Following the 2008 global financial meltdown, financial experts have increasingly highlighted the need to incorporate sustainability, ethics and human rights into the financial system for long-term stability. The financial system must support sustainable livelihoods, inclusive societies and mitigate the impact on the environment.
Looking into this critical need, the Institute for Human Rights and Business (IHRB), a global think tank, and the United Nations Environment Program (UNEP) Inquiry into the Design of a Sustainable Financial System, have published a joint report exploring the relationship between human rights and sustainable finance.
The report focuses on the need for interaction between the financial system and human rights at three levels. At the systemic level, it looks at how regulatory players can leverage their power to incorporate human rights. At the client level, it explores how financial institutions can address the human rights impacts of their sovereign and corporate clients’ activities. At the consumer level, it analyzes how the human rights impacts of financial products and services can be effectively addressed.
The IHRB-UNEP joint report explores emerging developments among Central Banks and other regulators to consider how inequality and social risk impact the financial sector. IHRB’s Director of Research and Legal Affairs and one of the report’s authors, Margaret Wachenfeld, said that human rights and monetary policy often do not go together. However, now some Central Banks have begun to recognize that lack of integration between the two can create systemic risks to the functioning of a sound financial system.
The report cites various examples, including the Central Bank of Brazil, which has adopted a mandatory Environmental and Social Responsibility Resolution in 2014 that requires financial institutions to adopt a social and environmental responsibility policy. The Mongolian Sustainable Finance Principles, developed by the Mongolian Central Bank, are being implemented by all Mongolian banks from 2015. The Central Banks of Nigeria, Peru and Vietnam are also adopting new regulations to support human rights and sustainability.
Even at the corporate level, there is a growing recognition to support human rights. According to the report, the Corporate Human Rights Benchmark (CHRB) will be the world’s first free and public benchmarking of hundreds of companies’ human rights policy and performance around the world. Public transparency combined with public rankings of companies’ performance can help to drive a race to the top.
As an example of Social Impact Bonds delivering on human rights, the report quotes Goldman Sachs’ Pay for Success (PFS) initiative to reduce recidivism and improve employment outcomes for young men at high risk of re-offending. Under this initiative, a service provider is only paid when a third-party evaluator determines that the initiative has achieved specific outcomes. The social impact bond provides a unique model for incentivizing an alternative to incarceration and prompting a second opportunity for juvenile offenders.
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