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The risk of human rights violations

The risk of human rights violations

Financial services organizations are being challenged as never before to recognize and respond to the serious risk of human rights violations within their operations and across their global networks of suppliers and partners.

Today’s trend of emerging legislation — as witnessed in the US, the UK, the Netherlands, France, Australia and beyond — is intensifying finance-sector scrutiny concerning human rights issues that include:

  • Forced labor, child labor and other slavery-like practices;
  • Unsafe or unhealthy working conditions;
  • Displacement of local communities;
  • Discrimination by race, age, gender, sexuality and other protected attributes;
  • Underpayment for labor or services provided.

Respect for human rights is considered a fundamental business responsibility today under the UN 2011 Guiding Principles on Business and Human Rights (UNGPs). In addition to the UNGPs — under which global financial firms must possess a clear policy on human rights management — the OECD’s Guidelines for Multinational Enterprises provides financial institutions with best practices for responsible global conduct. This includes a focus on due diligence and the requirement to assess real and potential human rights issues, act on findings, track responses, and communicate how issues are being managed.

The trend towards enhanced human rights awareness and performance among financial firms also includes the need for grievance mechanisms. As specified under both the OECD Guidelines for Multinational Enterprises and the UNGPs, banking clients receiving project financing must have a grievance mechanism to address and resolve issues or violations.

While the UNGPs are considered the internationally accepted framework for business practices regarding human rights today, financial-sector compliance remains limited. Today’s typical executive response on the issue? “What does human rights have to do with us?”

Preventing harm and protecting the bottom line

Failure to identify and respond to issues can lead to costly and disruptive legal action, investor divestment, negative publicity, reputation damage and significant financial loss. Managing human rights is not only about doing the right thing to prevent harm — it’s also about protecting the bottom line.

Several widely reported human rights cases involving banks have served as instructive examples of what type of risks emerge in the financial sector. For example, several Dutch banks provided more than US$5 billion in financing or investments to palm oil producers who were found to be involved in human rights cases that included environmental issues and disruption of local communities in several countries.

Some global financial institutions are making progress in the wake of such revelations. Major initiatives include the Dutch Banking Sector Agreement on International Responsible Business Conduct, created to ensure that, in the case of corporate lending and project financing, human rights are respected as set out under both the OECD Guidelines and UNGPs. The agreement requires banks to be transparent about investment portfolios, client screening and their response to clients involved in human rights cases. Dutch banks will also maintain a grievance mechanism for human rights cases.

In addition, 73 Dutch pension funds with EUR1,179 billion in invested assets in December 2018 signed a covenant with the Dutch Government, NGOs and unions to map, predict and prevent or address human rights violations within their global portfolios.

In Australia, banks and other financial institutions are beginning to respond to new modern-slavery legislation requiring large businesses to publicly report on how they manage the risk of modern slavery within operations and across supply chains. One leading firm we worked with is deepening supplier relationships in high-risk geographies as part of a suite of measures to better manage the risk of negative human rights impacts.

In addition to responding to media coverage, voluntary agreements and covenants, the financial sector is also pushed to act upon human rights as an outcome of the National Action Plans (NAPs) for Human Rights. NAPs are policy documents in which a government articulates priorities and actions that it will adopt to support the implementation of international, regional, or national obligations and commitments with regard to a given policy area or topic.

More than 20 countries explicitly mention finance and the banking sector in their NAPs. The French NAP, for instance, states: “Given the financial sector’s importance in providing loans, managing assets and financing projects, it has a duty to promote the adoption of responsible management practices by the companies it finances or invests in, especially in the human rights field”. Moreover, France has implemented a regulatory framework that is relatively unique in that some of its provisions specifically target the finance and banking sector (the Grenelle II Act of 12 July 2010). France is also examining whether to extend environmental, social and governance reporting requirements for institutional investors in Europe to cover human rights.

Every customer, supplier or partnership can pose an unseen risk

As expectations and requirements to improve human rights risk management grow, all financial institutions should explore new ways to identify, manage and report on potential issues that can emerge that involve:

  • Working conditions among employees or operations;
  • Partners in the global value chain, including suppliers and beyond;
  • Customers acquiring project financing, loans, asset-management services and more;
  • Acquired businesses or activities in new global markets and regions.

Financial institutions must acknowledge that every business, partnership or sourcing decision entails significant questions about potential human rights issues. This reality demands a shift in thinking — away from traditional risk-to-business concerns and towards non-financial risk-to-people concerns. Legislation requiring transparent reporting over human rights risk — such as modern slavery laws in the UK and Australia — is compelling boards to take on accountability for such non-financial issues and risks.

Expansion into new global markets — both by financial firms and their business customers, partners and suppliers — is an activity where business should look for red flags. A bank or client business acquiring a company or operation in a new region, for example, is also acquiring any potential human rights issues and legislative requirements related to that company or new geography. Gaining a comprehensive view of risk across their global supply chains should also be a top priority for financial firms.

Taking a strategic approach to risk analysis

KPMG is taking a strategic and proven seven-step approach to analyzing human rights risks for global finance-sector businesses that are dedicating the time and resources needed for a proactive stance on today’s reality. This is crucial to these businesses as the number of human rights risks is almost endless and can materialize in nearly all sectors of, for instance, a loan portfolio. Awareness of human rights across the organization and prioritization of them is therefore only the beginning in a process to address these risks to people. As the chart below shows, we begin by identifying relevant human rights risks based on global standards and map the value chain per sector. The more detailed assessment process follows, in which we:

  • Map the value chain by sector to identify each sector's risk profile;
  • Identify potential scenarios or events in each sector;
  • Assess the potential for each human rights risk scenario to emerge;
  • Evaluate the business impact — and the reversibility — of identified risk scenarios. 

With the assessment process complete, the business is positioned to develop a dynamic IT tool designed specifically to comprehensively summarize, sector-by-sector, the outcomes of the risk assessment. In the final step, a firm can prioritize the human rights risks within the financial firm’s global loan portfolio.

A step by step approach

Key considerations to enhance human rights risk management

Financial services leaders and boards should consider the following steps to enhance and prioritize management of human rights risk:

  • Set the tone at the top by appointing a board member or board committee with responsibility for human rights;
  • Ensure boards and leaders are committed to respecting human rights and to challenging traditional assumptions about corporate responsibility;
  • Set up a cross-functional working group that includes the sales, procurement, operations, legal, ethics, safety and HR functions to implement a human rights policy;
  • Build human rights actions into annual business-unit plans and ensure that accountability sits with business unit leaders;
  • Integrate human rights risks into risk management across different business functions;
  • Monitor the effectiveness of systems to manage and respond to human rights risk and establish appropriate grievance and remediation processes;
  • Ensure a clear line of reporting to the board and leaders on human rights risks and impacts so serious cases are escalated rapidly.

Where to begin on the human rights journey?

Today's financial services organizations should be asking themselves these important questions

  • Do we fully understand how human rights issues can impact our company — today and in the future?
  • What will be the impact to our brand of a future media or NGO human rights campaign if we fail to manage our human rights risk?
  • Who in our company is accountable for human rights issues?
  • Are we compliant with all national/international human rights regulations and guidelines?
  • Do we have adequate human rights policies, due diligence processes and systems in place — including grievance and whistleblowing mechanisms?
  • Are we confident that there are no unfair or unsafe working practices at our own operations and among our contractors, suppliers or franchisees?
  • How does our business growth strategy take account of potential human rights risks?
  • Are our merger and acquisition or joint-venture activities exposing us to new human rights risks?
  • Do we have the appropriate internal capability and expertise to identify and address human rights issues?
  • What opportunities are there for our business to contribute to improving human rights and support the UN's sustainable development goals?

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