By promoting accountability for human rights violations in legally binding instruments and by maintaining geopolitical stability, multilateral initiatives such as the EU’s 2020-24 action plan on human rights and democracy and other neighborhood policies could be used as cornerstones to achieving a successful transition, argues our contributor.
Upon announcing the Davos Manifesto 2020, Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, declared:
“Business has now to fully embrace stakeholder capitalism, which means not only maximizing profits but using their capabilities and resources in cooperation with governments and civil society to address the key issues of this decade. They have to actively contribute to a more cohesive and sustainable world.”
In this context, doing business in high-risk or conflict-affected countries poses particular challenges. Globalized economies are increasingly concerned about trading in commodity-dependent countries, with armed conflicts being indirectly funded through cash flows generated by foreign investments. More broadly, trading in areas or regions experiencing violent conflicts or transitioning to peace, where political and social instability prevail and/or human rights, political and civil liberties abuses are reported increases complexity for firms, particularly when it concerns resource-rich emerging countries.
Over the last decade, significant diplomatic, legal and operational progress have been achieved toward the “renaissance” of the concept of human rights as a subject of concern for business partners. In Europe, this paradigm shift has now become law as the EU Global Human Rights Sanctions Regime (EUGHRSR) finally entered into force in December 2020—a very significant milestone that went largely unnoticed because of the COVID-19 crisis and the marathon run to finalize Brexit.
The current renewed push does involve sustained and coordinated action between governments, business stakeholders, and civil society. Democracies and free market economies are already redefining their models. The last few months have seen an unpreceded performance in ESG funds, which focus on investments with a positive environmental (E) or social (S) record and solid governance (G). Sustainable finance is thus likely to stimulate the post-COVID economic recovery and play a role in the promotion of human rights.
This also explains a renewed attention on companies operating in particularly sensitive contexts and sectors, namely businesses involving trading and financial transactions. Some concrete proposals that would promote human rights through sustainable investments are being circulated.
Trading in financial instruments
Proposal 1: Extended Collateral Eligibility
The offer of sustainable financial products might not always meet the investor risk profile. But in this context, extending the eligibility of collateral by increasingly accepting sustainable financial instruments is likely to positively impact human rights.
In their first post-2008 financial crisis summit, the G9 members pledged to reform over-the-counter derivatives markets to improve their transparency, prevent market abuse and reduce systemic risks. Yet, OTC markets and, more specifically, OTC derivative markets still generate transactions with insufficient data quality and transparency.
Underlying assets might include commodities from high-risk or post-conflict areas where there lacks proper due diligence carried out by a commodity exchange or the existence of compliance requirements set by industry standards—leaving it voluntary for diligent providers, distributors, or issuers. In addition, derivatives used for hedging exposures might hedge physical trade flows in high-risk or post-conflict areas without proper due diligence.
In this context, EMIR and Dodd-Frank Act mandatory reporting on derivatives could be the base for reporting on certain OTC derivatives with underlying commodities from specifically high-risk or post-conflict areas.
Investments and Project Finance involving Recalcitrant Countries
As per pillar one of the United Nations Guiding Principles on Business and Human Rights (UNGPs), States should protect and promote human rights.
In December 2020, the EU Global Human Rights Sanctions Regime (EUGHRSR) entered into force. It is a more targeted regime in comparison with the current EU country sanction lists as it has a global scope and expressly foresees the prohibition for EU persons to make funds or economic resources available, directly or indirectly, to the listed perpetrators of serious human rights violations and abuses, including States (aka, “recalcitrant countries”).
However, considering the oversight required and the potential negative impact on the population working in commodity-dependent countries, investment boycotts, divestments, or loan restrictions in countries with evident human rights violations might not be efficiently applicable in the short term and on a large scale. Mandatory requirements and an ad-hoc withholding tax could offer remedial measures.
Proposal 1: Mandatory Reporting Requirements
Reporting requirements could cover promissory notes, structured financial products, and private placements involving recalcitrant countries and counterparties listed in the EUGHRSR.
Proposal 2: Ad Hoc Withholding Tax
A withholding tax levied on earnings generated by shareholders and private lenders financing significant public projects initiated or controlled by recalcitrant countries might be dissuasive.
It would promote fair competition by creating a level playing field with other investors and lenders targeting sustainable investments. In addition, it could be a funding source for the awaited Business and Human Rights Treaty being discussed by the UN, as it could fuel the international fund for victims.
A country rating could be based, amongst other parameters, on:
- the ratification of international treaties on human rights,
- adhesion to the Rome Statute,
- sanctions and applications filed before the European Court of Human Rights,
- Environmental, Social, and Governance metrics (ESG).
Economic Resilience, Multilateralism, and the Emergence of a “Public Order Among Neighboring Countries”
In international relationships, the growing call for strengthening resilience through supply chain diversification and environmental transitions might lead to new geostrategic partnerships and reinforce a realpolitik, negatively impacting the UNGPs’ goals.
By promoting accountability for human rights violations in legally binding instruments and by maintaining geopolitical stability, multilateral initiatives such as the EU’s 2020-24 action plan on human rights and democracy and other neighborhood policies could be used as cornerstones to achieving a successful transition.
*Pamela Woreth is a tax and financial lawyer. She holds a degree in European Business Law from La Sorbonne and Leicester Universities.