The Corporate Social Responsibilities of Financial Institutions for the Conduct of

their Borrowers: The View From International Law and Standards.

Larry Catá BackerW. Richard and Mary Eshelman Faculty Scholar, Professor of Law and International Affairs

Pennsylvania State University

Presented at 21st Annual Business Law Fall Forum, Innovating Corporate Social Responsibility: From the Local to the GlobalNorthwestern School of Law of Lewis & Clark College

Portland, Oregon -- 7 October 2016

Context•To what extent are financial institutions responsible for the human rights breaches of their borrowers?• “While the obligation for the protection of human rights lies with the state, IFIs and their

member states also have responsibilities to ensure that activities they support do not cause, or contribute to, human rights abuses by putting in place adequate safeguards.” Statement of Global Initiative for Economic, Social and Cultural Rights to UN Human Rights Council

• How might these obligations constrain borrowers? • Secondary responsibility of financial sector enterprises

• Loan making; Pricing; covenants• Due diligence during life of relationship

•Two questions embedded here:• What are the mandatory/discretionary CSR-Human Rights responsibilities of with

respect to its own internal operations• To what extent do those responsibilities carry over to their custolmersin 2 respects:

• Which companies fincaincial institutions will do business with• What the the conditions that financial institutions will impose on customers.

Roadmap for Discussion• Overall objectives:

• Considers the corporate social responsibilities of financial institutions, including sovereign wealth funds, for the conduct of their borrowers.

• The extent of any duty or responsibility of lenders to ensure that their borrowers comply with CSR obligations (or alternatively conforms to international human rights standards) as a core aspect of their own CSR obligations (or alternatively) of their responsibility to respect human rights. International norm structures

• FIRST: Sources and scope of CSR responsibility• Differences between CSR and human rights approaches• Legal and societal (soft law)• Application (techniques and methods)

• SECOND: Application of rules to Financial Institutions• THIRD: Case Studies

• OECD• SWFs• Private Standards

National Law• Basic structures

• CSR orientation rather than Human rights

• Constraints of fundamental corporate law principles• Autonomous corporate personality• Shareholder primacy

• Permissive rather than mandatory• Benefit corporations exception

•Disclosure oriented • (e.g. Dodd Franck ¶1502Conflict

Minerals; UK Modern Slavery Act)

• Comparison Cal. Transparency Act and UK Modern Slavery Act (from JD supra) 4

International Law• Human Rights rather than CSR oriented• General Human Rights Laws

• Large number in specific areas• Substantive; some disclosure requirements

• International Bill of Human Rights (1948)• Universal Declaration of Human Rights• Covenants: International Covenant on Civil

and Political Rights (1966) with its two Optional Protocols and the International Covenant on Economic, Social and Cultural Rights (1966).

• On Responsibilities of Economic Enterprises Hard law—none • New comprehensive Business and Human

Rights Treaty?

International Norms: Soft law

• Soft Law—Objectives• Norm creation• Source for public lawmaking

and private governance regimes

• Soft Law—Sources• UN Guiding Principles• OECD Guidelines for MNEs• BITs with Human Rights

Components• 3rd Party Standards• MNE internal norms• Social License for extractives Credit: Prof. Masahiko Iwamura, Soft

Law and the State-Market Relationship

UNGP• Endorsed by UN Human Rights Council

• Does not create new CSR or HR legal protections• Polycentric: simultaneous obligations to states

and enterprises• 3 part structure

• State duty to protect human rights• Extends no further than legal obligations of state• Opens the door to extraterritorial application

• Corporate responsibility to respect human rights• International bill of human rights• Human rights due diligence• Obligation to work around host state restrictions

• Remedial obligations for states and enterprises• Principally through state• Also international and private mechanisms

John G. Ruggie, Special Representative of UN Secretary General for Business and

Human Rights

OECD Guidelines for Multinationals• Guidelines: recommendations addressed by governments to MNEs.

• They provide principles and standards of good practice consistent with applicable laws and internationally recognised standards.

• Observance of the Guidelines by enterprises is voluntary and not legally enforceable.• Cover a number of general areas

• transparency/disclosure, human rights, employment/industrial relations, environmental issues, bribery/corruption, consumer protection, technology transfer, anti-competitive schemes, and taxation • Expert letters and statements on the application of the OECD Guidelines for Multinational Enterprises

and UN Guiding Principles on Business and Human Rights in the context of the financial sector, 2014

• Enterprises should carry out risk-based due diligence to identify, prevent and mitigate actual and potential adverse impacts and account for how these impacts are addressed. (Guidelines Chp II, ¶ 10)

• Special toolkit for weak governance zones• Extractives and weak governance zones HERE• OECD Due Diligence Guidance: Meaningful Stakeholder Engagement

• Complaint procedures through National Contact Points.• Have been used increasingly in two contexts

• NGOs to advance international normative agenda• Labor unions to leverage national litigation

BITs with Human Rights Elements?--Bilateral Investment Treaties

--typically deal with investment and investment protection;--Cuban Bits tend to focus on state prerogatives--Central focus-internationalize national law;-might discriminate in favor of foreign investors over domestic;-stabilization provisions protect investment against domestic law;-focus on expropriation-focus on dispute resolution mechanisms (eg ICSID, etc.).

--Multilateral version: --Trans Pacific Partnership (TPP)--China’s One Belt/One Road --Criticism: dispute resolution mechanism strips state courts of authority; internationalizes the “law” of

investment autonomous of human rights norms and national law--Possibilities

-Incorporate HR norms in BIT subject to stabilization protection-produce strong enforcement mechanism through arbitration-Early Study HERE

--Challenges: (1) coherence between HR and trade bureaucracies; (2) harmonized legal basis; (3) stable national governance (administrative expertise, resources, corruption)

3rd Party Private Standards

•GRI (Global Reporting Initiative)•Social, economic and rights based reporting of economic activity

•Private-public partnerships•ISO 26000 CSR•EITI (Extractive Industries Transparency Initiative;

•(2016 Standard)

•Private organizations •Certification of compliance with proprietary standards•Monitoring services•Effectively purchasing reputation and privatizing norm creation and administraiton

Internal MNE Norms•Largest MNEs already have harmonized and sometimes complex systems of CSR based control of its supply and production chain throughout their global operations

• Rio Tinto• Barrick• TransCanada

International Norms and Financial Institutions• UNGP/OECD Guidelines• UNPRI• Equator Principles• SWF

OECD Guidelines/UNGP•UNGP• ¶ 13 “directly linked to their operations”• ¶ 19 effective integration of HRDD•OECD Guidelines• Contextual application • Depends on the scope of the terms

“business relationships” and “directly linked”

• Scope and application of ‘business relationships’ in the financial sector under the OECD Guidelines for Multinational Enterprises, 2014

• Due diligence in the financial sector: adverse impacts directly linked to financial sector operations, products or services by a business relationship, 2014

3rd Party Standards for Financial Institutions

• IFC Financial Valuation Toolkit• “to help companies identify the optimum sustainability investment portfolio to deliver

maximum business and social value.”•Equator Principles

• risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects.

• Guidelines for incorporation into loan documents•U.N. Principles for Responsible Investment•SWFs

• Ethics Guidelines•Public-Private efforts

• PROTOCOLO VERDE AGENDA DE COOPERACIÓN ENTRE EL GOBIERNO NACIONAL Y EL SECTOR FINANCIERO COLOMBIANO

• Generally IFC Sustainable Banking Guidance from Sustainable Banking Network Members

UN-PRIAs institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.+Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.+Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.+Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.+Principle 5: We will work together to enhance our effectiveness in implementing the Principles.+Principle 6: We will each report on our activities and progress towards implementing the Principles.+

In signing the Principles, we as investors publicly commit to adopt and implement them, where consistent with our fiduciary responsibilities. We also commit to evaluate the effectiveness and improve the content of the Principles over time. We believe this will improve our ability to meet commitments to beneficiaries as well as better align our investment activities with the broader interests of society.--Sustainable financial system: nine priority conditions to address (2016)

Equator Principles• The EPFI will, as part of its internal environmental and social review and due diligence, categorise it

based on the magnitude of its potential environmental and social risks and impacts• Client to conduct an Assessment process to address, to the EPFI’s satisfaction, the relevant

environmental and social risks and impacts of the proposed Project• Address compliance with relevant host country laws, regulations and permits that pertain to

environmental and social issues in accordance with international standards• EPFI will require the client to develop or maintain an Environmental and Social Management

System (ESMS)• the EPFI will require the client to demonstrate effective Stakeholder Engagement as an ongoing

process in a structured and culturally appropriate manner• the EPFI will require the client, as part of the ESMS, to establish a grievance mechanism an

Independent Environmental and Social Consultant, not directly associated with the client, will carry out an Independent Review of the Assessment Documentation

• Incorporation of covenants linked to compliance• The client to retain qualified and experienced external experts to verify its monitoring information

which would be shared with the EPFI.• Client reporting requirements

Sovereign Wealth Funds• Santiago Principles:• GAPP 19.1. Subprinciple. • If investment decisions are subject to other than economic and financial

considerations, these should be clearly set out in the investment policy and be publicly disclosed.

• Explanation and commentary• Some SWFs may exclude certain investments for various reasons, including

legally binding international sanctions and social, ethical, or religious reasons (e.g., Kuwait, New Zealand, and Norway). More broadly, some SWFs may address social, environmental, or other factors in their investment policy. If so, these reasons and factors should be publicly disclosed.

SWFs: Norway Pension Fund Global

• History• A new form of projecting public power through private markets. Described HERE.

• Structure• Ministry of Finance• Norges Bank• Secretariat

• Applicable Standards• Santiago Principles

• The Norwegian Government Pension Fund Global’s adherence with the Santiago principles 2015).• Management Mandate (§2.2 Responsible Investment)• Ethics Guidelines

• Ethics Council• Authority

• Active Shareholding Global Voting Guidelines• Exclusion

•Bound by OECD Guidelines? UNGP?

Norway SWF: Pension Fund Global• Ethics Guidelines

• Section 3. Criteria for conduct based observation and exclusion of companies Companies may be put under observation or be excluded if there is an unacceptable risk that the company contributes to or is responsible for:

• a) serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour and the worst forms of child labour

• b) serious violations of the rights of individuals in situations of war or conflict• c) severe environmental damage • d) acts or omissions that on an aggregate company level lead to unacceptable

greenhouse gas emissions• e) gross corruption• f) other particularly serious violations of fundamental ethical norms

• SANCTIONS: Observation versus Exclusion

A Glimpse at the Future Now: Case Studies

• Friends of the Earth Europe and Friends of the Earth Netherlands/Milieudefensie – Rabobank

• Norway Sovereign Wealth Fund Cases

• Private Bank Responsible Investing Programs in Extractive Sector

OECD: -Friends of the Earth Europe and Friends of the Earth Netherlands/Milieudefensie - Rabobank• Large financial institution heavily involved in palm oil sector

• Rabobank states it expects its clients to respect rights and to obtain free, prior and informed consent (FPIC) as a part of and guided by the Round Table for Responsible Palm Oil (RSPO) principles & criteria and as part of the environmental and social impact assessment (ESIA) process prior to embarking on a new palm oil development.

Rabobank will address the consequences of non-compliance with the FPIC requirement in the provisions of its palm oil policy;

Rabobank handles complaints concerning negative impacts caused by clients. Rabobank will modify its current approach to handling complaints. It will publish its complaints procedure, including a time frame for the procedure;

• Privatization of enforcement of emerging rule systems for the management of the palm oil production chains through the organs of financial institutions.

• Rabobank, then, is entrusted with global management of palm oil production chains through its structurally differentiated self referencing governance system, one founded on its relationship with its borrowers. (On the structural characteristics here)

Norwegian Sovereign Wealth Fund:• Recommendations from 2010, 2012 and 2014

regarding the companies Repsol S.A. and Reliance Industries Limited• On 1 December 2010 the Council on Ethics

recommended the exclusion of the companies Repsol YPF (now Repsol S.A) and Reliance Industries Limited from the Government Pension Fund Global. In the Council’s view, the exploration activity undertaken by the companies in Block 39 would increase the risk that any indigenous peoples who may be living in voluntary isolation within the block would come into contact with outsiders, leading to potentially serious consequences for these peoples’ life, health and way of living. This would constitute an unacceptable risk of the companies contributing to serious and systematic human rights violations.

• Exclusion lifted when Repsol sold its interest

Norway SWF:

• Exclusion of San Leon Energy Plc for contribution to serious violations of fundamental ethical norms• The Council on Ethics for the Government Pension Fund Global (Etikkrådet for

Statens pensjonsfond utland) recommends the exclusion of San Leon Energy Plc (SLE; SLGYY) from the Government Pension Fund Global because the company contributes to serious violations of fundamental ethical norms through its onshore hydrocarbon exploration in Western Sahara on behalf of Moroccan authorities.

• Same: Potash Corporation of Saskatchewan (6 December 2011)

• Indonesian Company PT Astra International Tbk Placed Under Observation (Severe Environmental Risks) • “The Council on Ethics for the Government Pension Fund Global (GPFG)

recommends that PT Astra International Tbk be placed under observation due to the risk that the company may be responsible for severe environmental damage. The observation relates to the company’s plantation operation in Indonesia. On 11 June 2015, Astra announced that it would immediately be ceasing all logging and land conversion while developing a new sustainability strategy.

Norway SWF:

• Incoherence or Discretion in Corruption and Investment Approaches?--Petroleo Brasileiro SA (Petrobras) under observation

• Norges Bank has decided to place Petroleo Brasileiro SA (Petrobras) under observation because of the risk of severe corruption. Petrobras is one of the largest state owned petroleum TNCs in Latin America and one that is deeply embedded in corruption investigations (here and here (including the write off of over $2 billion in bribe payments)) that reached all the way to the office of the President of the Republic (here).• Compare Corruption

and Investment--Chinese Company ZTE Corp. Excluded From Norway Sovereign Wealth Fund Investment Universe

Privatization of Laws: Banks as Legislators• Banks now serve as the means

through which non binding international norm standards are hardened within production chains in those sectors in which banks influence behaviors through lending practices.• Example of banking rule systems

in the extractives sector

HSBC: Mining and Metals Policies

• Private standards drawing from international soft norms• Mixes risk management and CSR approaches• “HSBC’s Mining and Metals Sector Policy provides guidance to its offices on sustainability

standards applicable to the Group’s involvement with this sector. The standards are based on those accepted by the industry and by other stakeholders as representing best practice, and are consistent with HSBC’s long-standing commitment to sustainable development.”

• Complemented by Equator Principles

• Scope • The financial services covered by the Mining and Metals Sector Policy include all lending and

other forms of financial assistance, debt capital markets activities, project finance and advisory work. The policy applies to equity capital markets and asset management where practical, recognising the lower degree of influence the bank may have in these circumstances.

• The mining and metals activities within the scope of the policy are: exploration; mine development; mineral extraction and mine operation; mine closure and reclamation; and primary processing of minerals.

•2007 Mining and Metals Policies• Policy• Standards

HSBC: Policy• The policy is consistent with, and builds on, HSBC’s Sustainability Risk Standard and its adoption of the

Equator Principles – voluntary guidelines which apply to project finance activities – as well as the existing sector risk policies. In particular, HSBC will not provide financial services to the mining and metals sector which directly support: • Operations in UNESCO World Heritage Sites, unless the activities pre-date the UNESCO designation; • The mining, processing and/or sale of uranium for weapons purposes; • The mining or trading of rough diamonds not certified under the Kimberley Process Certification Scheme; • Artisanal mining; • Operations in wetlands on the Ramsar List (the Register of Wetlands of International Importance of the Ramsar

Convention on Wetlands); and • Operations in Primary Tropical Moist Forests, High Conservation Value Forests or Critical Natural Habitats, where

there is significant degradation or conversion – unless legacy assets are involved (see below).

• Support where the disposal of tailings is in a river or shallow sea-water environment will only be considered exceptionally where alternative options are not feasible and the benefits to local communities are significant.

• HSBC has a restricted appetite for supporting individual operating sites where: • Tailings storage facilities and waste rock dumps represent a material threat to human life or groundwater (for

example, from tailings dam failure or acid mine drainage); • Mines are in an area of high seismic activity or exceptionally high rainfall, without adequate accident and contingency

planning in place; • • Mines have no credible closure plan; and• • Mines or metals operations are in areas where there are credible allegations of human rights violations.

HSBC: Standards•HSBC looks to its clients to operate in accordance with relevant global, regional and national laws, and the policy makes express reference to the following standards. • International Cyanide Management Code: HSBC requires clients using cyanide in the mining of gold to

observe this Code or its equivalent. • International Atomic Energy Agency: HSBC has a restricted appetite for financing uranium for the

power sector where IAEA standards are not met. • European Union Emissions Trading Scheme: HSBC expects clients covered by the scheme to comply

with their allowances to restrict greenhouse gas emissions. • International Finance Corporation (IFC): in jurisdictions where appropriate standards do not exist and

potential client impacts are high, the IFC’s Performance Standards, and Environmental Health and Safety Guidelines are used as a benchmark of internationally accepted standards. This is especially important for social and safety risks, which can arise frequently in the sector and where there are a limited number of internationally accepted standards.

•HSBC is keen to work with clients in the sector who meet these standards. As part of its commitment to engage with clients and assist them towards higher standards of sustainable development, it will also work with clients who may not currently meet these standards due to legacy assets. These assets will typically be ones which pre- date this policy and clients should have a credible, documented and time-bound plan to meet our standards.

Crédit Agricole: Metals and Mining June 2015• The Bank will not participate in financings or investments directly related to the development,

construction or expansion of any metals & mining installation if aware of the following characteristics: • - coal mining projects • - asbestos mining projects • - artisanal mining • - critical impact on a protected area or on wetlands of international importance covered by the Ramsar

Convention • - the project is located within a site listed on the UNESCO World Heritage list

• or when a risk of material non-compliance has been identified and has not received, in its opinion, satisfactory answers with respect to:

• 6

• - the IFC Performance Standards (or equivalent standards when a export credit agency or a multilateral institution is involved) or the Environment, Health and Safety Guidelines, in particular with respect to the ESMS, protection of the fundamental rights of workers, displacement of population, management of tailings, closure and rehabilitation plans as appropriate, biodiversity conservation, impact on critical natural habitats, consent of indigenous people and protection of cultural heritage

• - the relevant industry initiatives listed in section 3 (International Cyanide Management Code for gold mining, Kimberley Process for diamonds, ISTCI for tin minerals, WNA Sustaining Global Best Practices for uranium)

• - public consultation or, when necessary, consent from affected indigenous peoples • - inter States consultation in the event of major cross-borders impacts

Summary• The responsibilities of enterprises to respect human rights

and with respect to environmental and sustainability principles have expanded to institutions that finance enterprise activity

• The scope of a financial institution’s obligations are evolving• Serve as an instrument of privatized international norms • Sources in international soft law frameworks and self-

governance structures

• Evolving structures of compliance• OECD NAPs; arbitration, etc.

• Challenges; • Policy Incoherence: • Obligations for both financial institutions and their borrowers

are evolving might be subject to different standards

• Private governance structures evolving as they incorporate international standards• Control of borrowers through loan pricing (based on human

rights risks) and covenants (compliance and monitoring of standards developed and imposed by lenders)

Conclusion• The trend toward legalization of the

private sphere and for the privatization of governance and administration continues to grow• In the context of the responsibility of

financial institution• privatization is implemented through

the evolution of contract webs with regulatory objectives;

• Legalization is implemented through the transposition of internationalized standards into the rule systems of production chains.

• Autonomy is achieved by detaching dispute resolution from national courts.

• From Social License the Regulation of the Societal Sphere

• “Social license ” generally refers to a local community ’s acceptance or approval of a company ’s project or ongoing presence in an area. It is increasingly recognized

by various stakeholders and communities as a prerequisite to development. The

development of social license occurs outside of formal permitting or

regulatory processes, and requires sustained investment by proponents to

acquire and maintain social capital within the context of trust-based relationships.”

(2013 Social License to Operate: How to Get It, and How to Keep It

, Brian F. Yates and Celesa L. Horvath)

Thank You!For more information please contact me at

lcb11@psu.eduor visit my website:

http:backerinlaw.com