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.
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.
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.
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.
Operationalizing Remedy for Financial Institutions with the Equator Principles Association
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
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.
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
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
6 resourcesTackling Child Labor: A Guide for Financial Institutions
In June 2023, following concern from member banks over the persistent scourge of child labor in global value chains and recent reports of the alarming increase in child labor – particularly migrant child labor – in the United States, Shift held a peer-learning session of its Financial Institutions Practitioners Circle on the topic. The session […]