Stockholm (NordSIP) – Despite paying lip service to the ‘S’ in ESG, Danish financial institutions still appear incapable of demonstrating that they include human rights considerations in their investment, lending, and insurance activities, according to a benchmark study published this week. The data gathered by the Danish Institute for Human Rights (DIHR) offers valuable insights into how financial actors deal with human rights issues and concludes that there is plenty of room for improvement.
Not enough to commit
The 2023 report from DIHR provides an initial benchmark of the human rights policies and self-reported human rights due diligence practices of Denmark’s twenty-two biggest financial institutions, including banks, pension funds, investment management companies, and insurance companies. It reveals that whereas most of them do commit to respecting human rights in their financial activities and disclose related investment risks, most have yet to communicate how they implement such commitments in practice across financial activities and demonstrate the results of these efforts.
The average score for the analysed financial institutions is 5,4 out of 14 available points, making the overall alignment just 38%. Somewhat disappointingly, none of the companies in the benchmark gets the full pot of 14 points and only six institutions out of the twenty-two score higher than 50%. Meanwhile, two institutions (both banks, as it happens) score zero. On average, it is pension funds that rank highest (50%), followed by investment management companies (37%), insurance companies (31%) and banks (26%).
Financial institutions perform best on policy commitments and descriptions of processes to identify and act on human rights risks. However, this does not seem to lead to actual engagement with affected stakeholders and their representatives or to establishing adequate grievance mechanisms and access to remedy. And these are just two of the worst-performing areas, according to the survey.
Beyond the Nordics
Two complementary benchmark studies conducted by Luxembourg-based Initiative pour un devoir de vigilance (IDV) and the World Benchmarking Alliance (WBA) confirm the conclusions of their Danish peers.
Luxembourgian fund managers also tend to be best at setting policies and enabling specific mechanisms while underperforming on indicators that relate to putting these into practice. Whereas seven out of ten companies in IDV’s survey commit to respecting human rights, there is no evidence that any of them carry out human rights due diligence. None of the surveyed institutions indicate having comprehensive processes in place to identify, assess and integrate related risks into their financing activities.
Globally, the picture looks even bleaker. “Outside of the minimum legal requirements, less than 7% of the 400 institutions assessed disclose the process they have in place to identify human rights risks and impacts within their own operations, and less than 3% within their financing activities,” states WBA’s Global 2022 Benchmark report. “As the finance sector acknowledges its role in the climate transition, there is much work to do in its contribution to the social transition.”
Calling on regulators
The findings across the benchmarks suggest that existing financial regulatory initiatives in the EU are still insufficient as they fail to persuade financial institutions to align their ESG practices with human rights standards. DIHR argues, therefore, that the financial sector should be covered by the upcoming European Corporate Sustainability Due Diligence Directive (CSDDD). Indeed, carving out the financial industry or parts of it from the scope of the Directive, as proposed by some negotiating parties, would run counter to the international consensus that all businesses – financial and non-financial – have responsibilities to avoid and address adverse impacts on human rights and the environment.
“As the traction around ESG investing continues to grow, financial institutions’ practices must align more closely with human rights standards,” urges Elin Wrzoncki, Department Director, Human Rights, Business and Technology at the Danish Institute for Human Rights. “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.”
