Report: Development finance institutions should strengthen their human rights risk management systems for intermediated finance
Development Finance Institutions have traditionally provided financing directly to projects in diverse sectors such as infrastructure, energy, education across developing economies – this is referred to as direct finance. Since the early 2000s, Development Finance Institutions have increasingly turned to indirect or intermediated finance - financing through financial intermediaries such as commercial banks and investment funds.
In a new report the Danish Institute for Human Rights assesses whether Development Finance Institutions´ policies for the management of environmental and social risks in intermediated finance can effectively prevent and address negative human rights impacts.
The report identifies various gaps in the Development Finance Institutions´ policies and procedures against the expectations set out in the UN Guiding Principles on Business and Human Rights (UNGPs). Specifically, the Report uncovers three areas of concern in respect to the (i) the scope of application of Development Finance Institutions´ policies to intermediated finance operations and transactions, (ii) the quality and adequacy of the Development Finance Institutions´ management of environmental and social risks; and (iii) barriers to remedy for those potentially and actually affected by financial intermediaries financing.
“Development Finance Institutions are unique investors dedicated to improving living standards and achieving the SDGs in low- and middle-income countries. But SDGs and human rights are two sides of the same coin. Respect for human rights, including a commitment to remediation when harms arise, needs to be firmly embedded in Development Finance Institutions´ strategies, policies and systems. That should be the case irrespective of the financing modalities Development Finance Institutions decide to use.”
Rights
The report concludes that Development Finance Institutions' policies, historically developed for direct finance operations, need various upgrades to better reflect the complexities and specificities of intermediated finance. The report also offers concrete suggestions and recommendations to Development Finance Institutions and other stakeholders to address some of the most obvious gaps identified.
The report will be primarily relevant for Development Finance Institutions, international and national policy makers, as well as CSOs and academics working at the intersection of human rights and development finance. Those interested in a quick reference guide on the on the implications of the UNGPs for Development Finance Institutions’ policies on intermediated finance should consult the companion of the report.
Read more on the Institute´s s work on finance and human rights.