Editor's note: Enrico Partiti is Assistant Professor of Transnational Regulation and Governance at Tilburg University and Associate Fellow at the Asser Institute. His expertise centres on European and international economic law, sustainability and supply chain regulation. In particular, he studies how private standard-setters and corporations regulate globally sustainability and human rights 

Upcoming Event: Fighting global deforestation through due diligence: towards an EU regulation on forest and ecosystem risk commodities? - 4 November 2020 - 16:00 (CET) - Register Here!

The recent vote in the Environment, Public Health and Food Safety (ENVI) Committee of the European Parliament on binding legislation to stop EU-driven global deforestation is a watershed moment in the global fight against deforestation, ecosystem conversion and associated human rights violations. The ENVI Committee report, that will soon be voted by the plenary, requests the Commission (as provided in Art. 225 TFEU) to table a legislative proposal for a measure disciplining the placing on the EU market of products associated to forest and ecosystem conversion and degradation, as well as violations of indigenous communities’ human rights. The Parliament’s initiative takes place in a policy context increasingly concerned with deforestation, in the framework of a Commission Communication on stepping up EU action to protect and restore the world’s forests which left a door open for legislative intervention. 

The proposed measure would aim to severe the economic link between demand of agricultural commodities, especially by large consumers markets, and negative environmental impacts - including on climate change. Beef, soy and palm oil alone are responsible for 80% of tropical deforestation, and consequent CO2 emissions. In 2014, EU demand was responsible for 41% of global imports of beef, 25% of palm oil and 15% of soy, as well as large shares of other commodities at high risk for forests and ecosystems such as such as maize (30%), cocoa (80%), coffee (60%), and rubber (25%). Protecting just forests is not sufficient, as it risks to displace conversion to other non-forests ecosystems such as the Brazilian cerrado. In light of their negative impact on both forests and other natural ecosystems, such commodities have been labeled as forest and ecosystem risks commodities (FERCs).

The Parliament motion lays down a rather detailed overview of a WTO law compliant measure that the Commission shall propose and that builds upon the previous EU experience in regulating placing on the EU market of agricultural products such as timber and biofuel crops. However, it goes beyond establishing a requirement of legality of product origin such as under the EU Timber Regulation. Instead, it would require that only FERCs and derived products that do not originate from land obtained via the conversion of natural forests or other natural ecosystems, do not originate from natural forests and natural ecosystems undergoing degradation, and are not produced in, or linked to, violations of human rights can be placed on the EU market. The obligation would apply to economic operators placing on the market commodities and derived products regardless of their EU or non-EU origin. This obligation of result would be operationalised through an obligation of conduct for economic operators placing covered products on the EU market, i.e. they would have to exercise due diligence in line with the human rights due diligence process laid down in the United Nations Guiding Principles on Business and Human Rights (UNGPs). A 2018 feasibility study indicated that mandatory due diligence centred on deforestation criteria would generate the highest impact among all possible regulatory and non-regulatory options.

The alignment of due diligence with the UNGPs represents a notable improvement from the requirements in the EUTR that are limited to performing a risk assessment in view to gather information about timber origin and assessing and mitigating risks of non-compliance. The proposed measure would instead include all relevant steps in human rights due diligence including involvement of affected stakeholders at all relevant moments in the definition and implementation of due diligence, reporting to the public and to enforcement authorities, ensure remediation and establish grievance mechanisms to improve accountability and access to remedy. The proposal in its current draft also contains strict enforcement and sanction provisions building on the national enforcement structure currently in place under the EUTR. As under the EUTR, enforcement will thus be determined by the practices of enforcement authorities at the Member State level. Civil society monitoring would be strengthened as individuals, NGOs and undertakings are given the possibility to challenge non-compliance before national judicial and administrative authorities. Sanctions for non-compliance would include fines, seizure of products, suspension of authorisation to place products on the internal market, exclusion from public procurement and criminal penalties for individuals. The proposal would also establish civil liability and, interestingly, it clarifies a vexed question about the relation between due diligence and liability. It notes that, while operators remain jointly and severally liable for human rights and environmental harm which they caused or contributed to, for harm to which they are directly linked, proper exercise of due diligence would lead to a discharge of liability. As the Regulation would also apply to ecosystem conversion taking place in the EU, a potential tension with the system of liability under the Environmental Liability Directive may arise.

Due diligence will have to focus on specific environmental and social criteria. This measure can therefore be seen as a sector-specific or risk-specific add-up to a future across-the-board human rights due diligence Directive. Notably, the environmental and social criteria against which due diligence is performed go beyond legality of land conversion, testifying to the awareness of the impossibility to arrest ecosystem destruction where countries willingly relax the enforcement of land-use regulations to favour agribusiness. A zero gross deforestation approach is adopted that allows placing on the EU market only FERCs and derived products that originate from areas that have not lost their status as forests and natural ecosystems, under the definitions that will be set forth in the measure, at a designated cut-off date. In addition, covered commodities shall not be harvested, extracted or produced from land obtained or used in violation of human rights and especially indigenous communities traditional land-use rights, free prior and informed consent and access to water. The operationalisation of due diligence obligations would require economic operators to map the entire value chain in question, and acquire information about the status of land of origin, including possible presence of formal and customary right, as well as human rights violations. Operators should ensure full traceability and, where needed, segregation to ensure that only compliant products are traded.

Extending due diligence responsibility to conversion clarifies the close link between human rights violations and ecosystem conversion. Apart from the clear connection between ecosystem conversion and degradation on the one hand, and human rights violations especially suffered by indigenous communities on the other, considerable human rights impacts originate from environmental harm. It is also well established that climate change, to which deforestation and ecosystem conversion greatly contribute, detrimentally affects the enjoyment of various internationally recognised human right. The proposal is also in line with various soft law instruments linking together social and environmental harm in the context of agricultural production, such as the OECD/FAO Guidance on Responsible Agriculture Supply Chains - that includes various social and environmental impacts including deforestation and conversion as part of the expected risk assessment that companies should undertake. Also one of the most high-profile voluntary pledges entered into by the industry together with other stakeholders, the UN New York Declaration on Forests, establishes a clear link between conversion of forests and ecosystems and human rights violations.

The proposal suggested by the European Parliament represents a strong starting point for a legislative process on a regulatory measure disciplining the placing on the EU market of products associated with forest and ecosystem conversion and degradation, as well as human rights violations. The clarification of the environmental component of human rights due diligence is particularly relevant not just as it makes clear what are the expected boundaries of human rights due diligence. It also puts pressure on companies to design, both individually and collectively, effective means to ensure that their supply chains are not associated to detrimental impact, and forces them to step up their so far voluntary and limited efforts towards deforestation-free value chains.

Editor's Note: Catherine Dunmore is an experienced international lawyer who practised international arbitration for multinational law firms in London and Paris. She recently received her LL.M. from the University of Toronto and her main fields of interest include international criminal law and human rights. Since October 2017, she is part of the team of the Doing Business Right project at the Asser Institute.

Background

At the United Nations Forum on Business and Human Rights from 27-29 November 2017 in Geneva, discussions focused on the central theme of Realizing Access to Effective Remedy. With an increasing focus on this third pillar of the United Nations Guiding Principles on Business and Human Rights, a working group of international law, human rights and conflict management specialists (Claes Cronstedt, Jan Eijsbouts, Adrienne Margolis, Steven Ratner, Martijn Scheltema and Robert C. Thompson) has spent several years exploring the use of arbitration to resolve business and human rights disputes. This culminated in the publication on 13 February 2017 of a proposal for International Business and Human Rights Arbitration. On 17 August 2017, a follow-up Questions and Answers document was published by the working group to address the principal questions raised about the proposal during the three-year consultation with stakeholders. Now, a drafting team is being assembled, chaired by Bruno Simma, to prepare a set of rules designed specifically for international business and human rights arbitration (the Hague International Business and Human Rights Arbitration Rules) in consultation with a wide range of business and human rights stakeholders. Once drafted, the rules will be offered to the Permanent Court of Arbitration and other international arbitration institutions and could be used in arbitration proceedings managed by parties on an ad hoc basis.

Introduction

Part 1 of this three-part blog series gave an overview introduction to the proposal for international business and human rights arbitration. This Part 2 focuses on (1) the potential advantages of using international arbitration to resolve such disputes, as well as (2) the substantial challenges the proposal will face in practice. Part 3 will then provide a case study of the Accord on Fire and Building Safety in Bangladesh’s binding arbitration process.

1.     The potential advantages of international business and human rights arbitration

The working group’s proposal to use international arbitration for the resolution of business and human rights disputes offers many potential advantages. As alluded to in Part 1 of this blog series, international arbitration can undoubtedly provide a more neutral forum, whereas domestic or international courts may face political pressure or judicial corruption. Arbitration would allow both parties to a dispute to select their own judges, who could, in theory, be impartial experts in business and human rights law and practice and accordingly more sensitive to the often complex issues at stake. This may particularly be welcomed in politically or emotionally charged human rights disputes. Additionally, international arbitration would allow for greater procedural flexibility and efficiency, as compared particularly to domestic court systems. Proceedings could be more tailor-made to fit both parties’ locations, means and resources, and resolved more swiftly than might otherwise be the case in business and human rights disputes. Other potential advantages include (a) the universal recognition of the arbitral award, and (b) an increase in supply chain responsibility.

a.     Universal recognition of the arbitral award

Final awards rendered in international business and human rights law arbitrations could include monetary damages, injunctive relief and close monitoring of future compliance. As the working group’s Questions and Answers document confirms, such awards could have the advantage of being enforceable under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). The New York Convention provides for the recognition and enforcement of foreign arbitral awards within its 157 State parties. The courts of each member nation must recognise foreign arbitral awards as binding and enforce them, unless the party against whom the award is being invoked can prove that there is reason to refuse enforcement. The limited grounds for refusing this universal recognition are outlined in Article 5 of the New York Convention, notably that:

• The parties to the agreement to arbitrate were under some incapacity or the agreement to arbitrate is not valid under the governing law or the law of the country where the award was made.
• The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present its case.
• The award contains decisions on matters beyond the scope or terms of the submission to arbitration.
• The arbitral authority’s composition or arbitral procedure was not in accordance with the parties’ agreement or, failing such agreement, the law of the country where the arbitration took place.
• The award is not yet binding, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.
• The dispute’s subject matter is not capable of settlement by arbitration under the law of the country in which enforcement is sought.
• The recognition or enforcement of the award would be contrary to the public policy of the country in which enforcement is sought.

Accordingly, parties have an established means by which to achieve the recognition and enforcement of final awards handed down by tribunals in business and human rights arbitrations.

Although this could provide a clear route by which parties can receive any monetary damages, it may however be found lacking when it comes to potential long term monitoring and supervision requirements of any business and human rights arbitration award. Business and human rights arbitration tribunals might well require in the award that a party’s actions to remedy a particular human rights breach are supervised, and that its future compliance with human rights obligations is closely monitored. In this vein, additional mechanisms of enforcement and monitoring may need to be developed, perhaps along the lines of the Permanent Court of Arbitration’s Optional Rules for Conciliation of Disputes Relating to Natural Resources and/or the Environment.

b.    Increase in supply chain responsibility

As the working group explains, international business and human rights arbitration has the potential to “reinforce global governance” and might encourage and assist businesses to better manage their supply chains in order to avoid rights abuses. Businesses are increasingly altering their supply chain contracts to observe human rights norms, particularly in line with the United Nations Guiding Principles on Business and Human Rights. In this manner, international arbitration for the resolution of any human rights disputes could be inserted into the contractual terms and conditions between companies and their immediate business partners.

Precedent contracts between parent companies, subsidiaries, suppliers and contractors could simply be amended to include business and human rights commitments along with a business and human rights arbitration clause. They might include clauses requiring business partners to observe specific norms or to refrain from particular practices which might lead to human rights abuses. They could also include clauses granting potential victims, workers or members of affected communities the right to enforce the human rights clauses. Parent companies might use perpetual clauses to ensure effective supply chain responsibility, meaning that parties throughout their entire chain of subsidiaries, suppliers, contractors and subcontractors are required to insert the same provisions into their own contracts. As the working group’s Questions and Answers document explains, any defaulting party could then be subject to a binding business and human rights arbitration process brought by any party empowered under the contract to invoke proceedings.

These steps would create a chain of contracts that protect victims from human rights abuses and provide businesses with an avenue to reduce or eliminate the risk of abuse for which they may share a degree of responsibility (see previous blog: Lungowe v Vedanta and the loi relative au devoir de vigilance: Reassessing parent company liability for human rights violations). The availability of international arbitration could allow businesses to better manage their supply chains and facilitate responsible conflict management in the event of any human rights abuses.

2.     The challenges facing international business and human rights arbitration

The working group’s proposal to use international arbitration for the resolution of business and human rights disputes also raises many potential challenges. Careful consideration must be given to the existing limitations of international arbitration. For instance, compared to domestic court systems, arbitration offers limited options for the summary dismissal of spurious claims. The recourse mechanisms available to defendant corporations must be reassessed when developing business and human rights arbitration to enable the early dismissal of unfounded allegations. Another key area for debate, is which norms or laws would be applied by the arbitral tribunal in business and human rights disputes, and indeed whether they would recognise corporate liability for human rights violations. As evidenced through Kiobel v Royal Dutch Petroleum, Jesner v Arab Bank and Lungowe v Vedanta, the question of corporate liability for human rights violations under international and domestic law remains open in many jurisdictions. As for the possibility of incorporating voluntary guidelines such as the United Nations Guiding Principles on Business and Human Rights, attention must be paid to the potential implications of making soft law a binding and contractually enforceable obligation. A successful business and human rights arbitration mechanism must also work to overcome the existing criticisms of international arbitration, often focusing on cost and efficiency. Moreover, in contemplating whether party appointed arbitrators or a permanent standing arbitral tribunal is more appropriate, the working group must consider issues such as the role of arbitrator bias and experience, as well as the feasibility of having multiple decentralised offices if a Court of Arbitration for Sport model were to be followed. As briefly mentioned in Part 1 of this blog series, other potential challenges include (a) an inequality of arms between parties, and (b) the transparency of arbitration proceedings.

a.     Inequality of arms between parties

As the working group’s Questions and Answers document explains, often victims of businesses’ human rights abuses are poor and accordingly cannot compete on equal terms in disputes against well-resourced business opponents. Unfortunately, this inequality of arms issue might be compounded through the use of international arbitration, as its high party and common costs, alongside procedural complexity, could place victims at a significant disadvantage.

International arbitration has been described as a “rich man’s game, best left to large companies, insurers and organs of sovereign states”. Both parties to international arbitral proceedings generally incur:

• Administrative charges by the arbitral tribunal.
• Fees and expenses of the tribunal, external counsel, experts and specialist services, such as transcribers and interpreters.
• Hiring fees for hearing room(s) and facilities.
• Expenses of testifying witnesses.
• Significant costs for legal representation.

Accordingly, in promoting the international arbitration of business and human rights disputes, efforts must be made to deal with the inequality of arms that victims of rights violations may face when attempting to assert their rights, and how they might afford the costs associated with arbitration proceedings.

Indeed, the working group’s proposal explicitly recognises that victims may need assistance to help defray their arbitration costs and legal fees. Proposals for cost reduction in future international business and human rights arbitrations include:

• Facilitating representation of victims by human rights non-governmental organisations, labour unions and pro bono lawyers.
• Supporting arbitration proceedings in the same way as domestic litigation, through legal aid or the provision of third-party funding.
• The establishment of dedicated grants or the advance of funds (to be repaid from the proceeds of final settlements or arbitral awards) for the arbitration of business and human rights disputes. For instance:
• Private corporations, individuals, foundations and States could contribute to the establishment of a dedicated private trust fund. This would promote better access to justice for victims whilst also contributing to businesses’ corporate social responsibility objectives.
• A dedicated fund could be established by arbitral institutions which adopt the Hague International Business and Human Rights Arbitration Rules. One funding model would be the Financial Assistance Fund established by the Permanent Court of Arbitration, which aims at helping developing countries meet part of the costs involved in international arbitration.
• Centralised funds could be created, for instance within the European Union, by which access to common markets is contingent upon fixed contributions to support victims of businesses’ human rights violations.

In terms of costs and legal expenses allocation, a number of proposals have been put forward to ensure a greater equality of arms. These include:

• Contractual requirements in business and human rights arbitration clauses mandating that a losing company pay the arbitration costs and legal fees of winning victims.
• The granting of additional powers to international business and human rights arbitrators, allowing them to allocate costs and legal fees to winning victims or with consideration of the degree of fault demonstrated.
• Examining the use of fee-shifting arrangements. Traditionally this could mean that the loser pays the winner’s legal fees and costs, which may reduce initial hurdles for victims seeking to litigate but also increases their potential risk and exposure post-judgment. Another idea would be implementing reverse fee shifting, whereby successful victims are awarded their legal fees and costs without winning businesses being afforded the same luxury. The concept has previously been implemented in environmental suits bought by citizens in the United States to help overcome often prohibitive litigation costs.

Given the widespread interest in access to justice for business and human rights victims, there is certainly the potential for means of reducing and reallocating the costs involved in international arbitration proceedings. However, more thought must be given by the working group, the drafters of new arbitration rules and the business and human rights community as a whole to overcome the inequality of arms between well-resourced business corporations and their potential victims.

b.    Transparency of arbitration proceedings

One key factor behind the success of international commercial arbitration is confidentiality. The potential privacy of arbitral proceedings is a distinct motivator for business parties to resort to this means of dispute resolution over more public domestic litigation proceedings. However, when considering the arbitration of business and human rights disputes, the expedient element of arbitral confidentiality is challenged by an inconsistent concern for ensuring transparency in human rights cases. When adjudicating on disputes involving human rights violations of international concern, the public interest lies in having open, transparent proceedings. Additionally, as Justice Scalia recognised in AT&T Mobility LLC v Concepcion, 131 S. Ct. 1740 (2011), confidentiality “becomes more difficult” with class action arbitrations involving absent parties and potentially higher stakes. Accordingly, any rules for arbitrating business and human rights disputes must rethink standard arbitration provisions dictating party privacy, and take account of a need for greater transparency. Indeed, the working group’s proposal identifies as an issue for drafters of new arbitration rules, how “transparent the proceedings and awards should be and how to accommodate any confidentiality concerns that either side might have”.

The working group’s Questions and Answers document identifies greater transparency as a prerequisite for business and human rights arbitration, including the possibility of open proceedings for disputes as well as the potential for publication of human rights arbitral awards. When reassessing arbitral confidentiality, it is suggested that drafters of new arbitration rules will turn to the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules and the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration. These rules recognise “the need for provisions on transparency in the settlement of such treaty-based investor-State disputes to take account of the public interest involved in such arbitrations”, in a similar vein to the public interest in human rights litigation. They also explain that “that rules on transparency in treaty-based investor-State arbitration would contribute significantly to the establishment of a harmonized legal framework for a fair and efficient settlement of international investment disputes, increase transparency and accountability and promote good governance”. Such harmonisation in a legal framework for business and human rights arbitration would similarly augment accountability and promote good governance in the resolution of disputes.

The UNCITRAL Rules increase the public transparency of investor-state arbitration proceedings, notably authorising arbitrators to protect confidential business information and permitting the submission of amicus curiae briefs by third parties. They also require that repositories make all documents, including exhibits and expert reports, available in a timely manner, in the form and language in which they are received. Future rules governing business and human rights disputes might incorporate these principles, as well as considering public entry to, and online streaming of, arbitration hearings and the publication of pleadings and arbitral awards. This will necessitate consultations with international arbitration institutions, which do not routinely create public venues for observation of their proceedings and often decline to publically state the number and kinds of claims with which they deal. It will also be critical that arbitrators are fully informed of the legal and policy issues surrounding confidentiality in business and human rights cases, in order to appropriately resolve disputes arising between parties about privacy provisions.

As Judith Resnik has highlighted, publicity in courts can discipline businesses and governments by making visible how they treat judicial procedures and the claimants against them. Only through such “public processes, one learns whether individuals of all kinds [...] are understood to be persons equally entitled to the forms of procedure offered others to mark their dignity and to accord them respect and fairness”. Public access to the resolution of business and human rights disputes is paramount, and great attention must be paid by drafters to balancing the protection of sensitive business information with the need for transparent arbitral proceedings.

Conclusions

The working group’s proposal for international business and human rights arbitration is not intended to replace any existing means of redress. Its desire is to offer a potentially more effective alternative to current means of dispute resolution, rather than remove access to any existing remedies. Providing parties with a greater range of options to resolve business and human rights disputes will undoubtedly improve their ability to select a method most appropriate to their cause. The availability of international business and human rights arbitration would bring with it many potential advantages, including the universal recognition of arbitral awards, an increase in supply chain responsibility and responsible conflict management. However, the concept still has some way to go before it could succeed in practice. International arbitration proceedings must be heavily adapted, accounting for, amongst other factors, a likely inequality of arms between parties and the need for transparency in human rights proceedings, whilst the existing limitations of international arbitration must be reconsidered. Commentators from business, human rights and arbitration communities have reacted to the proposal with questions and concerns, and the working group, drafters of new arbitration rules and the business and human rights community as a whole face substantial challenges moving from concept to reality. Part 3 of this blog series will further discuss the arbitration of business and human rights disputes through a case study of the Accord on Fire and Building Safety in Bangladesh’s binding arbitration process.

Editor’s note: Benjamin Thompson is a PhD candidate in business and human rights at Tilburg Law School in the Netherlands. His PhD research deals with the effects of the UN Guiding Principles on Business and Human Rights' endorsement of operational level, non-judicial grievance mechanisms and their role in improving access to remedy. He recently published an article for Utrecht Law Review’s Special Issue on Accountability of Multinational Corporations for Human Rights Abuses which discussed the roles the new Dutch multistakeholder initiative with the Dutch banking sector might play in improving banks’ performance with respect to human rights.

In November of last year the Asser Institute offered me the opportunity to take part in a roundtable on the Dutch Banking Sector Agreement (DBA), as part of their Doing Business Right Project. Signed in December 2017, the DBA is a collaboration between the banking sector, the government, trade unions and civil society organisations (CSOs), all based within the Netherlands: the first of its kind. It focuses on banks’ responsibility to respect human rights, as stipulated in the UN Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines for Multinational Enterprises (OECD Guidelines), within their corporate lending and project finance activities. The DBA has been something of a hot topic in business and human rights circles. However, it has not yet published a public monitoring report, making any evaluation of its performance at this stage difficult. During the roundtable, we discussed the role of the DBA as a potential means to improve the practices of Dutch banks with respect to human rights. A key challenge identified from this discussion, as reported here, was the various ‘interpretive ambiguities inherent in the UNGPs’. A key conclusion was that ‘further dialogue is required... to ascertain what conduct on the part of the banks is consistent with international obligations’.

This is not a unique conclusion to arise from multistakeholder discussions on banks and human rights; the discussion often focuses on what financial institutions are required to do to meet their responsibility to respect human rights under the UNGPs. So much so that questions concerning implementation or evaluation are often left by the wayside. As a result, when presenting my research on the DBA for the Utrecht Centre of Accountability and Liability Law’s Conference on ‘Accountability and International Business Operations’, published here, I decided to focus on how the DBA had responded to those key points of friction where there is the greatest disagreement between how different stakeholders conceive banks’ human rights responsibilities. This blog post seeks to build on this previous entry, hopefully without too much repetition.

Banks and Human Rights

So, how do the UNGPs apply to banks? Well, there is hardly a dearth of initiatives set up with exactly that question in mind. We have had various OECD initiatives providing analysis on banks’ human rights responsibilities, the UN Environmental Programme’s Financial Initiative, the OHCHR and UN Working Group on transnational corporations and human rights’ pronouncements on this matter, the Thun Group’s discussion papers (2013, 2017a and 2017b) on the UN Guiding Principles and now the DBA. While some have pointed to the interpretive ambiguities within the UNGPs as themselves preventing any emerging consensus, and I am certainly not denying there are interpretive ambiguities (there are), I would suggest this is not, in practice, the key challenge in banks developing practices consistent with the UNGPs. Banks’ interpretation of the UNGPs is largely eclipsed by their own preconceived understandings of their existing due diligence processes with respect to social and environmental risks (E&S due diligence), which originate before the UNGPs and are arguably rooted more robustly in a market-based paradigm. While banks have, at times, expressed concerns over whether their existing E&S due diligence procedures can adequately incorporate the full range of behaviour required under the UNGPs,[1] there has been a considerable effort amongst some banks to interpret the UNGPs in line with their existing practices.

This is perhaps best illustrated in the Thun Group’s 2017 discussion papers which dealt with questions as to how the UNGPs applied to banks, in particular how banks should understand their involvement in human rights impacts related to their financing activities. The paper suffered from various deficits of interpretation (that banks cannot contribute to human rights harms, they have no role in remedy, due diligence is largely limited to whether and how to approve a financial transaction etc.). The paper was such an affront to the UNGPs that it prompted John Ruggie, the main architect of the UNGPs, to write an open letter pointing at many of these failings. A representative of the Thun Group, Christian Leitz responded to say the paper was an ‘industry perspective’ and that he would welcome Ruggie and other stakeholders’ views in order to foster a discussion. Ruggie responded stating that many of the (quite stark) failings of the Thun Group paper to encapsulate the intention of the UNGPs did not amount to rival ‘opinions’ or ‘interpretations’ but were ‘factually incorrect’ and that it would be difficult to have a dialogue based on ‘alternative facts’.

While it might be true that the banks interpretations are ‘factually incorrect’ or, as David Kinley put it, that the recent Thun Group paper is simply an attempt by banks to dodge their human rights responsibilities all-together, how are we to understand this misalignment between banks’ understanding of the UNGPs and the logics of the UNGPs themselves (assuming ‘we’ share a kinship with the business and human rights project)? One can say that the Thun Group is failing to take its human rights responsibilities seriously; one can probably also cast that claim to include a much broader range of business enterprises and industries. However, to the extent to which businesses are not accepting and internalising the norms of the UNGPs, it is perhaps equally accurate to say both that businesses are failing to meet the UNGPs and that the UNGPs are failing in their ‘norm-building’ mission, with its key objective of ensuring business enterprises accept their responsibility to respect human rights as part of their business practices. Any serious proponent of the ‘business and human rights project’, must therefore understand the need to identify where the tensions are between industry perspectives and the UNGPs, and seek to evaluate which initiatives (if any) are successful (or partly successful) in bringing business enterprises’ understanding of their human rights responsibilities closer to that understood in the UNGPs. It is from this question of the extent to which banks are moved to a greater alignment with the normative requirements of the UNGPs that I will evaluate the Dutch Banking Agreement (DBA) as a multistakeholder agreement.

Given the backdrop of divergences over attitudes to banks and human rights, the DBA plays an important role. It is the only initiative which has actually reached any output on banks responsibility to respect human rights which is based on consensus. The initiatives cited above stem from organisations which represent a single type of stakeholder (States or banks), which may or may not consult other stakeholders but never require multistakeholder consensus for an output to be reached. Below is an analysis in how these divergences have been bridged somewhat in the text of the DBA, according to five identified divergences between the UNGPs and banks E&S due diligence processes. The description of banks’ perspectives with respect to their own E&S due diligence processes and human rights in the subsequent sections are principally taken from financial institutions’ responses to an OECD survey on environmental and social risks and the Thun Group papers: the Thun Group represents some of the world’s largest banks.

1.     ‘responsibility to respect’ vs ‘opportunity to affect’

While the UNGPs understand the actions businesses must take with respect to human rights as one of ‘responsibility’, E&S due diligence is more often understood as good business or ‘opportunity’.[2] This not only has connotations for both how banks see the nature of their practices with respect to human rights but also how they define the content of what is required. For instance, the contexts in which banks take action is often understood by the extent to which they have the opportunity to enact change in a client’s behaviour, rather than their responsibility for an impact (e.g., causing, contributing, directly linked, no link). Banks are happy to include ‘forward looking’ risk mitigation measures as part of their practices but are often reluctant to accept that they should take actions which imply a greater responsibility for the impact on their part. When understanding the application of the UNGPs, banks have often not considered themselves to be in even the lowest category of involvement (directly linked) in relation to human rights harms connected to their activities, preferring to consider themselves as not involved or ‘indirectly linked’.[3] Some have completely ruled out the relevance of remedy.[4] Banks have received more approval when they have discussed what they ‘could do’ compared to what they ‘should do’, where they are notably more ambitious. This led to a much more welcomed reaction to the first Thun Group paper in 2013, which focussed on operational principles, compared to more criticised Thun Group papers in 2017, which focussed on foundational principles.

The DBA commits adhering banks to meeting the responsibility to respect human rights, as understood in the OECD Guidelines and UNGPs (article 1). Adhering banks have all signed declarations of adherence to the Agreement stating that they are bound by the Agreement. However, as some of the requirements of the DBA go beyond the responsibility to respect (e.g., article 10 on Sustainable Development), it is not always clear which aspects of the DBA the stakeholders consider to be part of their responsibility to respect human rights and which arise solely from the Agreement itself.

One particularly progressive element of the DBA is its inclusion of remedy, referred to under the article ‘Enabling Remediation’. This article looks at the steps a bank can take to ensure their client’s provide remedy for human rights harms, and it also raises the question of how impacts can be addressed or remediated based on the categories of a bank’s involvement in human rights impacts. However, it omits any explanation of the categories of a bank’s involvement, leaving this to further exploration by a working group, which promises to incorporate guidance provided by the OECD. The findings of the working group are to be integrated into the practices of the adhering banks. Banks are required to have individual complaints mechanisms open to clients and third parties, but the DBA makes clear these are not grievance mechanisms as understood in the UNGPs/Guidelines (article 3.5). Banks seem to need only to report on steps taken to prevent and mitigate impacts in their annual reports used by the DBA’s monitoring committee, covering their implementation of articles 3 (on policies) and 4 (on due diligence) but not article 7 (on enabling remediation).

2.      ‘risks to people’ vs. ‘risks to bank’

E&S due diligence is principally concerned with risks that could present a liability to the financial institution; human rights risks are considered risks to the bank rather than risks to people, although these risks may coincide. This market-based paradigm depends on adverse impacts on a bank’s bottom line as the key incentive for a bank to carry out due diligence, and it also acts as a disincentive for banks to take action where doing so might deprive them of a business opportunity.[5]

When responding to an OECD survey on how financial institutions understand how the OECD Guidelines apply to them, financial institutions were asked what factors influences how much leverage they had. Banks largely identified risks falling under ‘risks to the bank’[6] as the main factors rather than factors that an outsider might see as more linked to the UNGPs understanding of leverage: the ability to influence a situation. Commercial providers of E&S risk information for use in E&S due diligence, such as Reprisk, still view environmental and social risks as those risks to the bank: to a bank's reputation, to banks complying with national law and to a bank’s finances.

The DBA looks to risks to people as the basis for what action should be taken (article 4.2). It recognises that this goes beyond existing E&S due diligence practices, and it expects banks to report on their human rights performance under the UNGPs Reporting Framework which requires that businesses look at impacts on people not themselves. Two occasions where a ‘risks to bank’ lens may enter the Agreement’s implementation is through the cross referencing of initiatives which do adopt this paradigm (the IFC Performance Standards and Equator Principles) and through mentioning that banks terminate their relationships where the client has broken ‘material due diligence requirements’ (article 4.3.b).

There is also reference to a concern over the potential financial implications for banks resulting from more robust human rights practices: the need to produce a ‘level playing field’ internationally (article 4.5.b).  However, at no point is it suggested that banks’ compliance with the DBA is contingent on them not being placed at a competitive disadvantage as a result. Overall, the ‘risks to bank’ paradigm is minimal and the ‘rights to people’ paradigm is kept central to the DBA.

3.     ‘transactional due diligence’ vs. ‘human rights due diligence’

Banks’ due diligence is commonly understood to primarily cover those actions taken by banks up to the point where the transaction takes place as opposed to the full duration of the business relationship as under the UNGPs. The types of measures expected will depend primarily on the type of financial product offered, the type of client and their overall risk profile. Banks have consequently interpreted those terms within the UNGPs/Guidelines which refer to actions moving beyond the client of actions required after the point of transaction narrowly, understanding value/supply chains as limited to their own suppliers[7] and not recognising any role for termination of relationships or remediation.[8] The Thun Group papers introduced ‘new’ terms to the UNGPs – unit of analysis and proximity – which largely sought to reconstruct the UNGPs to fit within this transaction based model, limiting how directly linked a bank was, and the actions a bank should take, to the type of transaction and which member of a corporate group the bank made the transaction with.

The DBA recognises that adhering banks should base what kinds of action they take based on the severity of the (potential) impact rather than the nature of the transaction (article 4.3(a)). The due diligence provisions do not state that actions to identify, prevent and mitigate human rights impacts are limited to the lead up to the transaction, and they expressly require the banks to monitor, track and assess the outcomes of their due diligence. It also stresses the need to look to creative means of exercising leverage (article 9).

The DBA covers many of those aspects of the UNGPs which banks have been reluctant to include in their policies and which have been hitherto overlooked by the Thun Group – termination of business relationships, value chains and remediation – albeit in a more diminished way than some of the other responsibilities under the UNGPs. Value chains are limited to those mapping exercises under the text and decided upon by the parties to the DBA, and identification of impacts in value chains is not expressly part-and-parcel of a bank’s human rights due diligence processes, which are largely limited to actions to be taken with respect to the client (article 4). Termination of relationships is mentioned as a possible action where a client is repeatedly not able or willing to comply with material due diligence requirements, but this is left entirely to the discretion of the bank (article 4.3(b)). Thus, the DBA accepts the need for more than a transactional due diligence approach, adopting an understanding closer to the human rights due diligence approach in the UNGP/Guidelines.

4.     ‘client-only engagement’ vs. ‘stakeholder engagement’

Banks limit themselves primarily to engaging with their client and not external stakeholders, as understood in the UNGPs. Engagement with external stakeholders is often considered the responsibility of the client, not the bank. Unfortunately, client-only engagement plays a dominant role in the DBA. All mention of meaningful consultations with stakeholders is the duty of the client, with banks expected to influence clients to do so, rather than also the responsibility of the bank. The DBA itself seeks to collaborate with the OECD, but does not expressly set up platforms for engagement with rights-holders. Inclusion of the CSOs and unions which are party to the DBA is itself seen as stakeholder engagement, and the CSOs and unions are expected to empower ways of interaction with affected stakeholders (article 12(a)), but this requirement is placed only on CSOs and there is no equivalent requirement on the adhering banks. Within the DBA itself, inclusion of rights-holders appears to depend on representation through the CSOs and unions. The text of the DBA sets up a dispute resolution mechanism, but this is again only open to parties of agreement; the DBA has no grievance mechanism open to external stakeholders to complain about its implementation, despite this being required under the UNGPs (article 13.3).

5.     ‘knowing and withholding’ vs. ‘knowing and showing’

In the UNGPs, there is an understanding that the relationship between civil society and business will move from ‘naming and shaming’ – whereby outsiders shame businesses for human rights impacts – to ‘knowing and showing’ – where businesses themselves understand and deal with their human rights impacts – showing what actions they are taking. However, banks are largely opposed to such a level of transparency, often glossing over any responsibility to ‘account for’ what actions they take publicly, beyond publishing their policies, sometimes citing regulatory rules or client confidentiality as a reason for not doing so.[9]

Client confidentiality plays a dominant role in banks’ reasons for not disclosing their human rights performance. The DBA states that all of the commitments of the banks are subject to law, and disclosure of banks’ actions in pursuance of the DBA’s provisions is limited by client confidentiality and banks’ internal policies (article 14.8(a)). It also states that banks should engage in being as transparent as possible and that the parties should discuss options for greater transparency (article 6.10).

The first and only public output of the DBA to date was legal advice on what forms of information banks could share with the CSOs and the public. It did not limit itself to law, including provisions of loan agreements that banks enter into and market practice. It concluded that individual client information cannot be discussed unless there is the consent of the client, this information is released in compliance with a statutory obligation of disclosure or it is made anonymous. This is likely to significantly impact what banks can ‘know and show’ in the course of their activities and in their reports under the DBA.

The future of the DBA

In this blog, I have focussed on how the DBA may help bridge the current deficit between how banks have traditionally sought to interpret the UNGPs in relation to their activities and the logics of the UNGPs themselves. To the extent the text of the DBA has bridged some of these gaps, the question remains to what purpose. Although it is too early to tell how the DBA will be implemented in practice, in my full article, which this blog is based on, I go into three roles that the DBA might play: regulation, experimentalism, and advocacy.

Regulation depends on ‘rules’ which will require a greater degree of conciseness than is in the UNGPs themselves. In those areas where there is the greatest convergence between the UNGPs and existing E&S due diligence processes, e.g., risk mitigation at the point of transaction, the DBA does have relatively precise requirements. In practice, enforcement of these requirements may, to some extent, be compromised by the DBA’s less-than-ideal enforcement apparatus, as there are some conflicts of interest between the different bodies responsible for the DBA’s implementation.[10]

Experimentalism is particularly relevant for those parts of the DBA where there is less consensus between the parties, e.g., remediation. Experimentalism is based on an iterative and reflexive cycle whereby broadly defined goals and metrics are agreed on, preliminary actions are taken, these actions are assessed against the goals and metrics, and then the goals and metrics are revised in light of lessons learned before the cycle begins again.

Advocacy refers to the DBA’s potential as possibly the only initiative in banking and human rights to result from a genuine multistakeholder consensus to advocate for the uptake of similar norms at the international level. For instance, the outcomes of the remedy working group and the exchange of best due diligence practices is expected to feed into the OECD processes on banking and human rights. This will depend on the DBA not only reaching new normative consensuses but also a) advocating for them internationally and b) demonstrating their added value in practice. While the DBA shows promise, it is yet to be seen what role it will actually play (if any) in the wider business and human rights project.                                        

[1] OECD Working Party on Responsible Business Conduct, ‘Environmental and Social Risk Due Diligence in the Financial Sector: Current Approaches and Practices’ (June 2013), (OECD Survey), p. 53.

[2] Ibid., p. 54.

[3] Ibid., p. 51.

[4] Thun Group, ‘Discussion Paper on the Implications of UN Guiding Principles 13 & 17 in a Corporate and Investment Banking Context’,(January 2017), p. 15.

[5] OECD, ‘Global Forum on Responsible Business Conduct 26-27 June 2013 Summary Report’ (2013), p. 17.

[6] OECD Survey, p. 61.

[7] Ibid, p. 52.

[8] Thun Group 2017 paper.

[9] Benjamin Thompson, ‘The Dutch Banking Sector Agreement on Human Rights: An Exercise in Regulation, Experimentation or Advocacy?’ (2018) 14(2) Utrecht Law Review 84, p.89.

[10] Ibid., p. 96.