuable contribution, though, is the focus on the human rights aspects  of sustainability, though its intimate connection with the environment--as John Knox was at some pains to point out in his work as the UN Special Rapporteur on Human Rights and the Environment (e.g., HERE)--is worthy of further attention. Indeed, if the Sustainability Development Goals did anything, it was to drive home the point that the silos created in the late 20th and early 21st century--a human rights  silo, an environmental silo, a climate change silo, a development silo, each presided over by their own elites jealously guarding their "territories"--presents a large obstacle to the realization of the hopes embedded in each.

2.  The objects of study are important.  To some extent they represent the vanguard forces of business inclined to reshape their cultures in ways that align--generally at least--with the outlooks and objective of those championing a very different approach to the valuation and operation of economic activity. As vanguard forces, their cultivation--rewarding appropriate actions and cajoling improvement--serves a broader purpose.  As the vanguard changes so do the expectations, the customs and traditions, within which business activity is undertaken, judged, and valued. 

3. The alignment of human rights with (1) board fiduciary duty (a national legal concept most relevant to certain OECD jurisdictions); (2) risk mitigation (though without distinguishing between legal and business risks); and (3) financial opportunity (the so-called business case for embedding human rights in production and operation) is considered an accepted and consensus approach.  And yet it is not.  That willingness to assume foundational basis for judging appears to present the temptation of transforming  the document and its report into a political expression.  That is, it presents these assumptions as an accepted basis of the ideal form of enterprise behaviors and then develops analytics around the concept.  But it might have been as useful to extract from the data a better sense of the connection between those assumptions (as working styles of these enterprises) and the realities of their operations.  In a sense that was doe, but one has to reverse engineer  the analysis to get there. 

4. There is a string tendency among those who advance knowledge in this field to all too quickly assume that the answer is more traditional law and state interaction, rather than to consider alternatives: delegated authority, reinforcing private law systems, and markets. That assumption than permeates the construction and interpretation of such reports  Right now there is a strong consensus belief in the power and utility of the legalization of the UNGP's second Pillar (corporate responsibility to respect human rights)--even as there remains an equally palpable reticence to push for both the legalization and implementation of the first pillar (state duty to protect human rights)  the failures of which remain the great elephant in the business and human rights field. It is not clear, and the report does not clarify, why exactly, the deficiencies well noted in this excellent report, inevitably lead to that flawed institution, and to national or international law (locally applied). That is an assumption--the value of rushing to state and national law, the failures of which originally prompted the movement toward international soft law and societal (markets) driven  alternatives--is surely worth testing.

5. To some extent the approach of the regulations look back toward a time  when one could rely on the certainty of state organs as a reliably authoritative and legitimate space for the construction of regulatory structures that could have real time and meaningful effect on conduct and operations in ways that could be measured.  To my taste, those are assumptions that effectively lost coherence died with end of the the last century. The obsession of law for lawyers is understandable--they are prisoners of the logic o their own field. The obsession of business people for regulation is also understandable--this is a pattern of engagement that is well understood and (to make the business case for the old fashioned regulatory model) its effects on  business operations has been minimized as it has been molded and applied in ways that align with economic purpose--or avoided. 

6. And yet it has become clear that the progeny of these systems--thier highest expression after centuries of moving toward the perfection of their states--has brought us to an era in which regulation and law are to some extent  enabling and constituting mechanisms but hardly effective tools for the governance of behavior that is complex, interconnected and quite dynamic.  Law changes at a glacial pace and must be written at a high level of generality; regulation moves at a snail's pace and though easier to apply to more local conditions cannot respond quickly to changes in behaviors, markets, tastes or practices. Business approaches this and has long played these temporal regulatory lapses to their advantage.  Who can blame them? On the other side states view even a flaws power to intervene as a means of indirect taxing of enterprises--to the extent that a law or regulation can be even imperfectly applied, or its treat alone, may be sufficient to extract concessions from (the larges) business that advantage the state with respect to objectives necessary to ensure popular stability and at least the appearance of a prosperity in which they had a hand.  Non governmental organizations are tempted by the ability to leverage their power through the invocation (indirectly) of the police power of states.  But to that end a certain level of internationalization is necessary--states that fail to conform to expectation can be made irrelevant when the (internationalized) domestic orders of more powerful or compliant states may be leveraged into a local context.  That is also fair. Yet together this produces the sort of games and gaps that brought the major stakeholders to the UNGP in the first place. 

7. Noticeably absent except at the margins, then, are the recognition of the centrality of the regulatory structures of data, data analytics, and modeling.  Data remains an object of use to the qualitative projects of norm embedding, and of traditional enforcement through the mechanics of the state (and its prosecutorial , administrative, and or judicial organs). Yet it has become clear that  data driven governance --even such governance grounded in the principles of human rights (translated into the language of compliance, accountability, and costing)--is likely to become the most effective forms of regulatory management of the challenges of human rights protection (much less the broader challenges of sustainability) in this field.

8.  The Report, effectively, beyond producing a brilliant examination of the state of affairs in this area and for unmasking the underlying premises and principles that guide the analysis (some of which I do not share), also effectively points ot the future.  And that future is grounded in the quantitative measures and the quantitatively enforced conditionality of governance--not through the majesty of law and the operations of the administrative state, but of the private law of lending. But that private law of lending is largely a function of the development of data driven analytics--and of rewards and punishments that result from quantitative triggers.  It suggests the need to develop mechanisms for quantifying human rights indicators and developing consensus on quantifiable triggers.  And it requires some sustained conversation about proportionality with respect to rewards and punishments. The Report points in that direction, certainly--especially with respect to its recommendation to regulators (some of them anyway) and to investees.  But reporting is the tip of the data driven governance iceberg.

9. Curiously, there was little mention of the human rights traps for human rights enhancing systems grounded in the harvesting and deployment of data.  Here one sees--if only in the somewhat modest role of reporting, a system for which potentially vast amounts of data are necessary.  Yet there is little here to suggest the range and importance of the human rights elements of such efforts. The human rights harming effects of data driven compliance meant (perversely) to enhance human rights compliance include more than issues of privacy.  They also touch on the protection and testing of the robustness of data and the potential bias in analytics drawn from data. Access to data is also not mentioned.  And yet that has become a substantially important issue as companies (and states) increasingly rely on banks of data whose contents are unknowable and the analytics of which are shrouded in mystery. Human rights defenders have little access to the data and there is no way to hold companies accountable for their use or misuse of data or the constriction of analytics. Perhaps a future report might touch on those issues.

10. There are some who consciously or not seek to transform the business sector (whether undertaken by public or private institutions) into privatized administrative agencies whose principal functions are measured by public objectives. That is certainly plausible, and there is evidence of some consensus among those who rule of of a movement toward that culture. The effects are substantial--with respect to the legitimacy of risk taking, with respect to the conceptions of the consumption of labor and capital (the former purchased the later invested, etc., But that movement also ought first to invite a more open debate around the question: what is the value that economic enterprises are meant to produce.  Traditionally they were meant to produce value to their key stakeholders and indirectly to society; if economic enterprises are now understood as producers of social value (however measured though that will be a challenge), then that suggests the transformation of conceptions of production, of the role of capital and the power of other stakeholders that will have to be undertaken. That conversation will be healthy. . . .and necessary.  But it ought not to be avoided by assuming it away.

11. The value of the report, however, should not be underestimated.  It is an important memorialization of significantly changing ways of viewing the world, and of acting on those views.  It serves as an important object around which solidarity in making making can be advanced. And its data and analysis will be immensely useful to all students in the field. 


Geneva Center for Business and Human Rights and the Löning Consultancy  Report: How are European financial institutions addressing human rights in their activities? (January 2021)

Executive Summary

In recent years, growing expectations of investors, asset managers, regulators, and civil society, have been putting increasing pressure on financial institutions to integrate sustainability considerations into their business models. As such, sustainable finance has been gaining traction, to the extent that today sustainable finance is considered by many to have gone ‘mainstream’.

While considerable attention in sustainable finance has been given to the ‘E’ dimension of ‘ESG’ (environment, social, and governance factors), not as much attention has been placed on the importance of the ‘S’ dimension, which includes human rights.

The objective of the research project described in this report is to document the current status of human rights implementation in the European finance industry, generate insights relating to the integration of human rights considerations into the activities of financial institutions, and offer guidance on how to advance human rights in the finance industry.

This research project focuses on banks and asset managers based predominantly in six European countries: France, Germany, Luxembourg, the Netherlands, Switzerland, and the UK. Based on data collected through 17 interviews that we conducted with industry experts, we constructed and then disseminated a survey with a view of establishing baseline data on the current status of human rights in the European finance industry. We received a total of 126 responses to the survey. The financial institutions represented in the data analysed had a total of assets under management (AuM) of approximately 14.5 trillion euros (14,500 billion euros) as of December 31, 2019. At the individual respondent level, 78% of respondents hold an executive level or other senior management position.


Key findings in brief:

1. Human rights are considered a key topic linked to financial institutions’ fiduciary duty, as well as to risk mitigation and the creation of opportunities for better financial performance. 

2. Key stakeholders driving the need to address human rights in financial institutions are clients and employees, alongside broader societal expectations. 

3. Governments should set clear legal standards by enacting mandatory human rights regulations - respect for human rights should not be left to voluntary initiatives alone.

4. Human rights are often addressed at top organisational levels, but organisational obstacles and gaps remain. Impediments to addressing human rights are mainly associated with a lack of time, lack of organisational knowledge, as well as a lack of human resources.

5. A clearer understanding of what is expected of financial institutions, as well as better and more reliable company data are needed for financial institutions to better address human rights.


* * * 

Recommendations (Report pp. 23-25)

1. Financial institutions

1.1.Human rights is a leadership matter. To address existing obstacles to the integration of human rights into their core activities, financial institutions need to allocate adequate resources, invest in building expertise on human rights, and assign clear responsibilities for human rights throughout all levels of the organisation. While top-level respondents show great awareness for human rights, they should make sure that the matter is driven through all decision-making levels at financial institutions.

1.2.Financial institutions will need to strengthen their reporting on human rights in light of upcoming regulations at the European level. Greater transparency over human rights due diligence will be mandatory.

1.3.Financial institutions should continue including and further integrating human rights considerations in their decision-making processes when working and engaging with investee companies and clients. Financial institutions should set clear expectations vis-à-vis investee companies on human rights matters; strive to incorporate human rights matters into their conversations with clients to better understand client preferences; and finance projects that take into account human rights considerations.

1.4.Financial institutions should activate their trade bodies to take a leading role. They should encourage their trade bodies to adopt industry standards for human rights due diligence to clarify expectations and create a level playing field.

2. Trade bodies

2.1.Trade bodies should take a more proactive roleto ensure that the human rights aspects of sustainability are adequately considered in the public debate, political considerations, and their members’ business operations.

2.2.Trade bodies should work with their members to develop industry standards for adequate due diligence and management processes, data generation, and reporting on human rights.

2.3.Trade bodies should support their members in gaining access to knowledge and best practices, possibly through trainings and workshops.

2.4.Trade bodies should be an active part of the conversations about the definition of data standards and data availability requirements for companies that will provide meaningful information to investors. At present, financial institutions lack clarity and data on companies’ human rights risk exposure and management capacity.

3. Regulators

3.1.Lawmakers should step up their efforts to advance the regulatory processes underway to create consistent regulatory standards at the European level. Regulations for financial institutions and multinational corporations should be aligned, consistent, and not contradictory in requirements, processes, and reporting.

3.2.Regulators should continue encouraging financial institutions to develop industry-specific reporting frameworks. These frameworks should incorporate metrics that capture companies’ human rights performance.

3.3.Regulators should inform the finance industry of upcoming regulatory initiatives and outline implications and expectations.

4. Investee companies

4.1.Whenever possible, investee companies should strive to provide meaningful data (ideally based on agreed upon industry-specific reporting frameworks) on their risk exposure and management capacity relating to human rights. Robust human rights due diligence will likely add to their competitiveness in investor decisions.

4.2. Investee companies should strive for consistent data provision and reporting on human rights across their industry, which may be achieved with the help of industry initiatives and trade bodies.

4.3.Investee companies should actively seek dialogue and engagement with their investors on human rights matters.

5. Clients

Clients should ask for sustainable financial products that integrate human rights considerations

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