No international trade, legitimate or illegal, can thrive withoutaccess to banking networks. This is already a highly regulated industrywith notable internal recordkeeping abilities.. If they step up or areforced to - increased accountability may be possible. We need an Equator II.

There are some really important points in this issue that haven't been commented on:  in my view, banks do have a responsibility to undertake an appropriate level of due diligence when their capital is being used to fund a project.  Hence, the evolution of the Equator Principles as the project finance market's "gold standard".   However, there are other product types that are not considered project finance, but that do likely require a level of diligence.  The question is the extent (and depth) of diligence vs. the amount of leverage a bank has with a potential client.  The Equator Principles have "teeth" because of nature of project finance:  the market allows for covenants, the hiring of independent consultants, etc.  As the discussion points out, however, we are one step removed from on-the-ground project assessment, involvement, and management.  Our clients undertake these activities - and, banks expect them to adhere to the standards that the bank itself has signed up to - or, there could potentially be adverse reputational damage.  Thus, the extent to which a human rights diligence process is conducted should be very clear:  who does it, who undertakes it, who's responsiblity for follow-up (e.g. project sponsor), etc, should all be carefully considered.

• Are the implications of the corporate responsibility to respect human rights different for financial institutions than for other sectors? If so, are any differences material to the SRSG's task of articulating principles that apply to all industries?

Financial institutions should have the same responsibility to respect human rights as other companies. Nevertheless there are a number of distinct features with the financial industry. The financial industry should therefore be explicitly addressed in the SRSG’s final report.

As banks are usually one step further removed from the actual human rights violation, the Financial Sector could overlook the relevance of the SRSG’s work unless his final report makes an explicit reference to their human rights responsibilities. Banktrack has consistently observed this dynamic in our monitoring of implementation of the Equator Principles, where financial institutions constantly try to shift the responsibility for action onto project sponsors while ignoring their own responsibility.

Although indirect, the role of banks and financial institutions can be very decisive, due to their ability to “pull the plug”. If financing is denied or withdrawn a particular project cannot proceed until another financier steps in. Apart from an on/off situation banks can use human rights indicators in their deal assessments or use non financial covenant clauses to ask for changes in the design and implementation of a particular project. If the financial sector would embrace the human rights agenda in a meaningful way this would have a multiplying effect on other corporate actors.

• Are the implications of the corporate responsibility to respect human rights different for different kinds of financial institutions and activity -- i.e. project finance, corporate lending, equity investing, sovereign wealth funds -- where there are varying forms and degrees of leverage on the part of the financier? As above, are any differences material?

In fact, within the financial sector there are widely differing degrees of involvement and therefore differentiated responsibilities as well as overlapping responsibilities. These differences are material and are even bigger, if we look at sovereign wealth funds, that have a completely different ownership structures and mandates.

Even in the commercial, non-state financial sector big differences exist. A bank which provides a loan guarantee may not have as much influence as a bank which provides a direct loan to a client. Similarly, a mining company looking to expand its operations may find that its bank financial advisor may be more influential and involved at an earlier stage than the one which helps underwrite a bond offering many months later.

The present situation within the financial sector is problematic; With the Equator Principles there exists just one industry standard, and only for a particular and tiny fraction of the market. In contrast, there exist no common standards at all for the vast majority of financial institutions activities. But there are a range of situations which in practice are similar to project finance in the narrow technical sense in wich the Equator principles are not being applied.

For example, if banks provide capital to a small mining company that operates only a few mines, the link between the banks’ operation and human rights impacts of the company are straightforward. Banks can provide capital either through commercial banking operations (short term loans, bridge loans, general purpose loans, revolving credit facilities, etc.) or investment banking operations (bond issuance and underwriting, initial public offering, secondary share offerings). In BankTrack’s view the responsibility is determined less by the specific activity of the bank, than by the link between the loan or capital raised and the human rights impacts of the companies financed. If banks are acting in syndicates, which is often the case, they share this responsibility.

A broad interpretation of the human rights responsibilities of banks would also encompass banks’ other activities beyond providing financial services to companies. It would include banks’ own anti-money laundering commitments and policies, since the flows of corruptly looted state funds out of the world’s poorest countries, which cannot occur without banks to process the wire transfers or accept the funds, have a devastating effect on poverty in those countries that result in a denial of human rights for their populations. It would also encompass transparency over loans banks make to governments or state owned companies, since these loans, if misappropriated as too often occurs, result in onerous national debt burdens whose repayments deny the populations of poor countries access to healthcare and education, which is a denial of social and economic human rights.

BankTrack will continue to work towards clarifying the role of banks and other financial actors in their vastly differing roles.

• What due diligence practices in the financial sector, whether initiated by business or required by governments, are particularly relevant to human rights due diligence?

BankTrack’s mapping and monitoring exercise of existing bank policies show that very few banks have human rights policies or do consider human rights aspects in a meaningful way in sectoral standards (e.g. a mining policiy). A forthcoming study of the Danish Institute for Human Rights comes to the same conclusion: “Many financial sector actors have weak in-house capacity to integrate social issues into their investment analysis and decision making. Human rights analysis is compartmentalised and outsourced to research providers.” (Quote from the announcement of the report: www.reports-and-materials.org/Danish-Institute-press-release-re-Values-Added-report-4-Jan-2010.pdf).

In the 2007 Briefing Paper “Human Rights, Banking Risks” BankTrack outlined the key elements of a human rights (due diligence) approach for banks. In the process of developing a human rights policy a FI should:

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- Identify its human rights risk profile, including critical business lines, clients, geographic exposures, etc.

- Develop human rights categorical exclusion criteria.

- Develop stringent basic and detailed due diligence procedures.

- Develop procedures to engage with clients of concern.

- Consult with civil society, human rights experts and relevant human rights committees.

- Publish a clear human rights policy with human rights standards, policies and procedures.

- Create a comprehensive and transparent management system to implement the policies andprocedures

www.banktrack.org/download/human_rights_banking_risks_incorporating_human_rights_obligations_in_bank_policies/0_1_0_070213_human_rights_banking_rrisks.pdf

Financial institutions are very much grappling at present with how we can in practice better assess and manage HR issues in future relating to our business activities. Usually our relationship is indirect through our clients and being one layer removed, so to speak, doesn't make it easier to readily identify exactly how we can effectively use our leverage. I personally believe there is already a relatively wide recognition among many companies that HR issues need to be dealt with better in many instances. On the other hand, as I expressed, I think our clients are trying to understand exacly what their stakeholders will expect in future and how they can potentially meet these expectations as well as mange the risks, etc. associated with HR issues in their own interest. To the extent these can be taken up as part of expanded ESG due diligence and existing E&S impact assessments, as appropriate, I am confident that this wil be taken up more effectively going forward. I think their concern, however, is that the stand alone term HRIA implies a separate process which for them can have significant implications in terms of time lines for completing projects, involvement of external specilaists, additional costs and investments, etc.

While many financial institutions have signed onto the Equator Principles or other codes related to their investments, these same financial institutions often have no human rights policy for their own employees.  Financial institutions themselves are often perceived as a low-risk sector for human rights violations.  However, bank workers and subcontracted workers who provide services to financial institutions are often subject to violations of their basic rights as well.  We need standards and accountability for banks’ own operations (as well as increased accountability/enforcement of financial institutions’ policies regarding their investments).

Similarly, we have lately seen in the United States and other countries how banks’ actions can result in significant social disruption.  In thinking about financial institutions’ responsibility to respect human rights, we should consider how the banks should screen their own business practices, such as predatory lending, deceptive marketing, and the subprime lending.

As stated in the comments above, financial institutions may assume that these obligations do not apply to them unless it is spelled out, so I am glad that the SRSG has identified this as a special issue.

Without Map or Compass: Credit Suisse, UBS and Human Rights

Berne Declaration has produced a discussion paper on the Swiss banks an human rights. We suggest that financial operations fall into the 'relationships' dimension of the scope of the corporate responsibility to respect human rights. And we urge the banks to develop and implement standards and procedures for a comprehensive human rights due diligence. The paper is available for download here:  http://www.bankenundmenschenrechte.ch/en/background?ci=4

Those interested in this topic might want to look at Rory Sullivan's recent piece on Ethical Corporation's website, and John Ruggie's response:   http://www.ethicalcorp.com/content.asp?ContentID=6954.  Who do you agree with?