Financial institutions are key players in the global sustainability agenda, and while environmental issues, such as climate change and water stress, have taken center stage, we are seeing greater attention dedicated to the S in ESG– to social issues.
In particular, scrutiny of the financial sector’s role in preventing human rights abuses continues to grow. Critics have pointed out that the industry tends to place more emphasis on their support for ‘green’ projects than seeking to avoid and address human rights risks associated with their activities and investments. Indeed, recent research from ShareAction has found that 70% of the world’s largest asset managers, with cumulative assets under management of $47 trillion, lack a policy to exclude or engage with companies that are not aligned with key international guidelines, such as the UN Guiding Principles on Business and Human Rights.
The finance sector has a unique role to play
Data on modern slavery and human trafficking provides insight into the extent of human rights abuses:
- More than 40 million people were estimated to be enslaved in 2016 around the world – equating to around 1 person in every 185.
- Modern slavery occurs across multiple settings and is connected to diverse industries spanning from agriculture, to beauty, to car washes and construction – to name but a few.
- 136,000 victims are thought to be located in the UK, working in the formal and informal economy.
- These crimes are estimated to generate more than $150 billion for organised criminal gangs per year, including $47 billion in developed countries, making it the third largest source of criminal profits globally.
The victims and perpetrators of modern slavery, and the businesses – wittingly or unwittingly – implicated, will intersect with the financial sector in multiple ways. For example, through their use of banking and credit services, through handling payrolls and worker remittances, or by providing finance to projects reliant on forced labour.
The Independent Anti-Slavery Commissioner, a role created to support implementation of the UK’s Modern Slavery Act, has called on the entire UK financial sector to play a more proactive role in the fight against modern slavery and human trafficking. As part of this, the commissioner has stressed that providers of capital are well positioned to police supply chains and ensure that those they do business with respect human rights. Governments simply cannot tackle these issues alone.
Interim results from a research programme conducted with financial crime think tank Themis have exposed worryingly low levels of awareness of the issue and inadequate policies and practices to mitigate modern slavery risks. The results of this project, which aims to promote a cross industry collaborative response, will increase pressure on the entire financial system to act – from accountancy firms to banks and building societies, to currency exchange houses and those handling cryptocurrency.
Responsibilities are becoming clearer
The human rights responsibilities of the financial sector are becoming increasingly clearer through new OECD sector guidance, including most recently for corporate lending and securities underwriting, published at the end of 2019. The guidance provides greater clarity for the sector on how to operationalize international requirements on human rights, as set out in the UN Guiding Principles for Business and Human Rights. It elaborates when financial actors are considered to have contributed to an abuse caused by their clients, and provides a framework through which to carry out due diligence to identify, respond to, and publicly communicate environmental and human rights risks associated with their clients.
Though this guidance remains voluntary for now, it is being integrated into EU and national legislation. The global movement for mandatory human rights due diligence legislation has attracted broad support from policymakers, civil society and a coalition of investors representing $5 trillion in assets under management. In April 2020, the EU Commissioner for Justice committed to a legislative initiative on mandatory human rights and environmental due diligence obligations for EU companies, in early 2021. And in the UK, two MPs have put forward an amendment to the Environment Bill calling the government to impose a duty on companies, including the financial sector, to conduct due diligence on environmental and human rights risks across the entire supply chain and investment chain, and to identify, assess, prevent, or mitigate the risks so that the impacts are negligible.
Given these fast-changing expectations, the financial sector would be wise to start engaging more proactively on this issue. Doing so will entail a fundamental change in mindset as the approach should focus on mitigating risks with the most severe outcomes to people – not the most financially material to the business. What is encouraging is that with growing stakeholder scrutiny, these risks will increasingly converge.
To learn more about how changing expectations on business and human rights will affect your business and what to do about it, please get in touch with our Consultant, Pendragon Stuart, at email@example.com
Please consider participating in this anonymous 10 minute survey conducted by Themis on behalf of the Anti-Slavery Commissioner to help inform a sector-wide response on tackling modern slavery and human trafficking.