Today’s financial institutions (FIs) are operating in a global geopolitical context marked by multiplying conflicts, shifting political alignments and a decline in respect for international law. Moreover, technological developments are redefining the methods of conflict.
In this environment, FIs face growing pressure from governments to navigate defense-related clients and transactions in ways that support evolving security priorities. They also have strong commercial incentives to participate in a rapidly expanding sector.
At the same time, institutions remain bound by longstanding commitments to responsible investment and lending practices. And we continue to see a large body of data showing that conflict -including the impacts on people’s human rights arising from conflict -creates business and investment risks for financial institutions.
Importantly, in a turbulent geopolitical context, institutions that adapt their policies and decisions in response to one particular conflict can quickly find themselves applying those policies to very different conflict situations, where alliances, actors and the justifications for the use of force are far less settled.
Against this dynamic backdrop, financial institutions face a practical question: how should human rights due diligence be approached in relation to companies developing, producing, brokering, selling or exporting weapons and dual-use technologies?
Shift has worked for many years with investors and lenders to help them understand and address human rights risks across their portfolios, with a growing focus on conflict-affected and high-risk contexts, particularly since the war in Ukraine. Through this work, we have observed recurring challenges in navigating complex, incentive-laden decisions, and while there are no simple solutions, there are stable anchors that can guide institutions through this rapidly evolving terrain.
This paper
- sets out particular challenges faced by practitioners within financial institutions who are tasked with managing human rights risks when it comes to defense-related lending and investing;
- sets out some key ‘anchors’ in international humanitarian law that set important parameters on decision-making by financial institutions; and
- discusses additional approaches that financial institutions can take as part of their human rights due diligence to strengthen their decision-making and better manage risk to their clients and to their own institutions.
