“Hardening” Soft Law and Human Rights Expectations for Financial Institutions

global moneyEarlier this month, a group of global banks known as the Thun Group released a discussion paper exploring the ways in which financial institutions might seek to integrate the U.N. Guiding Principles on Business and Human Rights into their core business activities.

Current members of the Thun Group include Barclays, BBVA, Credit Suisse AG, ING Bank N.V., RBS Group, UBS AG, and UniCredit.

Notably, one of the identified drivers for the Thun Group’s work includes “acting instead of waiting for legal requirements.” The authors observe that the Guiding Principles represent “hardening” soft law “in the sense that they act as a catalyst to spark new policy requirements or binding regulation.” In making this observation, the paper observes that:

While the Guiding Principles are non-binding, they have nevertheless prompted legal developments which are relevant for banks. The European Union, the United States, and other countries have introduced binding rules impacting on business responsibility for human rights.  It is therefore advisable for banks to proactively engage in the ongoing debate around the Guiding Principles and their implementation.

The paper specifically references the revised OECD Guidelines for Multinational Enterprises, the European Union Strategy on Corporate Social Responsibility, and the release of seven “shared principles on investment” by the  European Union and the United States as reflective of the influence of the Guiding Principles on legal and policy trends relevant to financial institutions.

In light of these developments, the body of the paper explores how financial institutions might seek to incorporate human rights considerations into different types of services including retail banking, corporate and investment banking, and asset management, and states that:

[B]anks need to examine how the Guiding Principles can best be applied across all types of products and services provided to clients and what the scope of depth of the human rights responsibilities and due diligence requirements should be, including what can reasonably be achieved in terms of leverage. Banks should consider assessing the human rights impacts inherent in a business opportunity and to what extent it is possible to eliminate or minimise adverse effects.

The Thun Group focuses on the fundamental expectation of human rights due diligence, as framed by the Guiding Principles, and notes that “the due diligence outlined by the Guiding Principles requires that businesses, including banks, take a broader view of their potential impacts rather than focusing solely on their own commercial and reputational risks.”

In exploring the different types of products and services offered by large financial institutions, the paper note that different services involved varying degrees of information being shared by clients with banks. Some transactions involve little information exchange and no ongoing relationship, while others, especially in the area of project finance, involve both significant exchanges of information and an ongoing relationship. These differences will impact the extent to which financial institutions can exercise leverage over clients and thus seek to mitigate potential adverse human rights impacts that may be associated with a client’s activities. In relationships where there is less leverage, financial institutions may need to make decisions at the outset as to whether or not to approve or decline a client relationship.

Ultimately, the Thun Group paper is intended to spark conversation both within the financial sector and with key stakeholders. While criticisms have been raised with regard to both the scope and substance of the report, the fact of its release reflects the ever-increasing importance of the Guiding Principles as a substantive normative framework for both policymakers and private institutions.

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