Change Agents: Financial Institutions

Shift’s Response to the UN Working Group Consultation on Investors, ESG, and Human Rights

In 2016, ESG investing amounted to US$ 22.8 trillion of global assets – by 2025 it’s expected to reach US$ 53 trillion.[1] Yet, while lenders and investors are increasingly using Environmental, Social and Governance (ESG) indicators in their decision-making processes, confusion about metrics persists, particularly when it comes to the ‘S’ in ESG. So, it’s vital that these approaches align with the UN Guiding Principles on Business and Human Rights, which leading financial institutions, states and businesses have been working to implement for over a decade.

In June 2024, the United Nations Working Group on Business and Human Rights will present a report to the UN Human Rights Council on the approaches to ESG taken by financial institutions, including investors, in recognition of their “unparalleled ability to influence companies and scale up on the implementation of the Guiding Principles”.[2] The report will provide guidance for governments, financial actors and others, on aligning ESG approaches with the UN Guiding Principles. As part of this, the group put out a call for input from a variety of stakeholders to inform their recommendations.

This response is Shift’s submission to the consultation, which builds on a decade of experience working with a range of financial actors, including investors, to drive successful implementation of the UN Guiding Principles on Business and Human Rights. For over 10 years, we’ve been supporting financial institutions to identify, assess, and manage the adverse impacts on people associated with their financing activities. In that time, the landscape has changed significantly – marked by new regulatory incentives, increased data availability, and a growing appreciation of the value of robust due diligence processes to financial institutions.

[1] ESG assets may hit $53 trillion by 2025, a third of global AUM, Bloomberg, via OHCHR

[2] P.15, para 77, A/HRC/47/39, Guiding Principles on Business and Human Rights at 10: taking stock of the first decade

Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions

From early warnings to controversy data, investors and lenders are increasingly recognizing their reliance on civil society and human rights defenders for their human rights due diligence (for more see No News is Bad News, the product of a collaboration between ABN AMRO, APG, ING, Robeco, and Morningstar Sustainalytics). This includes the essential insights they provide on salient human rights issues that are material impacts in client portfolios (e.g. for CSRD) include those impacts on people related to climate change and biodiversity loss – to which banks are connected through their financing of clients and transactions.

Also Read
July 2023 |

Indigenous Rights and Financial Institutions: Free, Prior and Informed Consent, Just Transition and Emerging Practice

Read

However, the civic space necessary for this important work is being increasingly restricted (see People Power Under Attack, CIVICUS Monitor, 2022). In 2022 alone the Business and Human Rights Resource Centre tracked 555 lethal and non-lethal attacks against human rights defenders. And according to Global Witness’ report, Standing firm: The Land and Environmental Defenders on the frontlines of the climate crisis, at least 177 land and environmental defenders lost their lives last year.

So, what role can – and should – financial institutions play in addressing shrinking civic space? In our latest Financial Institutions Practitioners Circle report, Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions, we explore key aspects of this challenge, including how banks can start to overcome the barriers they may face when engaging with civil society and human rights defenders.

Indigenous Rights and Financial Institutions: Free, Prior and Informed Consent, Just Transition and Emerging Practice

Companies, civil society and the finance sector are paying increasing attention to Indigenous Peoples rights and expertise, which are critical in the context of our most pressing global agenda items: climate change and biodiversity loss. This is not least because much of the world’s biodiversity, and many of the natural resources needed for the energy transition, are located on indigenous territories. However, recent events, from the Dakota Access Pipeline protests to the Juukan Gorge disaster, demonstrate that prevailing approaches to identifying and managing the impacts of business on Indigenous Peoples are falling short. That is, businesses are failing to meet their responsibility to respect indigenous rights under international standards.

Also Read
September 2023 |

Human Rights Defenders and Shrinking Civic Space: A Guide for Financial Institutions

Read

Free, Prior and Informed Consent


Financial institutions (FIs) are critical players in the value chains associated with impacts – both positive and negative – on Indigenous People.  With the rapid scale-up of financing for transition minerals and growing awareness of the need for nature-based solutions, FIs must ensure both they and their clients understand and respect Indigenous People’s rights – which includes ensuring that clients obtain “free, prior and informed consent” (FPIC) when developing projects on indigenous lands. Without FPIC, project owners and their financiers face the prospect of conflict, reputational damage, lengthy delays and project cancellations, as well as a failure to meet international standards.


Overcoming Key Challenges to FPIC


In December 2022, Shift held a Financial Institutions Practitioners Circle (FIs Circle) on Indigenous Peoples rights. Two expert contributors, Lloyd Lipsett and Mark Podlasly, shared their insights from decades of experience working with Indigenous Peoples interfacing with development on their lands. Together, we fielded some of the burning questions financial institutions are grappling with as they finance clients with projects or value chains connected to indigenous territories:

  • What do FIs need to know when there are differing views on whether a community is “indigenous”?
  • How can FIs determine what “good” Free, Prior and Informed Consent (FPIC) processes look like?
  • What steps should FIs take when supplied with limited or poor-quality information on respect for indigenous rights by their clients?
  • How can FIs spot – and address – power imbalances between clients and Indigenous People?

This paper captures key takeaways from the session, focusing on the responsibility to obtain and maintain FPIC. This focus reflects the importance of FPIC as a process to safeguard Indigenous Peoples rights to self-determination, to participation, and to their lands, territories and resources.

Submission to the International Finance Corporation/Multilateral Investment Guarantee Agency (IFC/MIGA) Consultation on the proposed “Approach to Remedial Action”

DOWNLOAD

At Shift, we have worked for several years with a wide range of financial institutions and their stakeholders seeking to embed the UN Guiding Principles on Business and Human Rights (UNGPs) into their practice, as well as supporting the integration of the UNGPs into the work and tools of various financial industry associations and initiatives. One of our areas of focus has been defining and operationalizing the concept of the ‘remedy ecosystem’ and the important role financial institutions can play in enabling remedy, including in the context of the innovative Dutch Banking Sector Agreement.

From March through April 2022, Shift supported the initial conversations of the IFC/MIGA interdepartmental Working Group on IFC/MIGA’s approach to remedial action by providing initial scoping and research on remedy as reflected in the UNGPs. IFC/MIGA subsequently carried out further analysis and then developed and published a proposed “Approach to Remedial Action” for public consultation. We are pleased to make this submission to that consultation.

We recognize that this is an extremely important topic for IFC/MIGA to be tackling in terms of its potential to deliver meaningful outcomes for people in connection with IFC/MIGA’s own investments and also in the signals that such an approach can send to other financial institutions, particularly national and regional development finance institutions.

IFC/MIGA’s proposed “Approach to Remedial Action” (the Approach) references extensively the concepts of the remedy ecosystem and enabling remedy. On the positive side, we note with appreciation that the Approach considers “prospective and anticipatory measures” throughout the project cycle that could lessen the need for and/or increase preparedness for remedy. However, the Approach is grounded in an assumption that IFC/MIGA’s involvement in remedy will typically take, absent “exceptional circumstances”, the primary form of “facilitating or supporting” its clients’ provision of remedy.

In this submission, we provide some background on the development of these concepts, grounded in the international standards on human rights due diligence (the UNGPs and the OECD Guidelines for Multinational Enterprises), and highlight examples of application of these concepts by financial institutions that we would encourage the IFC/MIGA to consider further. Both the Approach and the External Review reference these authoritative frameworks; moreover, a growing number of bilateral development finance institutions (DFIs) have made commitments and advancements in practice with reference to these standards over the last decade. They are increasingly being incorporated, in whole or in part, into existing or emerging regulations and legislation governing responsible business conduct. Most pertinently, the concepts of the remedy ecosystem and enabling remedy emerged from processes that took these standards as a core reference point.

This submission covers:

  1. The Centrality of the Connection to Harm Analysis to Concepts of Enabling Remedy
  2. The Remedy Ecosystem and Enabling Remedy
  3. The Relevance of Proximity to Harm?

We hope that the IFC/MIGA will draw on this, and other feedback, to reorient the core elements of the Approach to align more fully with the existing International Standards and developing practice among other financial institutions.

Climate Change and Human Rights: Avoiding pitfalls for financial institutions

Also Read
July 2023 |

Indigenous Rights and Financial Institutions: Free, Prior and Informed Consent, Just Transition and Emerging Practice

Read

This paper explores the nexus between climate change strategy and action by financial institutions (FIs) and the responsibility to respect human rights in accordance with the UN Guiding Principles on Business and Human Rights (UNGPs).

It discusses a series of pitfalls for financial institutions to avoid as they operationalize climate-related commitments and explore the social (“S”) dimensions of the challenges and opportunities presented by the activities of portfolio companies. It explores how the human rights lens of the UNGPs – complemented by over a decade of practice since their endorsement – can inform efforts to ensure transition and adaptation efforts respect peoples’ dignity.

The paper is a companion piece to Shift’s report: Climate Action and Human Rights: How the UNGPs can help companies respect human rights when responding to climate change. It benefited from discussions between banks and ECAs in Shift’s Financial Institutions Practitioners Circle.

What data do investors need to manage human rights risks?

With almost 1 in 4 asset owners using international human rights standards to guide their responsible investment activities last year, investor demand for “better S in ESG” data is growing. Investors are not only considering the impacts on people that arise or could arise from their business activities and investee companies, but they are also trying to understand how risks to people can create financial and reputational risk.

Working together, Shift and UN PRI, the world’s leading proponent of responsible investment, set out to identify the key challenges facing investors in understanding and addressing how portfolio companies manage human rights risks within their operations and value chains. In this paper, they outline four key areas for improving the quantity and quality of information accessible to investors. Download the full report to learn more about how these gaps can be addressed, and how they relate to the latest developments in reporting standards.

Embedding the UN Guiding Principles in Finland’s State Financing of Private Sector Activity Abroad

Between 2018-2021, THE FINNISH GOVERNMENT engaged Shift to support a comprehensive approach to integrating the UN Guiding Principles into the work of the main programs and agencies that provide state financing to Finnish businesses investing abroad. This included Finland’s national development finance institution and export credit agency, and several tailored programs, including one focused on private equity.

Shift’s support aimed to strengthen alignment between the policies, processes and practices of these agencies and programs and the expectations of the UNGPs, by embedding a human rights lens in their due diligence approaches. Read the final program report to learn more about the key takeaways – and three tools developed as part of Shift’s wider Valuing Respect Project that can help any financial institution – whether public or private sector – strengthen its human rights efforts.

Enhancing the S in ESG: Tools for Investors and Lenders to Drive Better Evaluation and Engagement on Human Rights

Investors and lenders are responding to financial incentives and external pressure to better consider human rights impacts connected to their investment and financing activities. These impacts are at the core of a company’s social performance or the “S” in ESG. However, despite increasing internal support for more explicit consideration of social performance, existing “S” data skews heavily towards well-known industry and geographic risk profiles and “observable basics” in the form of documented policies and processes, or numbers of audits, issues found, grievances or media stories about a company. 

At best these types of information signal minimal compliance with aspects of international standards of business conduct, well-known reporting frameworks and recent legal developments. But they offer little insight into whether a company has made or will make progress towards achieving improvements in its business practices and the resulting outcomes for workers, communities, and consumers. At worst, conclusions drawn from some of the “S” data can mislead financial institutions to allocate money and attention to the most talked about companies, versus those that bring the highest exposure to financial institutions due to the severity of risks to people and business. 

For three years, as part of our Valuing Respect Project, Shift worked with companies, investors, and civil society organizations around the world to research and co-create improved ways to evaluate business respect for human rights. The resulting, publicly available products can be used by investors and lenders in: 

  • Focusing their screening and engagement activities on whether portfolio companies are wired – at the level of their business model, strategy, and culture – to anticipate and address the most severe risks to people connected to their operations and value chain. 
  • Designing and measuring the impact of strategies that aim to effect changes in the behavior of investees and clients so as to achieve better outcomes for people and business. 

This series provides an overview of the indicators and tools developed, and how investors and lenders are beginning to draw from them to facilitate and strengthen their work.

These tools were produced as part of a multi-year program of expert support to the Finnish Government, focused on integrating the UNGPs into the activities of the main state agencies and programs supporting Finnish private sector investment abroad. This work is summarized in the final program report.

3 resources
December 2022

Business Model Red Flags

Investors and lenders may be missing a key source of risk in their portfolios, as well as the opportunity for more sophisticated and effective engagement, if they fail to consider how a company’s business model can lead to negative impacts on human rights.

Learn More
December 2022

Leadership and Governance Indicators of a Rights Respecting Culture

Lenders and investors that can identify the appropriate leadership and governance characteristics that drive a rights-respecting culture, can better understand and influence the extent to which their portfolio companies think and act about impacts on people. This resource offers an introduction to Shift’s Leadership and Governance Indicators.

Learn More
December 2022

Indicator Design Tool – a tool for Financial Institutions

The Indicator Design Tool provides financial institutions with a structured way to design and measure their efforts to use leverage with portfolio companies. At the core of the tool is an approach known as Theory of Change thinking: a well-established practice for designing, monitoring and evaluating interventions.

Learn More

Operationalizing Remedy for Financial Institutions with the Equator Principles Association 

Posted on by Matilda Donaldson

On 25 October the Equator Principles Association (EPA) released a suite of new due diligence tools designed to enhance access to grievance mechanisms and enable effective remedy in project finance transactions. Shift was pleased to partner with the EPA’s Working Group on the development of the tools, which will be valuable for Equator Principles Financial Institutions (EPFIs), their clients and consultants. The tools provide guidance for users to enhance remedy at various stages of a transaction and due diligence process.

The Equator Principles:
The Equator Principles set the financial industry benchmark for identifying, assessing and managing environmental and social risks in projects. The Principles are adopted by 137 financial institutions in 38 countries, and apply globally, to all industry sectors and to various project-related financial products.

The tools mark a notable step in the evolution of the standards and guidance of the EPA. They reinforce the importance of improving outcomes for people affected by projects financed by financial institutions in line with international standards (UN Guiding Principles on Business and Human Rights and OECD Guidelines). They do so by focusing specifically on human rights impacts in projects and on seeking to ensure that people affected have access to remedy.

These tools should help financial institutions address a persistent “remedy gap”: namely, that in too many cases, remedy is not available for people who are harmed by business activities that are part of projects they finance. The guidance draws from existing practice amongst leading financial institutions that already understand and demonstrate the important role they and their peers can play by using their leverage to enable remedy. This can have a critical role in strengthening the remedy ecosystem, resulting in better outcomes for vulnerable workers or communities affected by projects.

Two of the five tools (RM1 And RM2) specifically address the need to “front-load” for effective remedy.  Practice has shown that financial institutions can assess a client’s preparedness for remedy upfront in the due diligence process, and then use leverage to enhance higher risk clients’ capacity and commitment to provide remedy should it become necessary. The tools provide concrete guidance to execute this approach.

Importantly, the EPA also sets these tools in context. They provide guidance that will most typically apply in the common scenario where financial institutions are linked to a harm, but have not contributed to it by enabling or incentivizing the actions that led to it. They also recognize, however, that there may be situations where financial institutions contribute to harm and that they will then have a direct role to play in providing remedy. This distinction is important in light of the persistent myth that financial institutions will never cause or contribute to impacts in their portfolio, whether through their actions or omissions. This notion has been rebutted by the Office of the High Commissioner for Human Rights and the OECD, which have a mandate to interpret the UN Guiding Principles and the OECD Guidelines respectively, looking at both commercial banking as well as development finance contexts.

Practically speaking, contributing to remedy or supporting a client’s efforts to provide remedy will likely follow very overlapping paths – both will often require using and/or enhancing leverage with clients and working directly with them to execute remedy on the ground.  The new EPA tools provide many useful practical tips to support financial institutions in meeting those objectives.

Understanding Linkage and Responsibility for Remedy
“See the EPA Human Rights Guidance Note for a discussion of the ways in which EPFIs and other actors might be connected to adverse impacts, including the UNGPs framework of cause, contribution and linkage. As that note and additional authoritative guidance from OHCHR and the OECD highlight, financial institutions can, in some instances, contribute to project-related impacts. In such cases, EPFIs will have a responsibility not only to use leverage to encourage remedy, but to contribute directly to remedy in a manner proportionate to their contribution. EPFIs should carefully analyze their involvement with impacts in specific cases to understand their responsibility related to remedy.”
Source: EPA Remedy Tools

There are five related due diligence tools in the EPA suite of tools covering grievance mechanisms and remedy:

  • GM1: Grievance Mechanism Design: Diagnostic Questions
  • GM2: Monitoring Effective Grievance Mechanism Performance: Sample Reporting Metrics
  • RM1: Assessing Preparedness for Remedy: Diagnostic Questions
  • RM2: Strengthening Preparedness for Remedy: Sample Leverage Actions
  • RM3: Using Leverage for Remedy after Impacts Occur: Sample Leverage Actions

The tools are all available on the EPA’s website. Although written in the context of project finance, they will offer inspiration for commercial banks and development finance institutions who are working to take an ‘ecosystem’ approach to remedy.

For more on financial institutions and remedy, see Shift’s Financial Institutions Practitioners Circle publication, “FINANCIAL INSTITUTIONS AND REMEDY: MYTHS AND MISCONCEPTIONS”.

For more information please contact Ashleigh Owens, Financial Institutions Lead at ashleigh[dot]owens[at]shiftproject[dot]org.  

Financial Institutions and Remedy: Myths and Misconceptions

Also Read
July 2021 |

Using Leverage to Drive Better Outcomes for People

Read

It can be difficult for sustainability practitioners within financial institutions to engage the institution on the third pillar of the UNGPs: Remedy. But engage them they must. There remains an enduring “remedy gap”: in too many cases, remedy is not available for people who are harmed by business activities, which financial institutions may be involved with in some way via their products and services. In this paper, we explore possible factors that contribute to this challenge: 5 persistent myths about FIs and remedy that may cause internal blockages and get in the way of achieving better outcomes for people. We address each of these myths in turn and offer insights into emerging good practices as well as some initial steps that FIs can take to move in the right direction.

This paper draws from Shift’s experience working bilaterally with financial institutions, and from discussions in Shift’s FIs Practitioners Circle.