Human Rights Roadmap for Transforming Finance

Human Rights Roadmap for Transforming Finance - Page 1

Contents About This Report 3 Introduction 4 The Materiality of Human Rights for Financial Institutions 9 ESG 2.0: A Human Rights Approach 12 The Call to Action 18 The Next Steps for Transforming Finance 27

Human Rights Roadmap for Transforming Finance - Page 2

About This Report This report comes at a pivotal time for the global economy and the societies that drive and rely on it. Communities continue to battle the COVID-19 pandemic while confronting the resulting economic upheaval, a climate crisis, and geopolitical instability. This report reflects the need for urgent solutions and leadership to change the status quo and rebuild the global economy on a foundation of respect for human rights. The financial services industry—from asset owners and managers to commercial and investment banks—has a catalytic effect on the behavior of business and the economy. The vast range of financial products, services, and client relationships has enormous potential to transform the economy and put people’s lives and the health of the planet at the center. However, despite the need for this transformation, the financial services industry has been slow to recognize its responsibility to respect human rights under the UN Guiding Principles on Business and Human Rights (UNGPs) and is far from reaching its full potential. The recent release of UNGPs 10+: A Roadmap for the Next Decade of Business and Human Rights by the UN Working Group on Business and Human Rights serves as a call to action for the financial services industry to drive positive change. This report reinforces that call and provides guidance on how the industry can advance respect for human rights—from adapting core business and driving respect for human rights in financial markets to engaging with people affected by financial value chains and enabling access to remedy for victims of harm. Its goal is to grow awareness of a better approach to doing business and build capacity within the industry in order to create a global economy that works for people and planet. Acknowledgments This report was authored by Paloma Muñoz Quick, BSR Associate Director and Global Lead, Human Rights & Financial Services, and Kindra Mohr, Esq., BSR Manager, Financial Services. We are grateful for the valuable insights from our colleagues Dunstan Allison-Hope, David Korngold, and Jenny Vaughan, as well as feedback from external financial industry and civil society stakeholders. Design by Sunhee Choi, Creative Design Manager, BSR. 3 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Introduction The financial services industry—from asset owners and managers to private equity, venture capital, and banks—has a catalytic effect on the behavior of business and the economy. Its vast range of financial products, services, and client relationships ripples through every industry, value chain, and transaction. With this backdrop, the sector has enormous potential to create a global economy that puts people’s lives and the health of the planet at the center, while contributing to the implementation of the United Nations Sustainable Development Goals. Yet, we live in a time in which both people and the planet face severe and often interconnected challenges: the world’s richest 1 percent has more than twice as much wealth as 6.9 billion people, and nearly 80 million children are subjected to hazardous work—a contemporary form of slavery. We are in the middle of the sixth mass extinction in terms of biodiversity and face catastrophic food and water shortages as well as displaced populations due to climate change. Technology poses threats to democratic systems. For the financial services industry to transform the global economy to center people and planet, financial actors must work at every level to uphold human rights—a standard to which every individual is entitled in order to live life of fundamental welfare, dignity, and equality— and proactively address the social and environmental risks and opportunities associated with the business of finance. The unanimous endorsement of the UN Guiding Principles on Business and Human Rights (UNGPs) by governments in 2011 clarified that all companies—including financial institutions (FIs)—have a responsibility to respect human rights. This requires conducting human rights due diligence to prevent, mitigate, and account for how they address the negative impacts (or externalities) of their business activities and value chains on human rights. Since then, BSR has witnessed growing recognition among FIs of the importance of the UNGPs to the financial services industry. Spurred by the human rights and environmental 4 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Adopting a human rights approach to finance can strengthen the impact of traditional ESG practices. 5 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

movements and reinforced by the rise of environmental, social, and governance (ESG) investing, a rapidly evolving regulatory landscape, the climate crisis, and shocks to the global economy due to the pandemic, FIs have become increasingly aware of why they must manage their human rights footprint. Translating commitments to human rights into transformative action remains a challenge. In June 2021, the UN Working Group on Business and Human Rights (UNWG) found that while financial actors increasingly recognize their responsibility to respect human rights, a clear understanding of how human rights are defined, their relevance across ESG factors, and human rights due diligence remain limited. Universal Declaration of Human Rights Article 1 Article 2 Article 3 Article 4 Article 5 Article 6 Free and Freedom from Right to life Freedom from Freedom from Right to equal discrimination slavery torture recognition before the law Article 7 Article 8 Article 9 Article 10 Article 11 Article 12 Right to Access to Freedom Right to Presumption Right to equality justice from arbitrary a fair trial of innocence privacy before the law detention Article 13 Article 14 Article 15 Article 16 Article 17 Article 18 Freedom Right to Right to Right to Right to own Freedom of of movement asylum nationality marriage and to property religion or found a family belief Article 19 Article 20 Article 21 Article 22 Article 23 Article 24 Freedom of Freedom of Right to Right to social Right Right to expression assembly partake in security to work leisure and public affairs rest Article 25 Article 26 Article 27 Article 28 Article 29 Article 30 Right to Right to Right to take Right to a free Duty to your Rights are adequate education part in cultural, and fair world community inalienable standard of artistic, and living scientific life 6 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Inconsistent and often weak integration of international human rights standards and frameworks across corporate reporting frameworks, benchmarks, and other ESG data and research products contributes to these challenges. In 2021, companies implicated 80 in serious human rights abuses in Asia and Africa received high ESG marks and were included in key indices and funds. 70 The UNWG’s release of the UNGPs 10+: A Roadmap for the Next Decade of Business and Human Rights (UNGPs 10+ Roadmap) in late 2021 served as a call to action for the financial services industry to drive positive change. The report—intended to scale action in advancing corporate respect for human rights in the next decade—recognizes that while sustainability is increasingly at the core of the global agenda, the full potential of the UNGPs has not yet been seized. It follows the release of two UNGPs 10+ stocktaking reports assessing the uptake of the UNGPs among states, businesses, and financial actors, including institutional investors. In this report, BSR provides an overview of key areas of progress to tackle global challenges and contribute to new systems grounded in respect for human rights. We highlight the materiality of human rights for FIs and argue that adopting a human rights approach to finance can strengthen the impact of traditional ESG practices. This report further elaborates on the call to action set out in the UNGPs 10+ Roadmap—from adapting core business and driving respect for human rights in financial markets to engaging with people affected by investment value chains and ensuring that victims of harm have access to remedy. The report concludes with next steps for transforming finance. Without urgent action by banks, institutional investors, development finance institutions and those that work with and influence them to embed respect for human rights in corporate ownership, finance and governance, business respect for human rights risks will be stymied in the decade ahead. UN Working Group on Business and Human Rights, UNGPs 10+ Roadmap 7 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Respecting human rights also offers opportunities for increasing business success, not just reducing risks. 8 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The Materiality of Human Rights for Financial Institutions Respect for human rights is not just beneficial for people —it is also good for returns. Research has shown a positive correlation between attention to human rights risks and corporate financial performance. The Sustainability Accounting Standards Board (SASB) Materiality Map identifies human rights Financial System Benchmark risks, such as labor issues and privacy, as likely to affect business success. An example from a 2018 The World Benchmarking Alliance (WBA) has released a Financial study found the cost for investors when companies System Benchmark methodology fail to act with due diligence to respect the rights to assess the readiness of FIs to of Indigenous People in the Dakota Access tackle the social and environmental Pipeline project was no less than US$7.5 billion. transitions underway and contribute to the 2030 Agenda. In 2022, the WBA will assess 400 FIs at FIs increasingly face accountability stemming the group level and consider the from business relationships that undermine spectrum of their financial activities, human rights, such as from lawsuits, complaints such as investing, lending, investment banking, insurance through the National Contact Point system of underwriting, and advising. The the Organisation for Economic Co-operation and benchmark will measure FIs based Development (OECD), shareholder resolutions, on their governance and strategy, social protests, or worse. Courts have started respect for planetary boundaries, and their alignment to societal using the UNGPs to inform rulings and find conventions. Human rights due companies liable for human rights impacts (e.g., diligence is a key component of the a Dutch court ruling on human rights and climate methodology. change). How a company impacts people often affects its own financial success 9 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

This trend will continue in the face of a wave of legislative developments across Europe and beyond that makes human rights due diligence mandatory for FIs and their portfolio companies. This includes the French Duty of Vigilance law, German Supply Chain Due Diligence Act, the Norway Transparency Act, as well as the proposed EU mandatory human rights and environmental due diligence law. The EU Sustainable Finance Disclosure Regulation (SFDR) also requires FIs to disclose the impacts of their ESG-labeled investments, independent of financial materiality and their due diligence in addressing impacts. The minimum safeguards of the EU’s Green Taxonomy and the proposed Social Taxonomy also reflect business and human rights standards, as do a wide range of issue and context-specific laws on human rights issues, such as forced labor, privacy, and conflict minerals. Similarly, the concept of “double materiality,” which features prominently in proposals for a new EU Corporate Sustainability Reporting Directive (CSRD), makes clear that businesses are accountable not just to investors, but to society at large for impacts on people and the environment. Double Materiality Matrix • Considers the company’s impact outwards • Uses the GRI definition: “topics that reflect its most significant impact on the economy, environment and people, including impacts on human rights.” • Presented in the sustainability report • For multiple stakeholders • Considers the company’s impacts inwards • Uses the SASB definition: “expected to onment influence investment or lending decision that users make on the basis of their assessments of short-, medium-, and long-term financial performance and enterprise value.” he Envir • Presented in the annual report Impact on Society and t • For investors, lenders, and other creditors Impact on Enterprise Value 10 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Smart financial actors recognize that any association with harmful practices that either actively or passively undermine human rights is not worth the cost. Some investors have publicly stated that the risk management framework set out by the UNGPs—human rights due diligence—is key for managing risks to business, including operational delays, reputational harm, financial loss, and legal liabilities of portfolio companies and clients. They have also called on governments to help level the playing field by making due diligence mandatory for all companies. Respecting human rights also offers opportunities for increasing business success, not just reducing risks. For example, reports have demonstrated that businesses with human rights due diligence procedures in place were able to react more effectively to the COVID-19 crisis. By providing decent work in line with the standards set out by the International Labour Organization (ILO), companies can also enhance the well-being of employees and become competitive employers. Our research shows that companies who forged strong bonds with their employees have seen lower levels of turnover and higher returns through the pandemic. Larry Fink, BlackRock, 2022 letter to CEOs 11 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

ESG 2.0: A Human Rights Approach The astonishing growth of ESG has been an important and valuable development in efforts to advance responsible business. It has helped raise awareness and mobilize capital for ESG issues among companies, Same responsibility, different tools and paved the way for regulatory action on While the underlying responsibility to material ESG disclosure. At the same time, respect human rights is the same for the ESG movement has notable blind spots all FIs, the means through which the and opportunities to improve, particularly in responsibility is met may vary—at times how it addresses social topics. significantly. This is because the scale and complexity of the leverage tools and strategies available to diverse FIs, BSR seeks to build on the successes of e.g., commercial banks, asset managers, the ESG movement and contribute to the private equity firms, venture capital, and sustainable transformation of the financial pension funds, differ. Leverage tools may services industry by synthesizing ESG and include: human rights approaches that help deliver • Incorporating human rights more strategic value to investors—and most expectations into client contracts importantly—to build a financial system that • Engaging companies in constructive respects human rights. dialogue and capacity building efforts • Filling shareholder proposals and Achieving this transformation requires proxy voting aligning ESG efforts with the approach set • Participating in peer-to-peer and out by the UNGPs. The UNGPs provide multistakeholder platforms that promote responsible business a roadmap for FIs to identify, prevent, conduct mitigate, and account for how they • Engaging policymakers and address human rights impacts in their own standard-setting bodies to operations and connected to their activities, create environments that enable products, or services through business responsible business conduct • Providing space and resources for relationships, including clients and portfolio start-up entrepreneurs to conduct companies. due diligence 12 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

In practice, it means adopting human rights policy commitments and carrying out ex-ante and ongoing human rights due diligence to know if they are connected to human rights risks and show the steps they take to address these risks. It calls for applying their leverage to ensure clients and portfolio companies also respect human 1 rights. Embedding human rights standards in ESG efforts provides a consistent and comparable framework for assessing the full spectrum of risks to people in investment portfolios and across the three ESG pillars, which provides navigation across the constantly evolving landscape on topics like diversity, equity, and inclusion (DEI), labor, data privacy, and the just transition. Rights-Respecting Finance Policy Screen Leverage Remedy Track Disclose Stakeholder Engagement A human rights approach involves engaging a broad group of stakeholders, including rights-holders and those who legitimately represent them, such as civil society organizations, human rights defenders, and trade unions—all of whom can illuminate the real-world impacts of business on people. Such engagement provides valuable qualitative data on corporate conduct that FIs often lack. It also helps create solutions that meaningfully address rights-holders’ concerns and builds trust with stakeholders. Unlike ESG, a human rights approach is agnostic about whether human rights impacts Rights-holders are those stakeholders are financially material to a business and whose individual human rights or instead requires that all adverse human rights collective rights, such as those of impacts are prevented and addressed. Human Indigenous Peoples, are or could be rights due diligence is a holistic, forward- affected by business. looking, and process-based framework that helps FIs proactively and systematically identify risks that are or may become material over time (i.e., dynamic materiality). 13 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

While it is essential that ESG activities integrate a human rights lens, the responsibility to respect human rights applies to all the activities, products, and services of an FI whether or not these carry an ESG label. Not only do impact funds that seek to create innovative solutions for sustainability challenges need to address the potential risks to people created by these business activities, this responsibility also applies to other types of financial products and services. ESG through a Human Rights Lens Issue Examples Human Rights Impacted Biodiversity Right to a Healthy Environment, Right to Food, Right to Health, Cultural Rights EClimate Change Wide Range of Human Rights, e.g., Rights to Life, Water and Sanitation, Food, Health, Housing, Self- Determination, Culture, and Development Data Privacy Right to Privacy Labor Rights, including Freedom of Association and Human Capital Collective Bargaining, Decent Working Hours, Living S Wage, Freedom from Forced and Child Labor Diversity, Equity, Right to Equality and Non-Discrimination, Right to and Inclusion Effective Remedy Lobbying Right to Equal Participation in Political and Public Corruption Affairs; Realization of Economic, Social, and G Cultural Rights The following table provides an overview of the key challenges in current ESG practices and methods alongside some of the strengths of the UNGPs approach to respecting human rights. By aligning ESG practices with a human rights approach, FIs can enhance the effectiveness of ESG efforts and achieve their underlying sustainability goals. 14 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Phases Challenges of an ESG Benefits of a Human Approach Rights Approach General • No globally agreed upon standards defining • Universally agreed upon set of standards and ESG factors frameworks defining the S as well as many • “S” is the weakest link, often seen as a narrow E and G topics set of topics, such as DEI or certain labor issues • Process-based approach to doing no harm • Issues-based approach to addressing ESG and managing risks across the full spectrum of contributes to siloes between E, S, and G impacts on people efforts • Cross-cutting nature of human rights supports • Scope of attention to and action on ESG is integration, coherence, and effectiveness of determined by business and by regulatory E, S, and G efforts requirements • Scope of responsibility extends to all human rights and includes business activities and business relationships across the value chain, regardless of regulatory requirements Screening • Benchmarks against stakeholder interests, • Standards and process-based approach to which often differ, and focus on shareholder screening for risks and adverse impacts perspectives that are far removed from the • Benchmarks against globally agreed upon real-world impacts of business human rights standards, principles, and UNGPs • Traditional materiality assessments framework center financial risks and opportunities • Focus on actual and potential negative impacts for business success rather than risk to of business and finance on people, which are or people, which often misses real or potential may become material over time material risks • ESG data lacks consistency and • Identifies root causes of impacts as well as comparability as it relates to issues cumulative or systemic impacts of business and affecting people finance • Aggregation of ESG data limits visibility of • Assessment prior to entering a business corporate governance and performance on relationship and on ongoing basis. The full human rights realization of human rights is not static, conditions change over time, and respecting • Focus on quantitative data can exclude human rights is a process of continuous qualitative context and related issues improvement • Impact investing focus on assessment • Consistent global standards provide consistent of positive impacts, yet misses risks and metrics for evaluating corporate human rights negative impacts performance within a constantly evolving landscape • Focus on qualitative data, supplemented by quantitative metrics, due to the nature of impacts on people 15 HOW BUSINESS CAN BUILD A ‘FUTURE OF WORK’ THAT WORKS FOR WOMEN

Phases Challenges of an ESG Benefits of a Human Approach Rights Approach • Businesses choose which material issues Standards and process-based approach for Leverage to prioritize and address as opposed to a determining appropriate action: principled decision-making approach • All human rights risks and negative impacts • No set criteria for determining what in own operations and value chains must be constitutes appropriate or effective action on addressed material issues • Principled-based approach to prioritizing action • Use of negative/positive screens in investment where necessary—act first on salient issues— decision-making meant to exclude certain those issues at risk of most severe harm2 known severe risks from portfolios may fail • Set criteria for determining whether a business because companies of all sectors and sizes and causes, contributes to, or is directly linked to in all operating contexts may be connected to human rights risks or impacts, and guidance on severe human rights harm appropriate action • Focus on use leverage to address human rights risks associated with business relationships • Standards for responsible exit, divestment, and ending business relationships Remedy • Relatively weak accountability framework • The right of those who have suffered human primarily centered on voluntary use of rights abuses to access remedy is a central shareholder leverage component • Traditional ESG approaches do not address • Robust accountability framework for business remedy for victims of harm or effectiveness impacts that recognizes the complementary of corporate grievance mechanisms role of government and the judiciary • Clear criteria for ensuring business grievance mechanisms are effective Disclosure • Expected disclosure on the management of • Expected disclosure on the management of financially material risks and opportunities salient human rights issues for increasing business value • Format of disclosure appropriate for • Format primarily intended for investor stakeholders, including potentially impacted audience rights-holders Stakeholder • ESG stakeholder engagement is rare in • Broad group of stakeholders engaged, Engagement certain subsectors of the financial services including rights-holders industry • Engagement centers on impacts on and • Limited group of stakeholders typically concerns of rights-holders engaged and rarely rights-holders affected • Stakeholder engagement cuts across all steps by business of due diligence • Engagement is weighed toward business • Considers not only who to engage, but also and shareholder voices how to engage • Engagement generally takes place during assessment and disclosure phases • No guidance or uniformity of stakeholder engagement process 16 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The responsibility to respect human rights applies to all the activities, products, and services of an FI whether or not these carry an ESG label. 17 HOW BUSINESS CAN BUILD A ‘FUTURE OF WORK’ THAT WORKS FOR WOMEN

The Call to Action The UNGPs 10+ Roadmap puts forward a resounding call to action for the financial services industry. The priorities and recommendations expand on the implications of the UNGPs, while focusing attention on issues for progress to achieve transformative change in the next decade. In the following section, we unpack and elaborate on these recommendations for an FI audience. Although there is no one-size-fits-all approach for the entire industry, the Roadmap and BSR’s experience show that there are several core and interrelated areas that are fundamental to deepening respect for human rights. Getting started on human rights in finance Several resources provide guidance on the broad application of the UNGPs to diverse institutions and asset classes for FIs starting on their human rights journey: • The application of the UN Guiding Principles on Business and Human Rights in the context of the banking sector, UN Office of the High Commissioner for Human Rights (OHCHR) • Taking stock of investor implementation of the UN Guiding Principles on Business and Human Rights, UNWG • Responsible business conduct for institutional investors, OECD • Due Diligence for Responsible Corporate Lending and Securities Underwriting, OECD • Investor Toolkit on Human Rights, Investor Alliance for Human Rights • Rights-Respecting Investment in Technology Companies, OHCHR • Human Rights in Sovereign Debt: The Role of Investors, UN Principles for Responsible Investment (PRI) 18 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The Call to Action 01 Adapt Core Business Activities to Respect Human Rights Adopt a human rights policy. Establishing robust human rights policies applicable to all business lines is a critical first step for many FIs. While bank and investor human rights policies exist, they remain limited. Responsible investment policies are often framed around ESG and sustainability, with only occasional reference to specific human rights issues, as opposed to robust commitments to respect internationally recognized human rights and conduct human rights due diligence. Policy commitments may be stand- alone or integrated into broader ESG policies. In both cases, it is essential that they 3 align with the expectations of the UNGPs. Embed human rights into corporate governance and business strategies. The Illustrative actions set out by UNGPs UNGPs should be the north star for not only 10+ Roadmap achieving ESG goals, but also for guiding the design of FI business models and business “Adopt human rights policies and embed strategy, as they may carry inherent human human rights due diligence and develop grievance management approaches in line rights risks. Human rights respect needs to be with the UNGPs in their own governance at the heart of an FI’s culture, from the board of frameworks and in the investment directors and C-suite to deal teams, investment decision-making process.” portfolios, environmental and social risk management, public policy, human resources, and procurement. It means having proper incentives and checks to make sure human rights risks are addressed swiftly and appropriately. Where investors sit on portfolio company boards, such as general partners in private equity, it also means using leverage so that board committees have in place explicit human rights mandates, executive pay is tied to corporate human rights performance, and human rights respect is embedded 4 in the corporate business model and strategies. Challenge financial and business practices that are inconsistent with respect for human rights. All business functions and relationships must respect human rights. Lobbying—including through trade associations—at the expense of human rights is inconsistent with the UNGPs. So is financing companies that may be involved with 19 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

attacks against human rights defenders, as well as overlooking human rights risks in green Illustrative actions set out by UNGPs transition investments. Standing up to such 10+ Roadmap practices can be difficult for any company or individual. It is crucial to set clear, consistent Financial institutions should “publicly expectations for all employees and business disclose how the institution is addressing salient human rights risks and impacts relationships, including via strategies, connected with investment activities.” protocols, and contract clauses that can help guide tough decisions, like when to refuse a States should “ensure greater transparency deal, exit a trade association, or responsibly and accountability of human rights divest.5 performance of private capital market actors, including private equity firms.” Publicly disclose how to manage salient human rights issues. Calling on companies to disclose human rights risk management is key, but so is transparency and disclosure among FIs. While good examples are emerging (e.g., Swedish AP2 fund’s Human Rights Report), transparency remains limited. The UNWG notes that “insufficient reporting from asset managers leaves clients unclear about the degree to which human rights policy commitments are translating into action” and that the transparency problem is “especially pronounced in private equity.” The Call to Action 02 Drive respect for human rights in financial markets Use people-centered tools and approaches that translate commitments into action. Real progress requires human rights due diligence prior to deal-making, lending, or investment and on an ongoing basis. FIs should conduct stand-alone human rights assessments of their activities, products, and services or as part of double 6 materiality and impact materiality assessments. 20 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Use leverage to embed respect for human rights among clients and portfolio Illustrative actions set out by UNGPs companies. Use and maximize leverage to 10+ Roadmap require, facilitate, and/or incentivize respect for human rights. For example, FIs should ask “Set clear expectations that financial meaningful questions to portfolio companies support and investment will only be made where investees have put in place policies (and verify responses when necessary), file and human rights due diligence processes shareholder proposals with listed companies, and grievance mechanisms aligned with include human rights milestones in venture the UNGPs, can demonstrate performance capital term sheets, and create human rights improvements over time and provide data risk oversight structures at the board of to support effective investor monitoring.” 7 directors’ level. “Engage investees in constructive dialogue to promote: (1) the adoption Use leverage to move the ESG field of human rights policies, governance, toward respect for human rights. due diligence, and effective grievance mechanisms, and (2) the provision of The consistent integration of human rights remedy for victims of human rights due diligence into all leading ESG frameworks, abuse where the investee has caused standards, regulations, and taxonomies used or contributed to adverse human rights by the financial services sector is essential impacts.” for making progress. FIs are encouraged to use their leverage, either individually or through associations such as the PRI, to call for alignment of ESG benchmarks, data providers, 8 and reporting frameworks with the UNGPs. The Call to Action 03 Use the UNGPs as a Compass for Meeting Global Challenges Make respect for human rights a core element of the just transition. Climate change has profound consequences for the enjoyment of the full range of human rights, including the rights to life, a decent standard of living, and health. Respecting people’s 21 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

rights and ensuring access to remedy provide guard rails for the massive economic shifts Investor Alliance for Human Rights required to move from a fossil fuel-based to a renewable energy-based economy. Yet, A collective action platform for FIs often tackle climate risks and human responsible investment that is grounded in respect for people’s rights issues separately, undermining the fundamental rights. Close collaboration sustainability of each. For instance, a growing with peers and civil society helps number of renewable energy projects around investors identify human rights risks and the world face cancellation due to community priorities and maximize their leverage opposition. By carrying out due diligence, FIs to create change. can better assess the impacts of greenhouse gases attributable to business activities, as well as shed light on the impacts on all those affected by the necessary transition away from a carbon-based economy.9 Optimize digital transformation by ensuring technology also respects human rights. While financial technology, or “fintech,” such as digital financial services, may enhance financial inclusion and participation and bring about other social benefits, it is critical to safeguard against abuses that could have serious human rights implications. Discrimination and predatory lending, data mining and privacy abuses, facial recognition, the growth of cryptocurrencies, and money laundering are among the risks posed by fintech. Likewise, engaging portfolio companies in the tech sector to ensure the development, sales, and use of new digital technologies that respect human rights 10 is essential for tackling systemic risks posed by digital transformation. Engage in collective action to tackle systemic challenges. Addressing global challenges to advancing respect for human rights takes leadership, coordination, and stakeholder engagement to ensure that the solutions target the root causes of problems. Weak regulatory environments can encourage a race to the bottom among financial actors and their portfolio companies, and financial services and the broader economy can contribute to cumulative impacts such as socioeconomic inequality and climate change. To address these, action by individual FIs alone is insufficient. Multi- stakeholder engagement and collective action are essential for building leverage and 11 overcoming these collective challenges. 22 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The Call to Action Engage and Partner with People 04 Affected by Financial Products and Services 12 Meaningful stakeholder engagement is essential for respecting human rights. In a human rights context, this includes engaging with rights-holders who are currently or potentially affected, as well as their legitimate representatives, and expert organizations (e.g., trade unions, human rights defenders, and civil society organizations). Engaging stakeholders with firsthand knowledge of how a business may affect people— negatively or positively—is vital for due diligence to function and for business to succeed. Innovate FI stakeholder engagement. It may not always be practical for FIs to directly engage with impacted rights-holders. They Dutch Banking Sector Agreement on may be far removed from the impact of their Human Rights financial activities, as in the case of asset Banks participating in the Agreement owners and managers, or there may be no worked together with signatories actual adverse impacts to identify yet, which from civil society, trade unions, and may be the case for venture capital firms government toward meeting their human rights responsibilities. that invest in start-ups at the ideas stage. In these instances, FIs should be prepared to engage directly with impacted rights-holders where the opportunity arises, and proactively develop reasonable alternatives, such as engaging credible, independent expert resources, including human rights defenders and others from civil society to inform institutional understanding of human rights risks and how to manage them. Elevate stakeholder voice among clients and portfolio companies. Assess a company’s policies and practices regarding stakeholder engagement as well as the effectiveness of their grievance mechanisms to ensure understanding of what is happening on the ground. Use leverage with clients and portfolio companies to promote meaningful stakeholder engagement. Elevating stakeholder voice and perspectives in corporate governance of investee companies may also include reserving board seats for workers, promoting opportunities for employee ownership, and calling 13 for the creation of stakeholder advisory councils for boards. 23 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Engage critical voices in good faith and encourage clients and portfolio companies to do the same. Engaging with and enabling critical voices to raise concerns in good faith is key for finding human rights red flags. Instead of looking to manage reputational harm associated with highly critical stakeholders, FIs should embrace the tension that may arise in these situations and recognize it as an opportunity to gain valuable knowledge, inform due diligence, and even partner with external voices to jointly find solutions to key challenges. Consider not just the who but also the how. Meaningful stakeholder engagement means not only considering who to engage, but also how to engage, which will differ based on the individual or group. To ensure that interactions are meaningful, FIs should undertake efforts to remove inherent power imbalances and ensure stakeholders are able to engage on an even playing field, especially when they may face threats to their security and well-being. This may involve the participation of mediators, facilitators, or other third parties. The Call to Action 05 Ensure and Enable Access to Remedy for Victims of Harm Preventing harm is essential for respecting human rights, but so is repairing wrongs for victims of harm and ensuring access to remedy.14 FIs are expected to adopt or participate in effective grievance mechanisms that provide a channel for stakeholders, including affected rights-holders, to report adverse human rights impacts connected to an FI’s activities and portfolios. This may involve innovating approaches to remedy. Establish human rights grievance mechanisms for concerns arising in financed projects, such as the one launched by ANZ Bank in 2021 following extensive consultation with human rights organizations. Participate in or create multistakeholder initiatives with a grievance and remedy component that enables stakeholders to share information about human rights harm 24 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

and access remedy, such as the Dutch Pension Fund Agreement on Responsible Investment. Who provides remedy? Develop a robust grievance mechanism Some FIs, such as private equity infrastructure that involves (1) proactively firms or banks providing project supporting company preparedness for remedy lending, may be more likely than before harm occurs by communicating others to contribute to, or in some expectations regarding remedy and grievance cases cause, adverse impacts through their relationships with clients and mechanisms to investees and clients; (2) portfolio companies. In these cases, reactively using leverage where harm occurs FIs are expected to cease the action to influence portfolio companies and clients causing the harm and play a direct to focus on remedy, engage with affected role in providing remedy. Where an FI has contributed to harm, they are people, and ensure that there is a meaningful also expected use their leverage to remedy outcome; and (3) participating in influence other actors contributing to multi-stakeholder initiatives where clients the harm to mitigate the harm and and portfolio companies participate and to provide remedy. However, even if that incorporate a grievance and remedy FIs are not contributing to harm, they may still be directly linked to adverse component. human rights impacts through their products and services. FIs should use Explore innovative contract clauses or their leverage to promote and enable financial vehicles up front to capture the remedy for victims of their value risk of harm/adverse investment externalities chains. and ensure that there are funds available to provide remedy before harm occurs. Consider the innovations and lessons from grievance mechanisms and accountability frameworks that have evolved in other settings, such as in project and development finance. Networks and platforms, such as the Grievance Redress and Accountability Mechanism partnership, exist to build capacity and a community of practice for FIs and other entities in their efforts to meet the UNGPs’ requirements. Central to making progress on remedy are efforts to shift institutional culture. While difficult to achieve, when cultural changes within FIs reach a tipping point, the changes can be profound. It takes strong leadership, clear communication, and the need to view complaints not simply as a source of reputational risk, but as a source of learning that is essential for improved performance and accountability. 25 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The UNGPs 10+ Roadmap puts forward a resounding call to action for the financial services industry. 26 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

The Next Steps for Transforming Finance Without the active engagement of FIs and those that work with and influence them to make respect for human rights a reality, meaningful progress on addressing the financial system’s impacts on people will remain limited in the decade ahead. Efforts to build a common understanding of how the human rights and the UNGPs are the “S” of ESG but are also core to “E” and “G” are essential. This should be supported with appropriate metrics and a recognition that limiting the focus on human rights to ESG-labeled activities contradicts the basic idea that FIs, like all companies, have a responsibility to respect human rights. The UNGPs 10+ Roadmap emphasizes that the time for action is now, and the financial services industry has the reach and leverage to drive the realization of human rights in business. With the right mix of practical tools and tailored guidance across the industry, there is no reason why we could not see this transformation in time for the UNGPs’ 20th anniversary. Through collective action with peers and engagement with civil society, governments, international institutions, and other stakeholders, the financial services industry can play a leading role in reining in harmful practices while promoting business that leads to positive social impacts. While these steps will not happen overnight, they represent some of the crucial building blocks to meet the demands and expectations of the ESG movement, avert serious human rights risks, and achieve a more just and sustainable global economy. To learn more about BSR’s work to support FIs in their efforts to meet human rights expectations, align their business practices with the UNGPs, and act on key priorities in the next decade, visit our website or contact Paloma Munoz Quick, Global Lead on Financial Services and Human Rights, at [email protected]. 27 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

Endnotes ESG 2.0: A Human Rights Approach 1 The degree of leverage over a company does not determine whether an FI should use leverage. Rather, it helps determine what it can do to persuade that entity to act. 2 Guiding Principle 14 clarifies that severity of impacts are judged by their scale, scope, and irremediable character. The Call to Action 3 See UNGP 16 on policy commitments and page 36 of the Investor Toolkit on Human Rights to find a checklist for human rights policy commitments. 4 UNGPs 10+: A Roadmap for the Next Decade of Business and Human Rights, Action area 3, Goal 3.2: Embed human rights due diligence in corporate governance and business models 5 Action area 3, Goal 3.2: Embed human rights due diligence in corporate governance and business models 6 Action area 3, Goal 3.1: Scale up business uptake and translate commitments to respect into practice 7 Action area 6, Goal 6.1: Seize financial sector ESG momentum and align S in ESG with the UNGPs 8 Action area 6, Goal 6.2: Leverage other business community shapers: beyond regulators and finance 9 Action area 1, Goal 1.1: Make business respect for human rights a core element of just transition and sustainable development strategies, applying all three pillars of the UNGPs 10 Action area 1, Goal 1.3: Optimize the digital transformation through respect for human rights 11 Action area 1, Goal 1.2: Enhance collective action to tackle systemic challenges 12 Action area 5: Ensure meaningful stakeholder engagement to reinforce protect, respect and remedy 13 Recommendations, Taking Stock of Investor Implementation of the UN Guiding Principles on Business and Human Rights (A/HRC/47/39/Add.2), UNWG, June 2021. 14 Action area 4: Access to Remedy. Several factors determine where on the continuum between linkage and contribution a particular situation may sit, including the extent to which the firm enabled, encouraged, or motivated human rights harm by the company; the extent to which it could or should have known about such harm; and the quality of any mitigating steps the firm takes to address it. Disclaimer The conclusions presented in this document represent BSR’s best professional judgment, based upon the information available and conditions existing as of the date of the review. In performing its assignment, BSR relies upon publicly available information, information provided by member company, and information provided by third parties. Accordingly, the conclusions in this document are valid only to the extent that the information provided or available to BSR was accurate and complete, and the strength and accuracy of the conclusions may be impacted by facts, data, and context to which BSR was not privy. As such, the facts or conclusions referenced in this document should not be considered an audit, certification, or any form of qualification. This document does not constitute and cannot be relied upon as legal advice of any sort and cannot be considered an exhaustive review of legal or regulatory compliance. BSR makes no representations or warranties, express or implied, about the business or its operations. BSR maintains a policy of not acting as a representative of its membership, nor does it endorse specific policies or standards. The views expressed in this document do not reflect those of BSR member companies. 28 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE

BSR™ is an organization of sustainable business experts that works with its global network of the world’s leading companies to build a just and sustainable world. With offices in Asia, Europe, and North America, BSR™ provides insight, advice, and collaborative initiatives to help you see a changing world more clearly, create long-term business value, and scale impact. Copyright © 2022 by Business for Social Responsibility (BSR) All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. 29 HUMAN RIGHTS ROADMAP FOR TRANSFORMING FINANCE