Pix Credit: Photo: Uighur protest outside the White House in 2009 | Malcolm Brown / Flickr
One of the most potently important developments over the course of the last several years has been to shift the focus of business and human rights enforcement from operating companies to the financial sector from which operating companies derive capital. More interesting still has been the way in which that connection between human rights violations of operating companies, disciplined through the imposition of human rights based responsibilities by the institutions that finance their operations, is now being used as a private sector instrument to influence or manage the policies of states that have significant human rights dimensions.
This was evident, for example, in the context of the palm oil industry, where soft law substantive frameworks were used by host state governments as a basis for securing agreements by banks to include some measure of human rights due diligence and responsibility in their lending to operating companies in hist states (Sustainability Policy Framework: Rabobank Group). This was expanded into a more general agreement in the form of the Dutch Banking Sector Agreement on International Responsible Business Conduct regarding Human Rights, effective on 7 December 2016 among the banks, the Dutch Banking Association (NVB), trade unions, CSOs, and the Dutch
Government.Though it ended after three years (see Closing statement: The Dutch Banking sector Agreement on international business conduct regarding human rights), it provided a template for further action, one that has only been realized slowly.
That template was built around a commitment for the banks to exercise their responsibility to respect human rights under the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights (UNGPs). That commitment, in turn, was to be focused on two areas of banking activity: corporate lending and project finance.
This approach is now being applied against Chinese policies in Xinjiang, driven by a hos of private economic and civil society actors who seek a substantial change in Chinese policies in that region. It was recently scored the beginnings of what might be an important success in embedding this framework approach to the global operations of the financial sector. As reported by OECD Watch,
On January 28th, the Swiss NCP accepted the specific instance filed by the Society for Threatened Peoples (STP) against UBS related to the Swiss bank's business relationship with Hikvision, a company that is aiding China’s mass surveillance and genocide of Uighurs. This is the first OECD complaint to focus on a financial institution’s asset management business and passive products. Up until now, the NCP procedure has focused on asset owners’ direct shareholding, or banks’ mainstream lending. (OECD Watch Press Release)
The potential importance of this initial assessment ought not be be underestimated. It suggests, at a minimum, that the human rights responsibilities of economic activity are not constrained within the limits of the autonomous legal personality of enterprises. Instead, it suggests that the human rights responsibilities of business are intertwined within and through the production chains in which enterprises connect toward common projects. At the same time it suggests a closer connection between breaches of the state duty to protect human rights and the corporate responsibility of respect human rights along global production chains. This moves us beyond the limits of complicity based liability to a more integrated approach. But it does more than it--it also suggests a more seamless connection between the policies of states realized through economic activity and the activities of business. In this case--just as banks may serve as instruments for respect for human rights (through their financing or financial services activities) of operating companies, so too may may they serve as the bearers of liability for state policies that may be found in violation of the state duty to protect human rights. In other words, the initial assessment underlines the way that private responsibilities to respect human rights can be used to nudge (or pressure) states toward compliance with their autonomous (but connected) duty to protect human rights. In this case that nudging focuses on macro-economic policy as well as the specifics of human rights in China.
The full report of the Swiss NCP (Initial Assessment: Specific Instance regarding UBS Group AG submitted by the Society for Threatened Peoples Switzerland) follows along with the OECD Watch analysis and my own brief observations.
1. The essence of the initial assessment was centered on the existence, as a matter of the "law" of NCP Special Instance (discussed here) of a business relationship between a financing mechanism (UBS Group AG) and a Chinese operating company (Hangzhou Hikvision Digital Technology, Co.). "The Swiss NCP comes to the conclusion that a business relationship according to the OECD Guidelines between UBS and Hikvision and a direct link between UBS’s products and services and the alleged human rights violations could not be excluded with regard to the UBS fund sold by UBS. However, in relation to UBS’s role as custodian for Hikvision shares on behalf of clients, the Swiss NCP concludes that no business relationship between UBS and Hikvision exists."(Initial Assessment: Executive Summary).
2. "Business relationship" was essential to connect the alleged wrongdoing of the operating company (Hikvision) with the activities of UBS. "According to the submitting party, this company manufactures technology used for surveillance of the Uyghurs and other Turkic minorities living in the Xinjiang Uyghur Autonomous Region in China. On the grounds of its involvement in the crackdown on ethnic minority communities in the region, Hikvision, together with 27 other entities, was blacklisted by the United States (hereafter “US”) in October 2019."; Ibid., ¶1). UBS' failures were centered on its inability or failures to comply with its own Code of Conduct or its responsibilities to implement the OECD Guidelines for Multinational Enterprises in the way that the complaining party thought was appropriate in the circumstances. "By having entered and maintained a business relationship with Hikvision, the STP contends that UBS has neither fulfilled its duties regarding due diligence, i.e. avoided infringing on the rights of the ethnic minorities living in Xinjiang, nor sought ways to prevent or mitigate, i.e. address, the adverse human rights impacts despite being directly linked to them through its products and services." (Ibid.).
3. It is perhaps important to note the way in which the imperatives of human rights due diligence has moved to the foreground of an enterprise's responsibility to respect human rights. Equally important, the expansion of that obligation to engage in human rights due diligence with respect not just to an enterprise's internal operations, but also with respect to the way in which it manages its role and projects its products and services within the production chains in which it is embedded. For financial enterprises, that means with respect to its lending, its offer of financial services, or more generally its services for a fee. (described Ibid., ¶ 5(b)). It is likely that this principle of human rights due diligence is rapidly becoming a more generalized norm of international aw in the sense of the development of an expectation, within business culture, to engage in it in every aspect of enterprise operation. More important still is the equally strong push to align human rights due diligence to compliance and risk avoidance strategies grounded in the principles of prevention-mitigation-remedy. In effect, the thrust of movement appears to be to align the cultures of public administrative agencies with those of business enterprises--at least when it comes to the human rights (end eventually the sustainability and climate impacting) effects of economic activity.
4. As expected the parties made cases for a very broad and a very narrow reading of the OECD Guidelines respecting both the meaning of "business relation" and of the applicability of the Guidelines themselves. The Swiss NCP took something of a middle ground. That was possible in part because the Guidelines themselves are not legal documents, and the object of its measures are meant to be flexibly applied to attain behavior objectives that change business culture.
It is precisely because the OECD Guidelines are recommendations and not legally enforceable that open-ended descriptions of what is meant by business relations can be used. A legally binding character would require much more precision with regard to their scope and applicability12. This expansive reading is also applicable in terms of business relationships in the financial sector. According to an OECD reference document, for the financial sector business relationships include, for example, suppliers, clients, customers and investee companies, including a minority shareholding. The same may apply with respect to investments through index funds despite the multiple tiers of business relationships1(Ibid., ¶ 5(c)).
5. But even this somewhat flexible approach was insufficient to extend the notion to shares for which UBS acted merely as custodian (Ibid., ¶5(c). Here one engages in line drawing, but one based on principles of control rather than on principles of connection. "The mere management of clients' shares as a custodian implies a business relationship between the bank and its clients, but not with Hikvision." (Ibid.). This drew the ire of th analysts at OECD Watch (see below). OECD Watch argues in effect that service is service--especially service for which fees are generated. The legal relationships matter less; it is the fee, in effect, that drives the definition of business relationship. The Swiss NCP might not disagree. But its point is quite different--here they note that the business relationship does indeed exist, but only between UBS and the entities for whom it holds Hikvision shares.
6. There is a certain power to the Swiss NCP's conclusion. It is based, however, on a fidelity to traditional notions of corporate personality and its consequences that are increasingly rejected--as a matter of law an politics--by those who take the position that corporate law principles ought to be subordinated to a "higher law" of international human rights, whether "hardened" in international, national, or private law. Yet one might be cautious about sweeping a century of corporate law principles (and debate) about the consequences of adopting particular views of corporate personality where corporate enterprises ae required to act as or offer services as bailiffs or custodians of property that represents investment, ownership, or control by others. The notion embraced here by the Swiss NCP is that Hikvision shares are property in the hands of UBS, but property held in trust for the account of another. The direct relationship, grounded in investment, is between the shareholder-client and the company. In that context, the human rights obligations run to UBS' clients rather than through Hikvision to UBS directly.
7. And yet this also opens an opportunity that was missed by both the Swiss NCP and the Society for Threatened Peoples Switzerland. It is this: UBS might be obligated to conduct human rights due diligence for its custodial accounts, and perhaps to avoid custodial relationships with enterprises whose operations may breach human rights (and sustainability) norms. Here the direct link language of the Swiss NCP (Ibid., ¶5(c) could be usefully applied by analogy. But that would require a complaint that would be brought against UBS' clients. That, in turn, increases the difficulties of such actions, but does make it impossible. Here the key point made by the Swiss NCP is worth considering: It is the investment relationship that is the touchstone of the responsibility. It is the provision of services that triggers responsibility grounded on the conduct of the client. Here, though, that direct link is hard to show merely by the provision of custodial services to clients. Custodial services reaches no further than the realtionship between share owner and custodian.
8. It is worth considering, in this respect, whether there ought to be a collusion or bad faith exception to this limitation of the extent to which UBS' responsibility extends. Where a custodian hides the identity fo clients, where the custodian holds itself out as a principal, and where there are other elements of deception or misrepresentation, one can make a more powerful argument against UBS. But here the argument goes to a sort of corruption and a fraiud on stakeholder communities. These ideas now appear to be worth developing.