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The Equator Principles and Human Rights Due Diligence – Towards a Positive and Leverage-based Concept of Corporate Social Responsibility

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Abstract

The article is guided by two main research questions: First, do the Equator Principles (EPs), a voluntary CSR-initiative in the project finance sector, and the recently published working paper of the Thun Group of Banks adequately address the U.N. Guiding Principles on Business and Human Rights or do they fall behind the ‘Ruggie framework’? Second, is the demand for human rights due diligence sufficient to classify the EPs as a positive and leverage-based concept of CSR (à la Wettstein and Wood) or is this requirement still a feature of a negative and impact-based concept of CSR? In case it is a negative and impact-based concept of CSR, the question comes up which further steps should be taken by financial institutions to fulfill their positive and leverage-based responsibilities. The article argues that positive and leverage-based responsibilities for multinational companies exist – due to the moral nature of human rights and due to the political authority of multinational companies – and that the current (Ruggie-like) requirements for human rights due diligence are not adequate for a positive and leverage-based concept of CSR. Further measures should be taken by multinational companies – and especially (Equator) banks which possess a high leverage-influence over their clients – to not only ensure the respect for human rights, but also the on-the-ground protection and realization of human rights.

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Notes

  1. For instance, the IFC’s Guidance Notes 1, 2 and 7 contain references to the following declarations: the Universal Declaration of Human Rights, the International Covenants on Civil and Political Rights, and on Economic, Social and Cultural Rights, the core ILO-conventions and the Declaration on the Rights of Indigenous Peoples (IFC 2012b). Since the EPs are based on the IFC’s Performance Standards the EPFIs are also bound by these conventions.

  2. Direct references to the Ruggie framework can be found in the preamble of the EPs (EPA 2013: 2), paragraph 3 of IFC Performance Standard 1 and paragraph 2 of IFC Performance Standard 7 (IFC 2012a), IFC’s Guidance Note 1 (IFC 2012b) and in the Thun Group of Banks’ working paper (Thun Group of Banks 2013).

  3. That a close connection between environmental and social sustainability and stewardship as well as between environmental protection/destruction and the protection/violation of human rights exist can be shown by the following illustrations: Most project-affected indigenous peoples live in remote areas famous for their wilderness and unique ecosystems. Their lives, survival and well-being are intimately entwined with the natural ecosystem, that is, an intimate relationship between indigenous peoples and their land, territory and natural resources exist. The problem is that many extractive or infrastructure development projects financed under the EPs take place in exactly these sensitive ecosystems of high biodiversity and cultural diversity, that is, areas that are extremely vulnerable to the adverse socio-environmental impacts of project finance. Furthermore, several tradeoffs between environmental and human rights protection (and/or destruction/violation) (might) exist: Large industrial projects in emerging markets and developing countries such as transportation and telecommunication infrastructures foster some (human) rights (e.g., the right to development, the right to economic growth (and prosperity), the right to poverty alleviation and the right to employment creation). At the same time, they (may) conflict with other (human) rights or even worse: endanger, threaten and undermine them (e.g., the right to clean environment, protection of biodiversity, protection of cultural heritage as well as protection against involuntary displacement). That is, industrial projects financed under the EPs can have substantially large ecological and socio-economic footprints. They might impact on natural and ecological resources as well as local communities, including indigenous peoples and other disadvantaged and/or vulnerable ethnic minorities.

  4. Wood 2011a; 2012: 63; Wettstein 2009a: 290 ff.; 2012a: 41 ff.; Wettstein and Waddock 2005: 314; Shue 1980/1996: 52.

  5. Wood 2011a; 2012.

  6. Ibid.

  7. Ruggie 2008: 202 ff.; 2013: chapter 3; Wood 2011b.

  8. Wood 2011a; 2012.

  9. Ruggie 2009; 2013: The problem, however, is that regulatory vacuums and governance gaps prevail at the transnational level as well as at the national level of several developing countries and emerging markets.

  10. Ruggie 2008; 2009; 2013.

  11. To be precise, the Ruggie framework consists of negative (and impact-based) and positive (and leverage-based) duty elements. It thus holds an intermediate position between negative (and impact-based) and positive (and leverage-based) CSR-concepts. The main reason for classifying it here as a negative and impact-based CSR-concept is twofold: First, the negative and impact-based CSR-elements inside the Ruggie framework (clearly) outweigh the positive and leverage-based ones (see, for example, Ruggie’s emphasis on preventing and mitigating adverse human rights impacts; avoid causing or contributing to negative human rights impacts; avoid infringing on the rights of others; legal compliance; etc.). This, however, does not imply that positive and leverage-based CSR-elements are completely absent – to the contrary, think of Ruggie’s discussion of (non-) judicial remediation of corporate-related harm as well as the human rights due diligence requirements within the U.N. Guiding Principles. The ‘Protect, Respect and Remedy’ framework thus goes beyond the mere notion of ‘doing no harm’ and minimum legal obligations. The second reason for classifying it here as a negative and impact-based concept of CSR is that a major element of a positive and leverage-based CSR-concept is missing, that is, the notion of leverage: A detailed and qualitative examination of the positive and leverage-based responsibilities of (multinational) companies is lacking in Ruggie’s recent book ‘Just Business’ as well as in the U.N. Guiding Principles (in here, only short references to companies ending their business relationships are included). Moreover, the U.N. Guiding Principles refer to the term ‘leverage’ only a few times, exceptionally in paragraph 19b, while Ruggie’s recent book refers to it mainly in the context of nation states, but not in the context of (multinational) corporations (Ruggie 2009: 16; 2013; United Nations 2011a; 2011b; Wood 2011a; 2012: 65 ff.).

  12. Kobrin 2009: 352 f.; Wettstein 2012b: 748.

  13. Wettstein 2010a; 2012a: 41 ff.; 2012b: 758 ff.; Wood 2011a; 2012; Kobrin 2009: 352 ff.; Scherer and Palazzo 2007, 2008; Scherer et al. 2009, 2014.

  14. Wettstein 2009b; 2010b.

  15. Ibid.; Wettstein and Waddock 2005.

  16. Ibid.; cp. for foundation: Wörsdörfer (forthcoming).

  17. Kobrin 2009: 353 ff. and chapters 2–3.

  18. The term ‘quasi’ indicates the (fundamental) differences between the primary tasks and responsibilities of state and non-state actors; yet it does not create any (additional) room for voluntarism for companies in terms of human rights protection, e.g., in the sense that human rights would be regarded as an optional or voluntary matter of corporate philanthropy. Companies are defined here as (quasi-)political actors, not as organs of society which only need to fulfill their (primarily economic) functions; that is, companies have (moral) duties to fulfill, e.g., an obligation to help protecting and realizing human rights. These positive and leverage-based human rights duties stem from the heightened political status and the political authority and power of (multinational) companies.

  19. Crane/Matten 2004/2010: 76 ff.; Moon et al. 2005; Scherer and Palazzo 2007, 2008; Kobrin 2009: 354; Wettstein 2010a: 39 ff.

  20. Scherer et al. 2006; Wettstein 2010b: 275.

  21. Wettstein 2009a; 2009b: 143.

  22. Scherer and Palazzo 2007: 1098; Scherer et al. 2009, 2014; Moon et al. 2005; Crane and Matten 2004/2010; Matten and Crane 2005; Wettstein 2009a.

  23. Wettstein 2010b: 276; Scherer and Palazzo 2007.

  24. Common or public goods reflect shared ends that are mutually advantageous and beneficial such as environmental stewardship, socio-economic sustainability and human rights protection. These immaterial goods and objectives are not marketable and can only be achieved by collective action, that is, the common good can only be produced and enjoyed in common (Wörsdörfer 2015b). With regard to the EPs, this implies the protection of biodiversity; sustainable resource management and use of renewable natural resources; respect for and observance of human rights in the value and supply chain; and participation and consultation of affected stakeholders in the design, review and implementation of the project (Equator Principles Association 2013: 20).

  25. Wood 2012; Kobrin 2009.

  26. Wettstein 2009a: 284 ff.; 2012b: 748.

  27. Fasterling/Demuijnck 2013: 801 ff.; Wettstein 2009b; 2010a; 2010b; 2012a; 2012b.

  28. Wettstein and Waddock 2005: 312; Kobrin 2009: 351; Gosepath 1998/1999; Lohmann 1998/1999.

  29. Cragg 2004: 125; 2010/2012: 291 and 297; Wettstein 2009b: 145.

  30. Wettstein 2009a; 2009b; 2010a; 2010b; 2012a; 2012b; Kobrin 2009.

  31. Cragg 2004: 124; Sorrell 2004: 134.

  32. In reality, many financial institutions fall behind the human rights due diligence requirements laid down in the Ruggie framework and in the Thun Group of Banks’ working paper (BankTrack 2014a). Here, as well as in other regards, a substantial need for improvement exists to meet even the minimum requirements of a negative and impact-based concept of CSR – not to speak of a positive and leverage-based concept of CSR.

  33. Human rights due diligence is ‘Ruggie-proof’ since it refers to the corporate (negative) duty to respect human rights (Ruggie 2008: 199).

  34. Torrance 2012: 317; United Nations 2011a (in particular, principles 17–21); 2011b; Ruggie 2013: chapters 3 and 4; Fasterling and Demuijnck 2013; Thun Group of Banks 2013: 8 ff.

  35. Including their latest version, the EPs do not require any human rights impact assessment and human rights action plans. Furthermore, human rights due diligence is carried out on a solely voluntary, not mandatory basis.

  36. For financial institutions, this also implies the monitoring of risks throughout the client relationship and/or loan term, that is, value chain screening.

  37. This includes engagement with clients, peer group corporations, human rights specialists, etc. to share best practice and to allow for peer learning and joint problem solving (i.e., address common challenges and keep up to date with recent developments in terms of environmental, social and corporate governance issues).

  38. This element of human rights due diligence is often not included into the list of the main elements. Yet it is decisive from a (business and) human rights perspective – especially when referring to positive and leverage-based responsibilities – and for the on-the-ground realization and protection of human rights. In addition, the inclusion of the voices of affected stakeholders into human rights due diligence processes generates invaluable feedback for the company’s other human rights due diligence elements. Thus, the various elements of human rights due diligence are inextricably linked with each other (the following section draws upon: Wörsdörfer 2015b: section 4.2.2.).

  39. Affected stakeholders must have rights to information, consultation and participation in decision-making. The overall aim is to respect and protect the legitimate interests and needs of disadvantaged, marginalized and vulnerable (ethnic) groups.

  40. BankTrack 2013; Felice 2014: 15 ff.; 2015.

  41. The Legal Disclaimer at the end of the Thun Group of Banks’ draft paper (Thun Group of Banks 2013: 24) clearly states that the paper does not create any rights or liabilities. As such, it ensures that there are no mandatory obligations or direct punitive actions that can arise from the paper. The whole framework is legally non-binding and relies solely on voluntary self-regulation and self-enforcement.

  42. “A bank may apply international human rights standards wherever possible but if doing so means that its employees in a particular jurisdiction are acting in breach of local law and may be subject to legal retribution, then it may decide to comply with local law and seek alternative means of compliance with accepted standards” (Thun Group of Banks 2013: 5).

  43. For instance, more transparency and less confidentiality would help third parties to analyze and assess the client’s on-the-ground performance.

  44. I.e., link between financial institutions and abusive corporations, repressive-authoritarian regimes and controversial products and services.

  45. Kennedy 2013; Bates 2015.

  46. Felice 2014: 10 ff.; 2015: The paper does also not mention that there is a need to align the (human rights and due diligence) policy commitments with the internal incentive (and bonus payment) structures (Felice 2014: 6).

  47. For instance, “[i]f the bank’s due diligence identifies significant human rights risks, actions should be agreed with the client and implemented to manage and mitigate their impact, within the limitations of the client relationship and the leverage and influence the specific product or service entails. In certain circumstances where the risk is significant and cannot, in the bank’s judgment, be mitigated sufficiently, the bank may opt not to pursue the business opportunity” (Thun Group of Banks 2013: 15; emphasis added).

  48. This is of particular importance since all of these Chinese banks belong to the largest ten banks in the world by assets and/or market capitalization.

  49. “Seven banks have policies which explicitly refer to the international Bill of Human Rights […] and the International Labor Organization […] Fundamental Principles. […] Most banks do recognize that their human rights commitments extend to their finance. […] [Yet only] [t]en banks have human rights policies [in place] which are explicitly approved at the most senior level of the business. […] [Only] [t]hirteen banks had clear commitments to carry out human rights due diligence […]. [And] [o]nly eight banks clearly allocate responsibility for addressing human rights impacts to specific levels and functions within the business enterprise” (BankTrack 2014a: 12).

  50. “One bank commented that it does not believe its operations pose risks of severe human rights impacts “directly”, and therefore reporting is not required” (BankTrack 2014a: 12).

  51. FMO 2014; BankTrack 2014b.

  52. What is needed to reduce the number of dodgy deals and dirty projects is a proactive human rights engagement of financial institutions (and their clients), e.g., in the sense of a positive and leverage-based CSR-concept. This requires companies to not only implement a human rights policy (statement) and to conduct socio-environmental and human rights impact assessments as a further category of risk management; they also need to establish a corporate human rights advocacy campaign or a corporate lobbying for human rights (see below).

  53. Such a move towards positive and leverage-based responsibilities should be accompanied by the introduction of (more) mandatory and legally binding rules for (multinational) companies (i.e., ‘hardening the soft law’) into the EP-framework. The overall aim must be to strengthen the governance mechanisms of the EPA, e.g., by establishing minimum entry requirements and absolute performance standards as well as by including (more) formal enforcement, monitoring and sanctioning mechanisms, that is, an ‘enforcement pyramid’ and automatic sanctions like delisting and exclusion of non-compliant EPFIs (Wörsdörfer 2015a).

  54. Not least the most recent financial market crisis has revealed the crucial role played by financial institutions. The financial troubles of some so-called ‘system-relevant’ and ‘too big to fail’ financial institutions unraveled the whole global economy.

  55. Wettstein 2010a; Wright 2015.

  56. Cp. for the most recent World Bank (human rights) scandal: Guardian 2015; Human Rights Watch 2015: According to documents seen by the International Consortium of Investigative Journalists “[t]he World Bank has repeatedly violated its own policies on protecting the rights of indigenous people by funding [dirty] projects that resulted in nearly 3.4 million slum-dwellers, farmers and villagers losing their land or having their livelihoods damaged over the past decade …”

  57. The project finance sector funds – among others – the development, construction and operation of dams, mines, coal and nuclear power plants, chemical processing plants, manufacturing plants, oil and gas projects, hydraulic fracturing, tar and oil sands projects as well as transportation and telecommunication infrastructure projects.

  58. Facing Finance 2012; 2013; 2014.

  59. Clapham and Jerbi 2001; Wettstein 2010a; 2012a; 2012b: 756.

  60. Ibid.

  61. Cp. for the business case argument for speaking out: Lazala/Bardwell 2015; Wörsdörfer 2015b.

  62. This duty of assistance shall be applied generally and shall not be restricted to humanitarian emergency situations alone.

  63. (Mandatory and legally binding) Impact Benefit Agreements (IBA) between multinational companies and affected communities’ negotiation committees go beyond voluntary and informal negotiation protocols or memorandums of understanding. They record in a written form mitigation measures, financial compensation schemes and benefit sharing. Typically they “…include commitments and targets in the areas of employment, training, business opportunities, revenue or equity sharing, and environmental protection; and they establish clear, formal channels for communication and dispute resolution. […] Furthermore, some IBAs are re-negotiated periodically throughout the life of a [project], which forces companies to seek and keep community consent beyond the permitting stage” (Sosa 2011: 13). IBAs usually contain clearly defined community development plans, e.g., biodiversity action plans, schooling and healthcare programs, to name a few. Additionally, the setup of community liaison officers, grievance officers and resettlement negotiations committees must be compulsory for all EPFIs’ clients.

  64. Financial institutions and organizations play a key role here, e.g., by setting performance standards for loan applicants. Banks, export development or credit agencies as well as international financial organizations have to make sure that their clients live up to their human rights standards (and business-ethical) expectations: “[T]he corporations whose activities they support [should] embed their responsibilities in their management systems throughout their operations. Financial institutions [are able to] require human rights impact assessment and set relevant, setting-specific requirements for loans and other forms of financial support” [sic!] (Cragg 2010/2012: 293). The meeting of the internal human rights requirements of the financial institutions (and organizations) must be a primary condition for financial support.

  65. These investment strategies shall make use of all-encompassing human rights due diligence processes and adequate value and supply chain screening and monitoring systems. The aim is to identify, address and mitigate human rights risks and impacts in project finance in a timely manner. The implicit or explicit threat of withdrawing investments and/or terminating business relationships has to be considered as ultima ratio, that is, the last means of exerting pressure on companies which continuously and systematically violate human rights standards. The threat of divestment ideally leads to a change of thinking in the company itself (borrower/client) and prevents the lender(s) from being complicit in human rights violations – which in turn might also increase the reputational capital of the involved financial institution(s).

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Acknowledgments

The author would like to thank two anonymous reviewers for their critical feedback. Their comments helped to improve the article a lot. The usual caveats apply.

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  1. Goethe-University Frankfurt, Theodor-W.-Adorno-Platz 4, 60629, Frankfurt am Main, Germany

    Manuel Wörsdörfer

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Wörsdörfer, M. The Equator Principles and Human Rights Due Diligence – Towards a Positive and Leverage-based Concept of Corporate Social Responsibility. Philosophy of Management 14, 193–218 (2015). https://doi.org/10.1007/s40926-015-0014-6

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