Human Rights Due Diligence in International Finance

Revisions to the Equator Principles (EP) have created new requirements for businesses to conduct human rights due diligence in order to qualify for financing from 79 of the world’s largest financial institutions. The EP apply globally to all project financing with a value of over $10 million and to certain types of corporate loans, bridge loans and project finance advisory services. This development brings the importance of human rights due diligence beyond reputational risk management and ties it directly to access to capital for many companies. It also significantly increases the significance of human rights considerations for the financial industry.

New Standards of Human Rights Due Diligence

The third version of the EP, which took effect on June 4, 2013, requires signatory financial institutions to ensure their clients comply with the detailed requirements of the International Finance Corporation Performance Standards on Environmental & Social Sustainability (IFC Performance Standards). The IFC Performance Standards are a set of guidelines that are intended to “fill the gaps” of host country laws and regulations on environmental and social issues, including human rights.

Since 2012, the IFC Performance Standards have specifically referenced the “Protect, Respect and Remedy” Framework and associated “Guiding Principles on Business and Human Rights” (the Guiding Principles) developed by the United Nations Special Representative of the Secretary-General on Business and Human Rights and endorsed by the UN Human Rights Commission in 2011.

According to the Framework, to “respect” human rights means that businesses must recognize a private duty to address human rights issues, even in the context of state actions that are not in accordance with international legal norms. Human Rights Due Diligence While key human rights concepts relating to labour standards and indigenous rights have been incorporated into previous versions of the IFC Performance Standards, the new version specifically requires that human rights due diligence of the type endorsed by the Guiding Principles should be conducted in “limited high risk circumstances”.

Human rights due diligence generally requires: (1) the development of a human rights policy statement; (2) periodic assessment of actual and potential human rights impacts of company activities and relationships; (3) integrating commitments and assessments into internal control and oversight systems, and; (4) tracking and reporting of human rights performance.

Additional Human Rights Considerations

Consideration of human rights issues in the international trade context is also emphasized in the Guiding Principles and in EP financings. This requires consideration of human rights risks when negotiating host-country agreements, stabilization clauses or concessions with States to ensure they avoid complicity with State human rights violations and do not compromise human rights protections.

Wherever indigenous communities are affected by a project, the EP additionally requires a process of consultation to obtain “Free, Prior and Informed Consent”. While compliance with the consultation requirements in law is always necessary, the FPIC requirement is stronger than most national legal regimes and is drawn from international instruments like the United Nations Declaration on the Rights of Indigenous Peoples, which recognize that indigenous peoples must participate in the development of projects likely to affect them, as an element of sustainable development. As such, the EP may establish heightened standards for consultation than otherwise required by law.

The EP further requires specific labour standards and occupational health and safety diligence in relation to direct workers, primary supply chain employees, contract and migrant workers. Requirements are also set out for fostering workers organizations in jurisdictions where there is substantial interference in workers’ freedom of association. These standards inter-relate and overlap with legal requirements of host countries and international law.

Conclusions

When conducting due diligence in these areas, compliance with law (including laws implementing host country obligations under international law) is always a primary consideration. To the extent that legal requirements are weak or non-existent, then international standards such as the IFC Performance Standards, the Framework or Guiding Principles may be applied to fill the gaps. The new EP entrenches such requirements into international finance transactions and represents another development towards the “hardening” of these “soft law” concepts into required business practices.