Children from one of the communities in Ocean Division, southern Cameroon, who lost much of their forestland after the government leased it to a logging company. Credit: Monde Kingsley Nfor/IPS

By Carey L. Biron
WASHINGTON, Dec 9 2014 (IPS)

Just half of major global banks have in place a public policy to respect human rights, according to new research, despite this being a foundational mandate of an international convention on multinational business practice.

Further, of the 32 global banks examined, researchers found that none has publicly put in place a process to deal with human rights abuses, if identified. None has even created grievance mechanisms by which those impacted by potential abuses can complain to the banks.“The findings of this report are quite sobering about what can be expected from self-regulatory principles.” -- Aldo Caliari

The findings, published by BankTrack, an international network of watchdog groups, come three and a half years after the adoption of the United Nations Guiding Principles on Business and Human Rights. These principles, unanimously endorsed by the U.N. Human Rights Council in 2011, specify a range of actions and obligations for all businesses, including the financial sector.

Yet banks have a unique role in underwriting nearly all of the business activity around the globe, even as they are typically shielded from the impacts of those investments.

“Banks covered in this report have been found to finance companies and projects involving forced removals of communities, child labour, military backed land grabs, and abuses of indigenous peoples’ right to self-determination,” the report, released last week, states.

“Policies and processes, open to public scrutiny and backed by adequate reporting, are important tools for banks to ensure that these kinds of abuses do not happen, and that where they do, those whose rights have been impacted have the right to effective remedy … If these policies and procedures are to be meaningful, the finance for such ‘dodgy deals’ must eventually dry up.”

One of the banks studied in the new report, JPMorgan Chase, is one of the leading U.S. financiers of palm oil, through loans and equity investments. While the bank does have a human rights policy, BankTrack’s researchers find this policy applies only to loans, not investments.

“When it comes to reporting on implementation, the bank falls flat, making the policy little more than window-dressing,” Jeff Conant, an international forests campaigner with Friends of the Earth U.S., a watchdog group that is working on palm-oil financing, told IPS.

“We’ve spoken with JPMorgan Chase about the need to give impacted people an opportunity to file complaints about the human rights impacts of its financing, with the belief that this is a first step towards accountability. Frankly, from the bank’s response, I don’t see them stepping up anytime soon.”

While private finance today facilitates almost the full range of corporate activity, Conant notes, “the finance institutions themselves are wholly unaccountable.”

Sobering results

According to the new study, a few banks appear to be well on their way to conformity with the Guiding Principles. The top-ranked institution, the Dutch Rabobank, received a score of eight out of 12, with Credit Suisse and UBS close behind.

These are the exceptions, however. Against a set of 12 criteria, the average score was only a three.

Many scored at or near zero. While those ranked at the very bottom include several Chinese institutions, they also include banks in the European Union and the United States.

Indeed, Bank of America, one of the largest financial institutions in the world, scored just 0.5 out of 12, receiving a minor bump for having expressed some commitment to carrying out human rights-related due diligence. (The bank failed to respond to request for comment for this story by deadline.)

“The findings of this report are quite sobering about what can be expected from self-regulatory principles,” Aldo Caliari, the director of the Rethinking Bretton Woods Project at the Center of Concern, a Washington think tank, told IPS.

“The Guiding Principles are the bare minimum of any human rights framework in the corporate sector, a framework that has the companies’ consent. So the fact that there is so little [adherence to] such a relatively weak tool, where every effort to court corporations’ support has been made, is, indeed, very telling.”

Despite the spectrum of findings on implementation, the financial services industry as a whole has taken note of the Guiding Principles.

In 2011, four European banks met to discuss the principles’ potential implications for the sector. Three more banks eventually joined what is now called the Thun Group, and in October 2013 the grouping released an initial paper on the results of these discussions, including recommendations for compliance.

A previously existing set of voluntary guidelines for the banking sector, known as the Equator Principles, were also updated in 2013 to reflect the new existence of the Guiding Principles. So far, the Equator Principles have been signed by 80 financial institutions in 34 countries.

“To date, banks’ efforts to implement the UN Guiding Principles have mainly revolved around producing discussion papers on the best way forward,” Ryan Brightwell, the new report’s author, said in a statement.

“BankTrack has welcomed these discussions, but some three and a half years on from the launch of these Principles, it is time to move onto implementation.”

Strengthening accountability

The new findings on lagging implementation will strengthen arguments from those who want to tweak or supplant the Guiding Principles. Some suggest, for instance, that the framework be changed to treat financial institutions differently from other sectors.

“[T]he financial sector requires an exceptional treatment when it comes to the application of the Guiding Principles,” the Center of Concern’s Caliari wrote last year in comments for the Working Group on Business and Human Rights.

“Financial companies, more than other companies, have the potential, with their change of behaviour, to influence the behaviour of other actors. That means they also should be upheld to a greater level of responsibility when they fail to do so.”

Caliari and others are also part of a movement to move beyond voluntary frameworks such as the Guiding Principles (at least in their current form), and instead to see through the creation of a binding mechanism.

This decades-long effort received a significant boost in June, when the U.N. Human Rights Council voted to allow negotiations to begin toward a binding treaty around transnational companies and their human rights obligations. (This same session also approved a popular second resolution, aimed instead at strengthening implementation of the Guiding Principles process.)

The new data on banks’ relative lack of compliance with the Guiding Principles, Caliari says, is one of the reasons the call for a legally binding treaty “has been gaining ground.”

He continues: “It is increasingly clear that mechanisms that rely on the consent of the companies cannot be the total of available accountability mechanisms. More is needed.”

Edited by Kitty Stapp

The writer can be reached at cbiron@ips.org

Ho Chi Minh Stock Exchange, Ho Chi Mihn City, Vietnam. Credit: creative commons

By Samuel Oakford
UNITED NATIONS, Sep 18 2013 (IPS)

The concerns of developing countries about credit rating agencies (CRAs) risk going unheard as regulatory bodies around the world tackle questions raised after the 2008 financial crisis.

The Financial Stability Board (FSB) and the Basel III global accords, formed in the wake of the crisis, have each called on governments to reduce their regulatory reliance on ratings.

At the recent G20 conference in Moscow, world leaders called for similar limitations.

During the market collapse, ratings often proved inaccurate and are perceived by many as negatively contributing to the cascading series of events of the past five years.

But while wealthier countries are quick to recognise a need for redefining their use in markets like mortgage-backed securities, the “issues and concerns of many emerging and developing countries preceded the crisis period”, according to Merli Baroudi, director and chief credit officer of finance and credit risk at the World Bank, speaking before a U.N. General Assembly forum on CRAs.

Concerns are mounting that once more, the specific condition of poorer countries will be ignored.

Necessary debt

Countries, advanced and developing, rely on debt financing through the bond market to foster growth. Sovereign credit ratings are used by investors to predict the likelihood that a country will default on its obligation to pay them an agreed upon yield. The higher the perceived risk, the higher the yield.

Ratings are composed of publicly available economic data coupled with subjective opinions on a country’s political situation. There is a near consensus that ratings in some form are necessary for developing countries to attract international capital. Questions remain, however, about the dependence on the three dominant CRAs – Fitch, Moody’s and Standard and Poor’s – all of whom profit handsomely from the process.

A problem in the wiring

For years, global and national regulations, as well as internal firm policies dictated that many investors could only hold sovereign bonds and other assets that were deemed “investment” grade by the CRAs.

“When downgrades occur, especially near the investment-grade threshold, forced sales are often triggered,” said John Kiff, senior financial expert at the International Monetary Fund (IMF), told IPS.

This can send assets “off a cliff” and yield premiums, the difference between yields a bond pays and the yield of a stable asset such as U.S. Treasuries, soaring, he said. This makes borrowing more expensive for countries.

The problem, according to Kiff, is “the way that ratings are hard-wired into the financial system. For example, they are baked into regulations, and they mechanistically drive investment and collateral eligibility standards.”

Due to international capital standards inscribed in previous versions of the Basel accords, the lower a bond is rated, the less a bank can leverage it and hence the likelier they are to unload positions in the event of a downgrade.

Under proposed regulation, investors would be better protected and markets kept from the wild, rating-induced fluctuations of the past, but what of the sovereign issuers themselves?

Sovereign risks

According to the World Bank, 56 developing countries remain unrated by any of the big three CRAs. The list includes nations like Haiti, Cote d’Ivoire, Mali and Syria, all of which are unable to access international capital markets. This can increase reliance on donors to fill gaps. In some cases, the cost of a acquiring a rating – which developed countries do not have to pay – is simply too high.

For many, at fault is the “issuer pay” model that could theoretically allow issuers to shop around for the best rating and which was abused by firms securitising mortgages during the crisis. In the developing world, however, the problem can be the opposite. For a poor country, an unsolicited rating is unwanted at best and extortionist at worst.

But the CRA model is unlikely to change and is a “necessary evil” for developing countries looking to access capital markets, Aldo Caliari, director of the Rethinking Breton Woods Project at the Centre of Concern, told IPS.

The lack of fundamental change in the rating process leaves the developing world in limbo. But the choice is not always clear for countries. “Being rated is not necessarily benign,” says Caliari.

The standards imposed by CRAs can favour austerity and punish countries that increase social spending, without regard to growth. That ratings are meant to predict a very narrow occurrence, sovereign defaults, is part of the problem, according to Caliari.  Many incorrectly assume that ratings reflect the overall health of an economy.

“The fact that you have a balanced budget doesn’t necessarily mean you have a well-run economy,” he noted.

Developing realities

Poorer countries often find CRA methodologies “advanced country-centric”, said Baroudi. They may question “the application of some of the metrics used by the major agencies” and find it “difficult to get their own point of view across.”

To make matters worse, investors considering emerging markets find “the information available may not be that great and they may quite heavily rely on the ratings.”

Even if a country isn’t issuing debt itself, a rating often acts as a benchmark for bonds issued by firms in the country.  This bias incentivises developing countries to adhere strictly to rules dictated by CRAs, says Caliari.

Steps taken to achieve a certain rating can have a “counterproductive effect” on the long-term prospects of the economy. The same is not true for wealthier countries which enjoy positive subjective analysis of their political climates but which often carry some of the highest debt loads. The paradox frustrates many leaders in developing countries.

Lessons learned

Emerging markets began to be rated by CRAs in the 1980s and 90s, a period that overlapped with the rise of market-based antidotes to the economic ills of the developing world. The mutually influential mix was not always fortuitous for borrowers.

In Latin America during the 1990s, when many countries in the region adopted the free market principles pushed by the “Washington Consensus”, growth rates slowed to half of what they were in the 1960s and 70s, a period when Latin American economies were actively managed and considered by many in the developed world to be profligate.

Before the 2008 financial crisis, CRAs’ most damning failures occurred during the Mexican Economic Crisis of 1994 and the East Asian Financial Crisis of 1997-98. In both cases, CRAs didn’t issue downgrades until the crises were well underway. In fact, their lagging ratings worsened the situation when they caused forced selling of assets and currency.

Despite evidence of their damaging effect from economists like Nobel Prize winner Joseph Stieglitz, “consensus” policies are still considered positive steps towards achieving higher ratings.

For developing countries facing the gauntlet of a rating process, history serves as a reminder that their voices are not always the loudest in decision rooms.

“If there is a difference of views, country authorities may find it difficult to get their own point of view across,” says Baroudi. “What do a country’s authorities do when they genuinely do not understand or believe the rating?”