Change Agents: Financial Institutions

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

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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.

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.

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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

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July 2021 |

Using Leverage to Drive Better Outcomes for People

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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.

Using Leverage to Drive Better Outcomes for People

In March 2021, Shift held the first peer-learning session of its Financial Institutions Practitioners Circle, focusing on the topic of leverage. This resource captures the key takeaways of the session. 

The traditional approach of many banks and Export Credit Agencies (together “FIs”) has been to assess risk from a credit risk perspective and to make a binary decision about whether or not they will enter into commercial relationship with a client. As such, too often those decisions have been made on the basis of risk appetite rather than considering the more complex task of risk management, engagement with the client and the application of firm sustainability expectations. More committed FIs are shifting towards an approach that emphasizes managing risks to affected stakeholders rather than a sole focus on managing potential reputational risks. In addition to setting human rights-related expectations of clients upfront, FIs now need to focus, for higher risk sections of the portfolio, on scrutinizing the appropriateness of the expectations against intended outcomes, reviewing client adherence to them and evaluating their impact.  

When FIs take this approach, we see greater alignment with the UN Guiding Principles’ focus on improving outcomes for people. Moreover it facilitates a move away from so-called “cut and run” approaches whereby the bank makes another binary decision to cut ties with clients amid reputational concerns without first attempting to use leverage. Due Diligence is a wheel after all: it doesn’t start and end at assessment. The bank has a responsibility to get to action: to use its influence (leverage) to seek to improve outcomes for adversely affected people, including, at a minimum, engagement with clients around risks. This also helps the bank to get to the “yes, and” approach to navigating higher-risk transactions, whereby the bank can more confidently take on clients or transactions that pose heightened social risk, if it is prepared to invest the resources necessary for leverage and it has a credible road map for where the client needs to get to in terms of maturity of approach and/or concrete Key Performance Indicators (KPIs). It goes without saying that an element of pragmatism needs to be brought to bear when looking to achieve this at a portfolio level. The prioritization of resources and focus at the assessment phase is particularly important for financial institutions given their challenge of scale. 

The FI’s responsibility to respect human rights includes the need to understand where it has leverage – in the multiple different forms of leverage available – and where it needs to build it; it means using this leverage to seek to prevent and address harm in order to justify continued engagement. Leading FIs are increasingly exploring and institutionalizing this process.

Here are our 6 key takeaways from our discussion about how to consider leverage for financial institutions from the perspective of the UNGPs, with practical steps that might help turn these insights into action. 

Shift’s FIs Circle

A carefully designed space for leading practitioners in the financial sector to discuss human rights challenges and co-create cutting-edge solutions that fit their unique reality

Financial institutions are uniquely positioned to advance business respect for human rights. Their products, services, clients and investment portfolios span all sectors and industries, enabling them to catalyze change by using their leverage to help move markets in the right direction. At the same time, this broad reach means they are often connected to an enormous range of human rights risks.

For practitioners in the financial sector, this presents significant challenges as well as opportunities. Yet, there are limited spaces available for them to analyze how the responsibility to respect human rights applies to their context and to discuss possible approaches to human rights due diligence together with others who are facing similar challenges, informed by external human rights expertise.

Shift’s Financial Institutions Practitioners Circle (FIs Circle) was carefully designed to fill that gap. It is a purposefully small network of practitioners from private banks and export credit agencies – led by Shift experts – to foster insightful conversations, co-create innovative approaches and ultimately advance leading practice across the financial sector.

The FIs Circle is not a membership organization with a secretariat, nor an industry grouping for policy advocacy. Rather, it is a space for practitioners to have frank discussions about implementing respect for human rights with peers who understand the challenges involved and want to contribute to shaping leading practice in the sector, guided by top human rights experts.

Watch this Video to Learn More

FINANCIAL INSTITUTIONS LEAD, ASHLEIGH OWENS, EXPLAINS HOW THE FIS CIRCLE CAME TO BE

Benefits of the Program

Why join Shift’s Financial Institutions Practitioners Circle

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Group Workshops and Discussions

FIs Circle participants join their peers across leading financial institutions in tailored workshops and in-depth discussions that explore shared challenges in implementing the corporate responsibility to respect in the FIs context.

Every year, the FIs Circle has three virtual peer learning workshops, facilitated by Shift human rights experts who bring their experience, knowledge and learnings from working with a variety of stakeholders on distinct challenges across the financial sector.

 

 

INTRODUCTORY “UNGPs AND FINANCIAL INSTITUTIONS” SESSIONS

In addition to the peer-learning workshops, participants are invited to attend (and/or to send new team members or other colleagues) to bi-annual introductory sessions on the UN Guiding Principles on Business and Human Rights. These sessions are uniquely tailored to the operations and value chain of the financial sector.

They offer an introduction to the UN Guiding Principles to participants from institutions who are diving into business and human rights for the first time.

 

 

EXPERT FACILITATION BY SHIFT

For almost a decade, Shift has worked directly with banks, export credit agencies and other financial institutions in developing solutions for a wide array of challenges. In parallel, we’ve collaborated with peer civil society organizations and have been closely involved in standard-setting processes in this space.

Consistent with our mission, Shift brings to the table the learnings we have gathered and the tools we have designed, and are developing, to explore together with FIs Circle participants.

Learn more about our work with financial institutions, their regulators and other stakeholders here.

 

 

CONTRIBUTE TO SHAPE LEADING PRACTICE

Shift is a mission-driven organization that seeks not only to support individual companies, but to advance leading practice across entire sectors and to embed the UN Guiding Principles in authoritative standards. In line with this, we are committed to using the knowledge that we build through programs like the Financial Institutions Practitioners Circle to develop and share public-facing outputs that can inform practice and push the boundaries of business behavior, while appropriately respecting confidentiality.

Explore our public resources here.

 

 

OPTION TO JOIN SHIFT’S BUSINESS LEARNING PROGRAM

In addition to the workshops, discussions and opportunities that are specific to the financial sector, Shift offers participants of the FIs Circle the option to join our flagship Business Learning Program, where companies receive tailored strategic and operational support on specific challenges that they face, and participate in cross-industry learning with leading companies from around the world.

Learn more about Shift’s Business Learning Program.

FIs Circle Publications

We use the knowledge that we build through programs like the Financial Institutions Practitioners Circle to develop and share public-facing outputs that can inform practice and push the boundaries of business behavior, while appropriately respecting confidentiality.

PUBLIC-FACING OUTPUTS BASED ON THE KNOWLEDGE AND INSIGHTS GAINED FROM THE FIS CIRCLE

3 resources
October 2021
Financial Institutions and Remedy: Myths and Misconceptions

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 […]

Download
July 2021
Using Leverage to Drive Better Outcomes for People

In March 2021, Shift held the first peer-learning session of its Financial Institutions Practitioners Circle, focusing on the topic of leverage. This resource captures the key takeaways of the session.  The traditional approach of many banks and Export Credit Agencies (together “FIs”) has been to assess risk from a credit risk perspective and to make […]

Download

Criteria for Admission

WE ARE PURPOSELY SELECTIVE ABOUT WHO WE WORK WITH

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Shift’s FIs Circle is designed for institutions that have demonstrated organizational maturity to embed respect for human rights across their operations and are ready to take further action. Participants come from different regions of the world.

Prior to an organization joining the FIs Circle, we engage in an in-depth discussion to determine whether participation is the right fit for the organization and for the group, based on the financial institution’s human rights work and its commitment to sharing its experience and improving its performance.

At this stage the FIs Circle is only open to select participants from private banks and export credit agencies. This is to ensure that participants can take advantage of the opportunity to discuss challenges with peers that work in similar contexts and face analogous challenges and opportunities for positive impact.

Beyond the FIs Circle, Shift works bilaterally with a wide variety of financial institutions that are at an earlier stage in their human rights journey. You can learn more about the way we provide bespoke advisory support to financial institutions here, or contact us at info [at] shiftproject [dot] org to learn more.

Inquire about the FIs Circle

At the moment, Shift’s FIs Circle is open to invited practitioners from private banks and export credit agencies. Current participants include practitioners from Allied Irish Banks, ABN AMRO, Citi Group, ING, Wells Fargo and Westpac, among others.

To learn more about Shift’s Financial Institutions Practitioners Circle contact us at info [at] shiftproject [dot] org. You can also visit our Financial Institutions page to learn about more ways in which we work with other financial institutions, including investors, national development finance institutions, standard setters and others.

Introducing Shift’s Financial Institutions Practitioners Circle

Posted on by Daniel Berezowsky

New York, NY

VISIT THE PROGRAM PAGE

Shift, the leading center of expertise on the UN Guiding Principles on Business and Human Rights, is delighted to announce the launch of our Financial Institutions Practitioners Circle, a space carefully designed for a small number of leading practitioners from banks and export credit agencies (ECAs) to discuss common human rights challenges and co-create cutting-edge solutions that put people first.

The first generation of the FIs Circle will gather virtually for the first time in early March and will include a limited number of practitioners from institutions in the financial sector who have demonstrated a serious commitment to advancing their understanding and implementation of the UN Guiding Principles.

Discussion and learning in the FIs circle will be facilitated by experts from Shift, who will also contribute creative solutions that we have been fine-tuning in our one-on-one engagements with financial institutions. Together, through group workshops and discussions, practitioners will foster leading practice by sharing and co-creating approaches to putting the responsibility to respect human rights into practice in the FIs context.

Shift is committed to disseminating the learnings from this group for the benefit of a wider audience of FIs practitioners and other stakeholders.

LEARN MORE>

Participant selection

Shift is currently evaluating candidates for the first generation of the FIs Circle. Admissibility is determined through an in-depth discussion, based on where the organization is on their human rights journey and, regardless of its level of maturity, its commitment to sharing its experiences and improving performance.

To learn more about the FIs Circle, or to inquire about joining, please email communications [at] shiftproject [dot] org.