Investment and finance

The financial sector plays a significant role as a lubricant and enabler for global economic activity.

When it comes to demonstrating responsible investment and lending, financial institutions today face growing pressure from stakeholders to consider Environmental Social and Governance (ESG) and human rights issues. This, coupled with the fact that financial institutions have considerable exposure in fragile and conflict-affected regions, but limited understanding of the complexities of conflict-related risk, demonstrates an emerging need for industry-wide guidance on conflict-sensitivity and IHL.

In Australia, as in other parts of the world, there is growing awareness around ESG and human rights in the financial sector. ESG issues are increasingly integrated into enterprise risk frameworks and corporate risk registers and investors are actively considering integrating ESG criteria into their investment processes. Like other businesses, financial institutions are increasingly aligning to voluntary frameworks such as the UNEP Principles for Responsible Banking, the UN Principles of Responsible Investment, the Sustainable Development Goals and the UN Guiding Principles on Business and Human Rights. There are also a growing suite of reporting and disclosure requirements forcing financial institutions to be more transparent about how they operate.

Similarly, expectations around human rights and supply chain impacts are increasing. The activities of a financial institution and its value chain can significantly impact a range of human rights impacts. So understandably, there is increased scrutiny around instances where the financial sector may have contributed to adverse human rights impacts through their provision of finance. Under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines, businesses are expected to conduct a “heightened” version of this due diligence to strengthen their understanding of the contexts in which they operate, and to ensure that activities do not contribute to violence by identifying potential triggers or the forces driving conflict. While some major institutions have started to embed human rights due diligence into their standard business processes, there is very little evidence of institutions integrating conflict-sensitivity or IHL into these processes when preparing for or managing armed conflict contexts.

Sanctions associated with conflicts – such as the sweeping sanctions imposed against Russia in early 2022 – also present a significant risk to the finance sector. Though IHL and sanctions laws are different bodies of legislation, there are increasing connections that institutions ought to consider. For instance, recent amendments to Australia’s sanctions laws enable the Australian Government to make regulations that sanction those who engage in egregious conduct, including cases concerning breaches of IHL. Globally, these are largely known as Magnitsky-style thematic sanctions – an international movement of sanctions laws designed to hold individuals responsible for serious human rights and IHL violations and abuses, wherever they occur in the world.

In light of some of these geopolitical and other global trends, financial institutions are starting to pay more attention to the risks of conducting business, or investing in, conflict-affected areas. Most notably in Ukraine and Myanmar (at the time of writing). In some cases, there is even growing awareness and acceptance of the need to facilitate humanitarian action for those impacted by conflict – demonstrating a willingness not only to behave responsibly, but also to take more positive action and contribute to solving social issues. Much like other businesses across the private sector, companies have realised the impacts of conflict on their operations and, in turn, are beginning to understand their potential impacts on surrounding conflicts and conflict-affected populations. Yet, despite the operational, reputational and legal risks associated with conflict and associated sanctions, financial institutions have yet to embed conflict or IHL-related considerations into day-to-day business decision making and planning in a way that reflects genuine heightened human rights due diligence.