Assessing Pressure Points: Investor and Buyer Questions
Investor Question 1: Is the investor or lender a pension fund or insurance company?
Some investors like pension funds and insurance companies are typically more strongly regulated by government. This may also mean that in general they are more responsive to environmental, social and governance considerations. They are also typically publicly listed and can therefore be sensitive to reputational risks. It is important to bear in mind that it is difficult to make generalizations about the behavior of investors, as their objectives can vary widely. Try looking for information on the investor’s website or annual report about its investment strategy and what kinds of factors it takes into account when making investments.
Investor Question 2: How big is the loan or investment?
When the loan or investment is large, the investor or lender will have more influence over the business. For example, there may only be one loan or investment being made in the business by a single actor. This actor will have significant influence over the business because it is dependent on the financial resources of that actor.
Using the same sources identified here, you may be able to find out the size of the loan(s) or investment(s) in the business or parent company. Where there are a number of lenders or investors in the investment chain, take a note of the different sizes of the loans and investments. This will allow you to rank the possible strength of the pressure point according to the potential leverage of the investor or lender. Remember that a parent company has significant leverage over a project because it owns all or the majority of the business and can therefore influence its management and operations.
Investor Question 3: Is the investor or lender a development bank?
Multilateral and bilateral development banks often have institutional policies and standards to manage social and environmental risks. Examples include the International Finance Corporation’s Performance Standards and the Asian Development Bank’s Safeguard Policy Statement. Projects that receive financing from these institutions, either directly or indirectly through a financial intermediary, must apply the relevant standards. These standards and safeguard policies are included in the legal agreement between the development bank and their clients, and are therefore legally binding.
The presence of a development bank can offer a degree of financial and reputational security for the project, which can be important for relations with local governments and can be an important factor in attracting future investments or loans. For this reason, a business will typically be very keen to ensure the development bank involved in its project will not withdraw or cancel funding. This means a development bank can have a large amount of influence over the business, even if it is not a major investor or lender.
Box 4: An Overview of Development Bank Policies and Standards
The International Finance Corporation’s Performance Standards contain several provisions that are relevant to human rights and sustainability outcomes. For example, Performance Standard No. 1 requires International Finance Corporation clients to, among other things, “identify and evaluate environmental and social risks and impacts of the project; to avoid, minimize, and, where residual impacts remain, compensate/offset for negative impacts to affected people and the environment.” Performance Standard No. 5 on Land Acquisition and Involuntary Resettlement calls for the avoidance and minimization of physical and economic displacement. It also calls for the improvement or at least restoration of livelihoods and living standards of people who are displaced. Performance Standard No. 7 on Indigenous Peoples provides important protections, including the requirement to obtain the free prior and informed consent of indigenous peoples for impacts on their land and natural resources and relocation of communities.
The International Finance Corporation has an independent recourse mechanism – the Compliance Advisor Ombudsman – which offers a way for stakeholders affected by projects to raise complaints. This makes the International Finance Corporation’s investment in a project, whether directly or indirectly, a relatively strong pressure point.
Regional development banks also have internal standards or policies to protect the environment and people that will be affected by the projects they fund. For example, the Asian Development Bank has a Safeguard Policy Statement. If these policies are not respected by borrowers, affected people can submit a complaint to the Asian Development Bank’s Accountability Mechanism. Once again, this makes a bank investment a relatively strong pressure point.
The African Development Bank has an Integrated Safeguards System, which sets out the policies, standards and procedures the bank’s borrowers or clients should comply with to avoid and minimise social and environmental risks. The bank also has an Independent Review Mechanism to which people affected by the actions of the bank’s borrowers or clients can submit a complaint.
The Inter-American Development Bank, operating in Latin America and the Caribbean, has an Environment and Safeguards Compliance Policy. The bank also has an Independent Consultation and Investigation Mechanism to address concerns raised by individuals or communities who may be adversely impacted by bank-financed operations.
The European Investment Bank – which lends to projects within the European Union to further its policies – has a set of Environmental and Social Principles and Standards, to which all of the projects it finances must adhere. The bank has a complaints mechanism called the Complaints Office, which is designed to facilitate and handle complaints by individuals, organisations or corporations adversely affected by bank activities.
The European Bank for Reconstruction and Development has an Environmental and Social Policy, which needs to be applied to all of its projects.The bank has a Project Complaints Mechanism to assess and review complaints about Bank-financed projects from local individuals, organisations and local groups that perceive harm from a bank project.
Investor Question 4: Does the investor or lender commit to any external standards or guidelines?
Investors and lenders such as commercial, investment or development banks may have signed up to external standards or guidelines. For example, a number of commercial banks may have signed up to the Equator Principles or the Principles for Responsible Investment (see Box 5 below). While these standards are not legally binding, they can be used in advocacy to challenge the credibility and reputation of the signatories. This may make these actors stronger pressure points.
Box 5: Some relevant standards or guidelines that investors and lenders may use
The Equator Principles are a voluntary framework developed by commercial lenders as a benchmark for their own internal social and environmental policies, procedures and standards. The Equator Principles apply to operations that meet specified criteria, including project finance (usually infrastructure and industrial projects) with total costs of at least US$10 million; and project-related corporate loans of at least US$100 million or more. Many large banks, such as HSBC, Standard Chartered, Rabobank Group and China’s Industrial Bank, are signatories.
Here is a list of investors that have signed up to the Equator Principles.
The Equator Principles call for social and environmental impact assessments, the application of social and environmental standards that are aligned with the International Finance Corporation’s Performance Standards, and culturally appropriate engagement with affected communities. Members commit to reporting annually on implementation of the Equator Principles, taking into account confidentiality considerations, meaning that there may be certain investment information they refuse to disclose. An Equator Principle Financial Institution may be “de-listed” if it does not report.
The Principles for Responsible Investment are a set of six principles that signatories commit to abide by. Signatories include asset owners (such as pension funds), asset or investment managers (for example, hedge funds) and a range of service providers. The principles relate to financial investments made in a company. For example, the principles require that signatories incorporate environmental and social governance issues into investment analysis and decision making, and into their ownership policies and practices. The principles also require recipients of investments from signatories to disclose relevant information on environmental and social risk and promote the principles within the industry.
Signatories of the Principles for Responsible Investment can be found here.
Buyer Question 1: How much product does the actor buy from the supplier?
Where there is a sole or large, dominant buyer, its relationship with the company can be a strong pressure point. In these cases, the buyer is likely to have high levels of influence over the business, which depends on the relationship for its profitability. If the buyer is sensitive to reputational risks, it may find that its image is compromised by sourcing products from a supplier that is accused of human rights abuses or negative social and environmental impacts. In these cases, the buyer may threaten to stop purchasing from the business if these abuses are not stopped and remedied.
Buyer Question 2: Is the buyer based in the EU?
Global or regional agreements are made between two or more countries that set the rules and incentives for trade between businesses in those countries. A trade agreement between a developed and developing country, for example, may allow a company to export its produce from a developing country to a developed country at lower tax rates.
The aim of such schemes is to encourage production in developing countries to improve their economies. This might create new incentives for investors to set up or invest in operations, such as large-scale hydropower projects, in a particular country. However, this may also mean the other government that formed the trade agreement (the government of the developed country or countries) has some responsibility for the social and environmental impacts of the increased investment that it incentivised.
The example of the European Union’s Everything But Arms preferential trade scheme in (see Box 22) shows how a trade arrangement relevant to a particular country, product or investment can create a strong pressure point in an investment chain.
In addition to the European Union, a number of other countries have preferential trading schemes, which may offer effective pressure points. These includes the United States, Canada, Japan, Australia, New Zealand, Turkey, the Czech Republic, Hungary, and Switzerland. For more information, see these UN handbooks.