Abstract: Corporate social responsibility (CSR) can be split along two distinct lines. The first touches on the nature of corporate personality and is rooted in domestic law regulating enterprises specifically and legal persons generally. The second touches on the nature of the rights of individuals and is rooted in international law (and sometimes domestic constitutional law) defining the scope of the human rights of individuals and the consequential obligations of states and legal persons. Both conversations intertwine though they tend to operate autonomously. In both cases, however, the traditional focus of corporate responsibility has focused on the relationship between an operating company and its direct effects on individuals, society and the environment. That discussion remains contentious, conflicted and unresolved. But it ignores a critical actor—the financial institutions which provide operating capital to enterprises. This paper considers the corporate social responsibilities of financial institutions, including sovereign wealth funds, for the conduct of their borrowers. The focus will be the extent of any duty or responsibility of lenders to ensure that their borrowers comply with CSR obligations (or alternatively conforms to international human rights standards) as a core aspect of their own CSR obligations (or alternatively) of their responsibility to respect human rights. Section II examines the general regulatory framework. There are two aspects that are relevant. The first is to understand the scope and character of the legal norms that may be applied to enterprises generally with respect to their operation’s that might be understood as CSR-human rights related in nature. The second is to consider the range of non-legal normative governance rules that might apply. In the process it will be important to distinguish between a CSR based regulatory approach and a human rights based approach. Section III considers the application of these norms to financial institutions. This requites distinguishing between those obligations that apply to the internal operations of financial institutions generally, and those obligations that apply to the financial institution’s obligations with respect to its lending activities, that is with respect to its relationship with its borrowers. The essay ends with a brief examination of recent cases in which financial institutions undertook such a responsibility, and the ways in which that obligation was undertaken. Three different types of institutions are considered—private banks, sovereign wealth funds and international financial institutions (IFIs). The paper ends with a preliminary consideration of the consequences of this movement for domestic CSR in the U.S.

1. The Corporate Social Responsibilities of
Financial Institutions for the Conduct of
their Borrowers: The View From
International Law and Standards.
Larry Catá Backer
W. Richard and Mary Eshelman Faculty Scholar, Professor of Law and International Affairs
Pennsylvania State University
Presented at 21st Annual Business Law Fall Forum, Innovating Corporate Social Responsibility: From the Local to the Global
Northwestern School of Law of Lewis & Clark College
Portland, Oregon -- 7 October 2016

2. Context
• To what extent are financial institutions responsible for the human rights
breaches of their borrowers?
• “While the obligation for the protection of human rights lies with the state, IFIs and their
member states also have responsibilities to ensure that activities they support do not cause,
or contribute to, human rights abuses by putting in place adequate safeguards.” Statement of
Global Initiative for Economic, Social and Cultural Rights to UN Human Rights Council
• How might these obligations constrain borrowers?
• Secondary responsibility of financial sector enterprises
• Loan making; Pricing; covenants
• Due diligence during life of relationship
• Two questions embedded here:
• What are the mandatory/discretionary CSR-Human Rights responsibilities of with
respect to its own internal operations
• To what extent do those responsibilities carry over to their custolmersin 2 respects:
• Which companies fincaincial institutions will do business with
• What the the conditions that financial institutions will impose on customers.

3. Roadmap for Discussion
• Overall objectives:
• Considers the corporate social responsibilities of financial institutions, including
sovereign wealth funds, for the conduct of their borrowers.
• The extent of any duty or responsibility of lenders to ensure that their borrowers
comply with CSR obligations (or alternatively conforms to international human
rights standards) as a core aspect of their own CSR obligations (or alternatively) of
their responsibility to respect human rights. International norm structures
• FIRST: Sources and scope of CSR responsibility
• Differences between CSR and human rights approaches
• Legal and societal (soft law)
• Application (techniques and methods)
• SECOND: Application of rules to Financial Institutions
• THIRD: Case Studies
• OECD
• SWFs
• Private Standards

4. National Law
• Basic structures
• CSR orientation rather than Human
rights
• Constraints of fundamental
corporate law principles
• Autonomous corporate personality
• Shareholder primacy
• Permissive rather than mandatory
• Benefit corporations exception
• Disclosure oriented
• (e.g. Dodd Franck ¶1502Conflict
Minerals; UK Modern Slavery Act)
• Comparison Cal. Transparency Act
and UK Modern Slavery Act (from
JD supra) 4

5. International Law
• Human Rights rather than CSR oriented
• General Human Rights Laws
• Large number in specific areas
• Substantive; some disclosure requirements
• International Bill of Human Rights (1948)
• Universal Declaration of Human Rights
• Covenants: International Covenant on Civil
and Political Rights (1966) with its two
Optional Protocols and the International
Covenant on Economic, Social and Cultural
Rights (1966).
• On Responsibilities of Economic
Enterprises Hard law—none
• New comprehensive Business and Human
Rights Treaty?

6. International Norms:
Soft law
• Soft Law—Objectives
• Norm creation
• Source for public lawmaking
and private governance
regimes
• Soft Law—Sources
• UN Guiding Principles
• OECD Guidelines for MNEs
• BITs with Human Rights
Components
• 3rd Party Standards
• MNE internal norms
• Social License for extractives Credit: Prof. Masahiko Iwamura, Soft Law and the State-Market
Relationship

7. UNGP
• Endorsed by UN Human Rights Council
• Does not create new CSR or HR legal
protections
• Polycentric: simultaneous obligations to states
and enterprises
• 3 part structure
• State duty to protect human rights
• Extends no further than legal obligations of
state
• Opens the door to extraterritorial application
• Corporate responsibility to respect human
rights
• International bill of human rights
• Human rights due diligence
• Obligation to work around host state
restrictions
• Remedial obligations for states and
enterprises
• Principally through state
• Also international and private mechanisms
John G. Ruggie, Special Representative of
UN Secretary General for Business and
Human Rights

8. OECD Guidelines for Multinationals
• Guidelines: recommendations addressed by governments to MNEs.
• They provide principles and standards of good practice consistent with applicable laws and
internationally recognised standards.
• Observance of the Guidelines by enterprises is voluntary and not legally enforceable.
• Cover a number of general areas
• transparency/disclosure, human rights, employment/industrial relations, environmental issues,
bribery/corruption, consumer protection, technology transfer, anti-competitive schemes, and taxation
• Expert letters and statements on the application of the OECD Guidelines for Multinational
Enterprises and UN Guiding Principles on Business and Human Rights in the context of the financial
sector, 2014
• Enterprises should carry out risk-based due diligence to identify, prevent and mitigate actual and
potential adverse impacts and account for how these impacts are addressed. (Guidelines Chp II, ¶ 10)
• Special toolkit for weak governance zones
• Extractives and weak governance zones HERE
• OECD Due Diligence Guidance: Meaningful Stakeholder Engagement
• Complaint procedures through National Contact Points.
• Have been used increasingly in two contexts
• NGOs to advance international normative agenda
• Labor unions to leverage national litigation

9. BITs with Human Rights Elements?
--Bilateral Investment Treaties
--typically deal with investment and investment protection;
--Cuban Bits tend to focus on state prerogatives
--Central focus
-internationalize national law;
-might discriminate in favor of foreign investors over domestic;
-stabilization provisions protect investment against domestic law;
-focus on expropriation
-focus on dispute resolution mechanisms (eg ICSID, etc.).
--Multilateral version:
--Trans Pacific Partnership (TPP)
--China’s One Belt/One Road
--Criticism: dispute resolution mechanism strips state courts of authority; internationalizes the
“law” of investment autonomous of human rights norms and national law
--Possibilities
-Incorporate HR norms in BIT subject to stabilization protection
-produce strong enforcement mechanism through arbitration
-Early Study HERE
--Challenges: (1) coherence between HR and trade bureaucracies; (2) harmonized legal basis; (3) stable
national governance (administrative expertise, resources, corruption)

10. 3rd Party Private Standards
•GRI (Global Reporting Initiative)
•Social, economic and rights based
reporting of economic activity
•Private-public partnerships
•ISO 26000 CSR
•EITI (Extractive Industries Transparency
Initiative;
•(2016 Standard)
•Private organizations
•Certification of compliance with
proprietary standards
•Monitoring services
•Effectively purchasing reputation
and privatizing norm creation and
administraiton

11. Internal MNE Norms
• Largest MNEs already have harmonized and
sometimes complex systems of CSR based
control of its supply and production chain
throughout their global operations
• Rio Tinto
• Barrick
• TransCanada

12. International Norms and Financial Institutions
• UNGP/OECD Guidelines
• UNPRI
• Equator Principles
• SWF

13. OECD Guidelines/UNGP
• UNGP
• ¶ 13 “directly linked to their operations”
• ¶ 19 effective integration of HRDD
• OECD Guidelines
• Contextual application
• Depends on the scope of the terms
“business relationships” and “directly
linked”
• Scope and application of ‘business relationships’ in
the financial sector under the OECD Guidelines for
Multinational Enterprises, 2014
• Due diligence in the financial sector: adverse
impacts directly linked to financial sector
operations, products or services by a business
relationship, 2014

14. 3rd Party Standards for Financial Institutions
• IFC Financial Valuation Toolkit
• “to help companies identify the optimum sustainability investment portfolio to
deliver maximum business and social value.”
• Equator Principles
• risk management framework, adopted by financial institutions, for determining, assessing
and managing environmental and social risk in projects.
• Guidelines for incorporation into loan documents
• U.N. Principles for Responsible Investment
• SWFs
• Ethics Guidelines
• Public-Private efforts
• PROTOCOLO VERDE AGENDA DE COOPERACIÓN ENTRE EL GOBIERNO NACIONAL Y EL
SECTOR FINANCIERO COLOMBIANO
• Generally IFC Sustainable Banking Guidance from Sustainable Banking Network Members

15. UN-PRI
As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role,
we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment
portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that
applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with
our fiduciary responsibilities, we commit to the following:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.+
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.+
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.+
Principle 4: We will promote acceptance and implementation of the Principles within the investment
industry.+
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.+
Principle 6: We will each report on our activities and progress towards implementing the Principles.+
In signing the Principles, we as investors publicly commit to adopt and implement them, where consistent with our
fiduciary responsibilities. We also commit to evaluate the effectiveness and improve the content of the Principles over
time. We believe this will improve our ability to meet commitments to beneficiaries as well as better align our investment
activities with the broader interests of society.
--Sustainable financial system: nine priority conditions to address (2016)

16. Equator Principles
• The EPFI will, as part of its internal environmental and social review and due diligence,
categorise it based on the magnitude of its potential environmental and social risks and
impacts
• Client to conduct an Assessment process to address, to the EPFI’s satisfaction, the
relevant environmental and social risks and impacts of the proposed Project
• Address compliance with relevant host country laws, regulations and permits that
pertain to environmental and social issues in accordance with international standards
• EPFI will require the client to develop or maintain an Environmental and Social
Management System (ESMS)
• the EPFI will require the client to demonstrate effective Stakeholder Engagement as an
ongoing process in a structured and culturally appropriate manner
• the EPFI will require the client, as part of the ESMS, to establish a grievance mechanism
an Independent Environmental and Social Consultant, not directly associated with the
client, will carry out an Independent Review of the Assessment Documentation
• Incorporation of covenants linked to compliance
• The client to retain qualified and experienced external experts to verify its monitoring
information which would be shared with the EPFI.
• Client reporting requirements

17. Sovereign Wealth Funds
• Santiago Principles:
• GAPP 19.1. Subprinciple.
• If investment decisions are subject to other than economic and financial
considerations, these should be clearly set out in the investment policy and
be publicly disclosed.
• Explanation and commentary
• Some SWFs may exclude certain investments for various reasons, including
legally binding international sanctions and social, ethical, or religious reasons
(e.g., Kuwait, New Zealand, and Norway). More broadly, some SWFs may
address social, environmental, or other factors in their investment policy. If
so, these reasons and factors should be publicly disclosed.

18. SWFs: Norway Pension Fund Global
• History
• A new form of projecting public power through private markets. Described HERE.
• Structure
• Ministry of Finance
• Norges Bank
• Secretariat
• Applicable Standards
• Santiago Principles
• The Norwegian Government Pension Fund Global’s adherence with the Santiago principles 2015).
• Management Mandate (§2.2 Responsible Investment)
• Ethics Guidelines
• Ethics Council
• Authority
• Active Shareholding Global Voting Guidelines
• Exclusion
• Bound by OECD Guidelines? UNGP?

19. Norway SWF: Pension Fund Global
• Ethics Guidelines
• Section 3. Criteria for conduct based observation and exclusion of companies
Companies may be put under observation or be excluded if there is an
unacceptable risk that the company contributes to or is responsible for:
• a) serious or systematic human rights violations, such as murder, torture,
deprivation of liberty, forced labour and the worst forms of child labour
• b) serious violations of the rights of individuals in situations of war or conflict
• c) severe environmental damage
• d) acts or omissions that on an aggregate company level lead to unacceptable
greenhouse gas emissions
• e) gross corruption
• f) other particularly serious violations of fundamental ethical norms
• SANCTIONS: Observation versus Exclusion

20. A Glimpse at the Future Now: Case Studies
• Friends of the Earth Europe and
Friends of the Earth
Netherlands/Milieudefensie –
Rabobank
• Norway Sovereign Wealth Fund
Cases
• Private Bank Responsible Investing
Programs in Extractive Sector

21. OECD: -Friends of the Earth Europe and Friends of
the Earth Netherlands/Milieudefensie - Rabobank
• Large financial institution heavily involved in palm oil sector
• Rabobank states it expects its clients to respect rights and to obtain free, prior and informed
consent (FPIC) as a part of and guided by the Round Table for Responsible Palm Oil (RSPO)
principles & criteria and as part of the environmental and social impact assessment (ESIA)
process prior to embarking on a new palm oil development.
Rabobank will address the consequences of non-compliance with the FPIC requirement in
the provisions of its palm oil policy;
Rabobank handles complaints concerning negative impacts caused by clients. Rabobank
will modify its current approach to handling complaints. It will publish its complaints
procedure, including a time frame for the procedure;
• Privatization of enforcement of emerging rule systems for the management of
the palm oil production chains through the organs of financial institutions.
• Rabobank, then, is entrusted with global management of palm oil production
chains through its structurally differentiated self referencing governance system,
one founded on its relationship with its borrowers. (On the structural
characteristics here)

22. Norwegian Sovereign Wealth Fund:
• Recommendations from 2010, 2012 and 2014
regarding the companies Repsol S.A. and
Reliance Industries Limited
• On 1 December 2010 the Council on Ethics
recommended the exclusion of the companies
Repsol YPF (now Repsol S.A) and Reliance
Industries Limited from the Government Pension
Fund Global. In the Council’s view, the exploration
activity undertaken by the companies in Block 39
would increase the risk that any indigenous
peoples who may be living in voluntary isolation
within the block would come into contact with
outsiders, leading to potentially serious
consequences for these peoples’ life, health and
way of living. This would constitute an
unacceptable risk of the companies contributing to
serious and systematic human rights violations.
• Exclusion lifted when Repsol sold its interest

23. Norway SWF:
• Exclusion of San Leon Energy Plc for contribution to serious violations of
fundamental ethical norms
• The Council on Ethics for the Government Pension Fund Global (Etikkrådet for
Statens pensjonsfond utland) recommends the exclusion of San Leon Energy Plc (SLE;
SLGYY) from the Government Pension Fund Global because the company contributes
to serious violations of fundamental ethical norms through its onshore hydrocarbon
exploration in Western Sahara on behalf of Moroccan authorities.
• Same: Potash Corporation of Saskatchewan (6 December 2011)
• Indonesian Company PT Astra International Tbk Placed Under
Observation (Severe Environmental Risks)
• “The Council on Ethics for the Government Pension Fund Global (GPFG) recommends
that PT Astra International Tbk be placed under observation due to the risk that the
company may be responsible for severe environmental damage. The observation
relates to the company’s plantation operation in Indonesia. On 11 June 2015, Astra
announced that it would immediately be ceasing all logging and land conversion
while developing a new sustainability strategy.

24. Norway SWF:
• Incoherence or Discretion in Corruption and Investment
Approaches?--Petroleo Brasileiro SA (Petrobras) under observation
• Norges Bank has decided to place Petroleo Brasileiro SA
(Petrobras) under observation because of the risk of severe
corruption. Petrobras is one of the largest state owned petroleum
TNCs in Latin America and one that is deeply embedded in
corruption investigations (here and here (including the write off of
over $2 billion in bribe payments)) that reached all the way to the
office of the President of the Republic (here).
• Compare Corruption and Investment--Chinese Company ZTE
Corp. Excluded From Norway Sovereign Wealth Fund Investment
Universe

25. Privatization of Laws: Banks as Legislators
• Banks now serve as the means
through which non binding
international norm standards are
hardened within production
chains in those sectors in which
banks influence behaviors
through lending practices.
• Example of banking rule systems
in the extractives sector

26. HSBC: Mining and Metals Policies
• Private standards drawing from international soft norms
• Mixes risk management and CSR approaches
• “HSBC’s Mining and Metals Sector Policy provides guidance to its offices on sustainability
standards applicable to the Group’s involvement with this sector. The standards are based on
those accepted by the industry and by other stakeholders as representing best practice, and
are consistent with HSBC’s long-standing commitment to sustainable development.”
• Complemented by Equator Principles
• Scope
• The financial services covered by the Mining and Metals Sector Policy include all lending and
other forms of financial assistance, debt capital markets activities, project finance and
advisory work. The policy applies to equity capital markets and asset management where
practical, recognising the lower degree of influence the bank may have in these
circumstances.
• The mining and metals activities within the scope of the policy are: exploration; mine
development; mineral extraction and mine operation; mine closure and reclamation; and
primary processing of minerals.
• 2007 Mining and Metals Policies
• Policy
• Standards

27. HSBC: Policy
• The policy is consistent with, and builds on, HSBC’s Sustainability Risk Standard and its adoption
of the Equator Principles – voluntary guidelines which apply to project finance activities – as well
as the existing sector risk policies. In particular, HSBC will not provide financial services to the
mining and metals sector which directly support:
• Operations in UNESCO World Heritage Sites, unless the activities pre-date the UNESCO designation;
• The mining, processing and/or sale of uranium for weapons purposes;
• The mining or trading of rough diamonds not certified under the Kimberley Process Certification Scheme;
• Artisanal mining;
• Operations in wetlands on the Ramsar List (the Register of Wetlands of International Importance of the
Ramsar Convention on Wetlands); and
• Operations in Primary Tropical Moist Forests, High Conservation Value Forests or Critical Natural Habitats,
where there is significant degradation or conversion – unless legacy assets are involved (see below).
• Support where the disposal of tailings is in a river or shallow sea-water environment will only be
considered exceptionally where alternative options are not feasible and the benefits to local
communities are significant.
• HSBC has a restricted appetite for supporting individual operating sites where:
• Tailings storage facilities and waste rock dumps represent a material threat to human life or groundwater
(for example, from tailings dam failure or acid mine drainage);
• Mines are in an area of high seismic activity or exceptionally high rainfall, without adequate accident and
contingency planning in place;
• • Mines have no credible closure plan; and
• • Mines or metals operations are in areas where there are credible allegations of human rights violations.

28. HSBC: Standards
• HSBC looks to its clients to operate in accordance with relevant global, regional and
national laws, and the policy makes express reference to the following standards.
• International Cyanide Management Code: HSBC requires clients using cyanide in the mining of
gold to observe this Code or its equivalent.
• International Atomic Energy Agency: HSBC has a restricted appetite for financing uranium for the
power sector where IAEA standards are not met.
• European Union Emissions Trading Scheme: HSBC expects clients covered by the scheme to
comply with their allowances to restrict greenhouse gas emissions.
• International Finance Corporation (IFC): in jurisdictions where appropriate standards do not exist
and potential client impacts are high, the IFC’s Performance Standards, and Environmental Health
and Safety Guidelines are used as a benchmark of internationally accepted standards. This is
especially important for social and safety risks, which can arise frequently in the sector and where
there are a limited number of internationally accepted standards.
• HSBC is keen to work with clients in the sector who meet these standards. As part of its
commitment to engage with clients and assist them towards higher standards of
sustainable development, it will also work with clients who may not currently meet these
standards due to legacy assets. These assets will typically be ones which pre- date this
policy and clients should have a credible, documented and time-bound plan to meet our
standards.

29. Crédit Agricole: Metals and Mining June 2015
• The Bank will not participate in financings or investments directly related to the development,
construction or expansion of any metals & mining installation if aware of the following
characteristics:
• - coal mining projects
• - asbestos mining projects
• - artisanal mining
• - critical impact on a protected area or on wetlands of international importance covered by the Ramsar
Convention
• - the project is located within a site listed on the UNESCO World Heritage list
• or when a risk of material non-compliance has been identified and has not received, in its
opinion, satisfactory answers with respect to:
• 6
• - the IFC Performance Standards (or equivalent standards when a export credit agency or a multilateral
institution is involved) or the Environment, Health and Safety Guidelines, in particular with respect to the
ESMS, protection of the fundamental rights of workers, displacement of population, management of tailings,
closure and rehabilitation plans as appropriate, biodiversity conservation, impact on critical natural habitats,
consent of indigenous people and protection of cultural heritage
• - the relevant industry initiatives listed in section 3 (International Cyanide Management Code for gold mining,
Kimberley Process for diamonds, ISTCI for tin minerals, WNA Sustaining Global Best Practices for uranium)
• - public consultation or, when necessary, consent from affected indigenous peoples
• - inter States consultation in the event of major cross-borders impacts

30. Summary
• The responsibilities of enterprises to respect human
rights and with respect to environmental and
sustainability principles have expanded to
institutions that finance enterprise activity
• The scope of a financial institution’s obligations are
evolving
• Serve as an instrument of privatized international norms
• Sources in international soft law frameworks and self-
governance structures
• Evolving structures of compliance
• OECD NAPs; arbitration, etc.
• Challenges;
• Policy Incoherence:
• Obligations for both financial institutions and their
borrowers are evolving might be subject to different
standards
• Private governance structures evolving as they
incorporate international standards
• Control of borrowers through loan pricing (based on
human rights risks) and covenants (compliance and
monitoring of standards developed and imposed by
lenders)

31. Conclusion
• The trend toward legalization of
the private sphere and for the
privatization of governance and
administration continues to grow
• In the context of the responsibility
of financial institution
• privatization is implemented through
the evolution of contract webs with
regulatory objectives;
• Legalization is implemented through
the transposition of internationalized
standards into the rule systems of
production chains.
• Autonomy is achieved by detaching
dispute resolution from national
courts.
• From Social License the Regulation of the
Societal Sphere
• “Social license ” generally refers to a local
community ’s acceptance or approval of a
company ’s project or ongoing presence in
an area. It is increasingly recognized by
various stakeholders and communities as a
prerequisite to development. The
development of social license occurs
outside of formal permitting or regulatory
processes, and requires sustained
investment by proponents to acquire and
maintain social capital within the context of
trust-based relationships.” (2013 Social
License to Operate: How to Get It, and How
to Keep It, Brian F. Yates and Celesa L.
Horvath)

32. Thank You!
For more information please
contact me at lcb11@psu.edu
or visit my website:
http:backerinlaw.com