Nominee shareholders responsible for human rights impacts of investees says UN

With the preparations for COP26 in full swing and the headlines dominated on a daily basis by a new report telling the world how much trouble it is on climate change, you would be forgiven for having missed an equally significant development in the Business and Human Rights space reported earlier this month (here). 

Earlier this year, the Society for Threatened Peoples Switzerland submitted a complaint to the Swiss National Contact Point (NCP) concerning allegations that a financial institution had contravened the OECD Guidelines for Multinational Enterprises in relation to certain of its investment products, activities and nominee shareholding services. While the Swiss NCP has accepted the complaint for further examination in relation to the financial institutions passive funds (the first time an NCP has recognised the responsibility of banks in relation to their passive investments through indexed funds), it did not accept the element of the complaint which related to the nominee shareholding/custodian services. 

The second part of this decision led BankTrack and OECD Watch to submit a request to the UN High Commissioner for Human Rights (OHCHR) for advice concerning the application of the UN Guiding Principles on Business and Human Rights (UNGPs) in the context of a financial institution acting as a custodian or nominee shareholder. Specifically, BankTrack and OECD Watch wished to understand whether acting as such constituted a “business relationship” under the UNGPs and, if so, how a financial institution should act to fulfil its responsibility under the UNGPs to respect human rights. 

The OHCHR has since responded to the request. Adopting a position that will be ringing alarm bells for many financial institutions (but which is in line with the recent, wider trend of the ever-increasing sphere of business responsibility), the OHCHR has indicated that a financial institution providing custodian or nominee shareholder services have a “business relationship” with the investee company and are therefore: (i) directly linked under the UNGPs to any adverse human rights impact they cause or contribute to; and (ii) responsible for taking steps to identify, prevent, mitigate and account for how they address such impacts in order to ensure they fulfil their duty to respect human rights. 

Although potentially alarming on the face of it for financial institutions offering such services, the OHCHR advice is helpful in some respects: 

• Firstly, it notes that its advice is limited to a prescribed understanding of being a nominee (effectively being an institution which holds shares pursuant to a custodial or nominee shareholder agreement and is titled on the securities or other property to facilitate certain transactions or transfers while leaving the actual or legal owner as the beneficial owner) and that there is a wide array of types of custodian arrangement which may warrant further analysis.
• Secondly, although the advice acknowledges the direct link and the responsibility of the financial institution (which it notes is unchanged by the construction of the financial service provided), it also acknowledges that a financial institution’s human rights due diligence exercise is influenced by various factors, including the nature of its products and services, and that nominee shareholding poses a particular challenge in identifying human rights risks connected either to the beneficial owners or the investee company. 
• Thirdly, it goes on to make some practical suggestions about how nominee shareholders might meet their responsibility under the UNGPs, including inserting clauses on human rights expectations in nominee shareholding agreements and providing advice to clients on identified human rights risks and potential courses of action.

Following on from its helpful practical suggestions, the OHCHR note does however sound another alarm bell for financial institutions. The advice note sets out that where the financial institution has identified adverse impacts but lacks the leverage (ability to effect change) to prevent or mitigate such impacts and is unable to increase its leverage to do so, the financial institution should (in line with the expectations of the UNGPs) consider ending the relationship. 

The advice does not have a direct bearing on the Swiss NCP complaint. It may, however, lead to an increase in the number of NCP complaints against financial institutions and will only continue to increase the expectations of stakeholders on such businesses. Fortunately, the UN Working Group on Business and Human Rights is expected to provide a roadmap on the next decade of implementation of the UNGPs by the end of the month – here’s hoping this provides some further practical guidance on how financial institutions (and others) can meet their responsibilities under the UNGPs at a time when scrutiny of that responsibility has never been higher.

For more on the OECD’s NCP complaint procedure, see our briefing.