Setting human-rights due diligence back on track

A carve-out for the finance sector would water down the ambition of the EU’s human-rights due-diligence legislation.

When in April 2020, Didier Reynders, the European Commission member with the justice brief, promised a legislative initiative on mandatory obligations for European Union companies on human-rights due diligence, it sent a positive signal that business would be required to assume global responsibility in tackling associated violations. When the commission’s proposed directive however materialised in February this year, it was riddled with missed opportunities to deliver on this mission.

For too long, the global operations and value chains from which multinationals draw their profits have been a wild west. Companies have been allowed to overlay human-rights abuses with complexity, obscurity and soft ‘corporate social responsibility’ pledges, without accepting real accountability for the conditions of their workers, and those of their suppliers, around the world.

Ending corporations’ unilateral oversight over human-rights due diligence is key. For the adoption of legislation to truly shift practices to safeguard human rights, including workers’ rights, we must embed accountability throughout the process by creating a seat at the table for those representing rightsholders—including trade unions at national and international levels.

This must be the case for all companies—the proposed directive would only cover large enterprises—and for all sectors. Yet the proposal includes several clauses limiting the human-rights due-diligence responsibilities of financial corporations, as the finance-sector trade unions which UNI Global Union represents have highlighted.

Own goal

Finance has a catalytic effect across the economy. To grow to their current size, all multinational companies have needed it. Through these links, finance has an influence in setting standards of company practice, which must not be overlooked.

While financial relationships vary, this influence may stem from privileged access to the operations of multinational clients and investees or ownership rights which offer a shareholder voice and, ultimately, the ability to reward good behaviour or punish bad through financing decisions. That is why the attempt to exempt finance companies from full human-rights due-diligence would represent not merely an opportunity missed but an own goal.

There are three key flaws. The latest draft of the EU legislation excludes finance from the list of high-impact sectors, absolving many smaller and often less visible financial corporations from due-diligence obligations. Remaining larger corporations would be required to undertake a due-diligence assessment only once in the duration of a contract. And this assessment would be limited to large multinational clients, excluding their own value chains.

Increasingly acknowledged

Finance’s impact on human rights is hugely significant and it should be classified as high. The commission acknowledges that high-impact sectors should be those for which the Organisation for Economic Co-operation and Development has developed specific due-diligence guidelines. In fact the OECD has developed not one but two sets of guidance for the financial sector—covering institutional investors and corporate lending.

Finance has itself increasingly acknowledged the importance of ‘environmental, social and governance’ considerations. Front-runners in the sector have gone further to address their impacts on people and the planet, including through leading institutions adopting practices based on human-rights due diligence.

Only requiring due-diligence assessments once during a contract ignores evolving human-rights risks. Myanmar provides an illuminating example. Two years ago, investing in the country would have presented manageable risks. But since the February 2021 coup, blatant human-rights violations have become rife and UNI has urged banks to cut ties with the military junta. Yet the draft directive would allow prior investment decisions in such a scenario to retain a due-diligence green light.

Finally, restricting due-diligence requirements to direct investments or contracts with large corporate clients would create a vast exemption which would limit financial due diligence to the tip of the iceberg of human-rights risks. This would be in contrast to explicit guidance on the sector from the OECD and the Office of the United Nations High Commissioner for Human Rights, as well as the UN Principles for Responsible Investment. Ensuring the client was merely a holding company could confine due diligence to that legal shell, rather than embracing operations actually taking place in a company subsidiary—let alone those affecting workers in outsourced companies or along the value chain.

Banks and insurance companies already have a highly efficient infrastructure for quality assessments, on risk and return, when investing in companies. In fact this is their primary role. Integrating an additional component is perfectly feasible if human rights become mandated as a priority.

Core consideration

Indeed, in some sectors of finance, human rights are already a core consideration. Pension funds have been leading the way. In the Netherlands, pension funds broke new ground in 2018 when they signed a covenant with trade unions, other civil-society organisations and the Dutch government committing to respect human and labour rights.

Rather than acting as a barrier to delivering workers’ pensions, respecting human rights in investment processes supports pension funds: human-rights due diligence provides a ‘canary in the coalmine’, potentially highlighting other areas of poor governance where failings are found. And this is not just about pension funds: more than 100 investors with $4 trillion in assets under management are part of the Investor Alliance for Human Rights, which also makes the case for serious due-diligence legislation.

The role of finance corporations here is not to bear all responsibility for action on the ground but to ensure that multinationals have addressed their own responsibilities. While the reach of finance is vast, by taking a risk-based approach, as the international standards foresee, finance’s human-rights due-diligence actions can be prioritised to address the most severe risks to people, making the process entirely proportionate and feasible. Ending human-rights abuses is worth a minor administrative burden.

Gatekeeper role

Unions are by no means alone in rejecting the proposed carve-out of finance in the draft directive. The UN Principles for Responsible Investment, the Business and Human Rights Resource Centre, a coalition of nongovernmental organisations, the experts Shift on the UN Guiding Principles on Business and Human Rights, the European Coalition for Corporate Justice and many more have come out emphatically against it.

Profiting from human-rights abuses can no longer be accepted. To deliver the transformative promise of human-rights due diligence, we need all hands on deck—not business as usual. To get there, the finance sector’s gatekeeper role must be activated.