INSIGHT by the World Benchmarking Alliance
Wednesday, 13 December trilogue negotiations related to the EU Corporate Sustainability Due Diligence Directive resume. One of the key remaining topics of discussion is the question of whether, and if so, how, the financial sector should be covered by the future due diligence obligation. A number of financial institutions and initiatives have expressed support for the inclusion of the sector however the negotiating parties remain divided.
Three complementary benchmarks now provide snapshots of financial institutions’ ability to document respect for human rights in Luxembourg, Denmark and globally. The benchmarks show a discrepancy between a rising ESG trend in the financial sector on the one hand and financial institutions’ documented policies and practices in relation to human rights on the other.
Info on the three benchmarks
- The 2023 benchmark from Danish Institute for Human Rights (DIHR) covers the 22 biggest financial institutions from Denmark (banks, pension funds, investment management companies and insurance companies).
- The 2023 benchmark from Initiative pour un devoir de vigilance (IDV) covers the 10 largest Luxembourg based investment fund management companies.
- The 2022 benchmark from the World Benchmarking Alliance (WBA) adds the global perspective and covers the world’s 400 most influential banks, asset owners, asset managers and insurers.
The just published national benchmarks reveal how some of the biggest financial institutions operating out of Luxembourg as well as Danish financial institutions across financial actors, all struggle to demonstrate that they include human rights considerations in their financial activities such as investment, lending and insurance.
| Main findings:
- The financial institutions on average score 5,4 out of 14 available points making the overall alignment score just 38%. None of the companies reached full score and only 6 institutions out of 22 scored higher than 50% and two institutions (both banks) score 0.
- Pension funds on average score the highest (50%) followed by investment management companies (37%), insurance companies (31%) and banks (26%)
- Thematically the financial institutions overall perform best in relation to policy commitments and descriptions of processes to identify and act on human rights risks. The worst performing areas are engagement with affected stakeholders or their representatives as well as existence of grievance mechanisms and access to remedy.
- The companies on average scored 3.7 out of 10 available points (37%). None of the analysed companies reached the full score of 10 points, and only two companies reached more than half of the available points. Most companies scored only between 2 and 4 out of 10 points. One company, the largest Luxembourg based management company, scored zero out of 10 points.
- The analysed companies score best on indicators that measure policies or the availability of specific mechanisms, and poorest on indicators that relate to existing practices. Although seven out of 10 companies commit to respecting human rights, there is no evidence that any of the companies carry out human rights due diligence.
- While there are individual examples of what companies assess as their salient human rights risks or how they integrate these into their operations, no company indicates that it has comprehensive processes in place to identify, assess and integrate human rights risks into its financing activities.
- WBA defines human rights due diligence as i) identifying human rights risks in operations and financing activities, ii) assessing human rights risks and iii) taking appropriate action. Just 12% of financial institutions meet any of these elements. However, three financial institutions disclose that they meet all, demonstrating the potential for others to improve their human rights due diligence.
- Less than 10% of the 400 institutions assessed disclose the processes they have in place to identify human rights risks and impacts within their own operations, and less than 3% within their financing activities.
- While 35% of financial institutions disclose gender equality targets only 2% provides gender pay equality transparency.
| Call to Action
The findings across the benchmarks affirm the need to align financial institutions’ ESG-practices more closely with business and human rights standards. Despite existing EU regulatory initiatives aimed at improving practices and disclosures on sustainable finance including the Sustainable Finance Taxonomy and the Sustainable Finance Disclosure Regulation, which both include elements around human rights, the benchmarked organisations are far from demonstrating that they consider human rights throughout their financial activities.
“As the traction around ESG investing continues to grow, financial institutions’ practices must align more closely with human rights standards. The benchmark findings highlight that this is a crucial moment in time for policymakers to ensure that financial institutions meet minimum expectations on human rights through including financial institutions in the scope of the Corporate Sustainability Due Diligence Directive.”
-Elin Wrzoncki, Department Director, Human Rights, Business and Technology, Danish Institute for Human Rights
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| Background:
The Environment, Social and Governance (ESG) trend has recently been on the rise in the financial sector. While the traction around ESG continues to grow, common definitions and regulation of the area has been lacking especially when it comes to the ‘S’.
The UN Guiding Principles for Business and Human Rights however apply to financial institutions and clarifies expectations of these actors in relation to respect for human rights, among these are the practice of human rights due diligence.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
