When thinking about human rights in the context of the banking and financial sector, how traditional notions of human rights due diligence – as described by the UN Guiding Principles on Business and Human Rights – apply to the vast array of financial products and services in today’s economy is not always readily apparent. There are a wide range of examples of how the financial sector can negatively impact on human rights, from project financing for controversial mining projects to the sale of credit default swaps that drive up commodity food prices that become unaffordable to millions, but in many instances the traditional human rights due diligence framework does not allow for a clear understanding of the harms linked to the financial sector.
For “footprint” project financing, such as a non-recourse loan to finance an open-pit mine, assessing the impacts arising from business operations are relatively straightforward. When an institutional lender provides the necessary capital for a mining company, it is clear at the outset that, for example, access to water and displacement of indigenous people can create serious risks. If the mine operator moves forward without having done adequate due diligence to assess and mitigate the human rights risks, the lender is implicated in the harms.
In contrast, the purchase and sale of credit default swaps as a means of managing portfolio risk by an institutional investor seems, at first glance, disconnected from any sort of human rights impacts. In 2007, commodity index swaps, a type of financial derivative, began to flood the financial markets dramatically driving up food prices around the world as price pressures were created by massive demand via these synthetic financial products. This problem became acute in 2008 when global food commodity prices (rice, corn, wheat, et al.) skyrocketed more than 200%. Commodity spot prices (the price of commodities on a given date) spiked as the massive volume of money, estimated at close to a trillion dollars, flowed into these exotic derivatives. While historically commodity futures sold at a discount to spot prices, the sheer weight of new money injected into the commodity markets lifted futures prices above current market prices and “pulled up” spot prices to predicted future price levels. This distortion of the commodity markets can be attributed to the deregulation of the commodity markets in the early 1990s and seized upon by Wall Street banks bent on selling new investment products to unsuspecting investors. However, when considered as part of a systematic process, these particular derivatives were a primary cause of the economic collapse of 2008 that resulted in massive human rights impacts and played a key role in human rights harms – millions of jobs lost, collapse of the housing markets and dramatic increases in global hunger. But the question remains: how do we go about assessing the human rights impacts ex ante?
Is this the financial equivalent of the Butterfly Effect as suggested by Edward Lorenz in his seminal thinking in the development of chaos theory? This effect, described aptly by the analogy of a butterfly flapping its wings in North Africa, thereby causing a massive hurricane in the Caribbean some weeks later has seeming parallels to derivatives and the resulting economic crisis in 2008. This raises some profound questions about the culpability of institutional investors purchasing swaps and other derivative products and the creation and sale of these financial products by individual banks in the U.S. and Europe; but the common response from the banking sector can be summarized as “Who knew?”
From a human rights perspective, this would appear to be an intractable problem given the attenuated relationship between individual financial institutions and the harms done to the global economy. The question remains as to how should financial institutions go about human rights due diligence in a manner that adequately accounts for these global human rights risks? A clue might be found in the way in which we look at the problem. At a recent meeting of economists and human rights advocates hosted by the UN Environment Programme in Washington DC in April 2015, an expert on economic policy was queried about the problems that have arisen from the conduct of banks characterized as too big to fail. He put it quite simply, “It’s not the few bad apples that’s the problem. It’s the barrel.”
This shift in thinking suggests that human rights due diligence is not simply a process that needs to be applied to individual financial institutions, but rather entails a rethinking by governments and their proxies (Organization for Economic Cooperation and Development, International Monetary Fund, G20 and the Financial Stability Board) about the human rights implications arising out of macro-economic policies and financial regulation. While this should not come as a surprise to anybody paying attention to the goings on in the global economy, what is necessary is a paradigm shift in economic leadership thinking from fixing the economic mechanisms that brought about the disaster in 2008 to a more inclusive approach to the problem that accounts for all stakeholders in the global economy. From the perspective of the UN Guiding Principles, addressing the problem of human rights in the financial sector has been centered on the “corporate responsibility to respect.” However, government leaders must shift their thinking to incorporate the UN Guiding Principles’ recognition that governments have an obligation to “protect human rights.” This is not to suggest that financial institutions should be absolved of their responsibility to respect human rights in every aspect of their business activities, but a more expansive view of due diligence must be developed to address these complex financial activities.
So far, governments and these related organizations have failed take such a broader and critically necessary view of global economics as a root problem for human rights everywhere. It is time to rethink this approach to global economic policy if human rights are to have any meaning for those billions impacted by global economic policies. To do this, the G20 countries must begin to think about financial reform in human rights terms, not just in terms of prevailing economic theories.