Achieving Global Rules on Social Impacts for Export Credit Agencies

Andrea Saldarriaga and Andrea Shemberg's column represents the seventh chapter for Global Policy’s e-book, 'The Future of Foreign Trade Support – Setting Global Standards for Export Credit and Political Risk Insurance'. Contributions from academics and practitioners will be serialised on Global Policy until the e-book’s release in the second quarter of 2015. Find out more here.

Policy implications

• Governments who have supported the development and dissemination of the United Nations Guiding Principles on Business and Human Rights (UNGPs) should drive the inclusion of global standards on social and human rights impacts in the context of government-supported export credit agencies (ECAs). There is an opportunity now to initiate this discussion within the ongoing work of the International Working Group (IWG) on export credits. In this context, the US and China as conveners of the IWG and supporters of the UNGPs should take the lead on this effort.
• To preserve the long-term legitimacy of ECAs, and to facilitate the identification of common ground around which global standards for ECAs on social and human rights impacts can be developed, the IWG should initiate the discussion to achieve a global consensus that a core purpose of all ECAs should be to facilitate trade and investment that is supportive of states’ commitments on sustainable development and human rights.
• Governments who operate under the “Common Approaches” and others who now employ good practices on environmental and social due diligence should bolster the efforts to build this global consensus. They can do this by demonstrating and disseminating good practices that they employ with success and by spearheading empirical and case study research to document the impact of social and human rights policies on the ability of ECAs to remain competitive in the global market. These practical steps will help overcome arguments that social and human rights standards will hinder the competitiveness of ECAs and impose unnecessary burdens.

Export credit agencies for the purposes of the present discussion are government-backed institutions “that provide [] official financing assistance in direct support of its country’s exports”. ECAs support their national government's industry, trade promotion and foreign aid strategies and operate under government mandates to fulfil key policy objectives linked to growth and job creation (See Klasen 2011). Specifically, these agencies provide insurance cover for risks related to export transactions in situations where the coverage from private insurance companies are restricted, often because of the perceived high risk related to the transactions. In fact, as private lenders became more selective, in the wake of the 2008 economic crisis, ECAs assisted in recovery and reform by filling a substantial gap in export credit insurance supply (See Klasen 2011).

However, these agencies are also often criticised (see for example, Corner House, and ECA Watch) as being at least partially responsible for environmental degradation and human rights infringements linked with the economic activities that the ECAs support. Indeed, the role of government-backed ECAs, while sometimes limited and circumscribed in the context of major projects, attracts much attention and reproach because of their governmental nature — and therefore their public policy role. As agencies that operate with taxpayer money under a governmental mandate, there is a strong policy argument that the ECAs should ensure the economic activities they support, at a minimum, do not put people and the environment at risk.

The responsibility of government-backed ECAs to safeguard human rights in the context of their activities is called out specifically in the UNGPs that were unanimously endorsed in 2011 by the UN Human Rights Council, the UN body directly responsible for human rights issues. While detailing the State Duty to Protect Human Rights, Principle 4 says:

'States should take additional steps to protect against human rights abuses by business enterprises that are owned or controlled by the state, or that receive substantial support and services from state agencies such as export credit agencies and official investment insurance or guarantee agencies, including where appropriate, by requiring human rights due diligence.'

The Commentary to UNGP 4 further elaborates:

'States individually are the primary duty-bearers under international human rights law, and collectively they are the trustees of the international human rights regime. Where a business enterprise is controlled by the state or where its acts can be attributed otherwise to the state, an abuse of human rights by the business enterprise may entail a violation of the state’s own international law obligations. Moreover, the closer a business enterprise is to the state, or the more it relies on statutory authority or taxpayer support, the stronger the state’s policy rationale becomes for ensuring that the enterprise respects human rights….'

'A range of agencies linked formally or informally to the state may provide support and services to business activities. These include export credit agencies, official investment insurance or guarantee agencies, development agencies and development finance institutions. Where these agencies do not explicitly consider the actual and potential adverse impacts on human rights of beneficiary enterprises, they put themselves at risk – in reputational, financial, political and potentially legal terms – for supporting any such harm, and they may add to the human rights challenges faced by the recipient state.

Given these risks, states should encourage and, where appropriate, require human rights due diligence by the agencies themselves and by those business enterprises or projects receiving their support. A requirement for human rights due diligence is most likely to be appropriate where the nature of business operations or operating contexts pose significant risk to human rights.'

Both China and the US were members of the UN Human Rights Council when the UNGPs were presented. Both countries spoke in favour of the UNGPs and supported their unanimous endorsement. Both countries continue to publicly support the implementation of the UNGPs. Most recently, in September 2014, the US announced its intention to “develop a National Action Plan to promote and incentivize responsible business conduct… consistent with the UN Guiding Principles on Business and Human Rights…”.

The former UN Special Representative to the Secretary-General for Business and Human Rights, John Ruggie, also identified practical reasons why ECAs should understand and work to manage the risks to people in which they get involved through financing:

“…ECAs potentially are running two risks in relation to human rights. The first is the risk that a client’s business activities or relationships contribute to human rights abuse abroad, with the moral, reputational, political and in some cases legal implications this entails for an ECA itself. The second is the financial risk to the project that may result from its adverse impact on the human rights of individuals and communities, which in turn could affect the ECA’s own exposure. These risks are inextricably linked. But in the case of many if not most ECAs, they are currently unknown and unmeasured.”

Beyond the UN Human Rights Council, governments have acknowledged the need for ECAs to ensure that their activities are carried out in a manner that respects people and the environment. In 2003, the OECD Working Party on Export Credits and Credit Guarantees adopted the first ‘Recommendation on Common Approaches on Environment and Officially Supported Export Credits’ (“Common Approaches”). Following the adoption of the UNGPs, the Common Approaches were revised to recognise that member states have human rights obligations, business enterprises have the responsibility to respect human rights and to recommend that ECA members carry out environmental and social impact assessments and take a number of steps to reduce environmental and social risks associated with activities supported.

The Common Approaches is a formal recognition by governments that ECAs have an active role in ensuring appropriate environmental and social standards are followed in the context of ECA-backed activities. The Common Approaches is also evidence of the value of multilateral harmonisation as a means to avoid a race-to-the-bottom approach for key global societal issues such as the environment and human rights. Yet, while the OECD Common Approaches is an important precedent, export financing is no longer an exclusive OECD activity. As of 2013, 44 percent of global official export support came from ECAs from outside the OECD, including China, Brazil, India and Russia.

The growing importance of government-supported export credit financing that is not subject to any kind of multilateral standards on environmental or social impacts not only intensifies the risk of a race-to-the-bottom on key societal issues, but also casts a shadow on the ECAs’ public policy role that threatens to erode the rationale for their own existence. The harmonisation of environmental and social standards has therefore emerged as an urgent priority to be addressed.

The work of the IWG, presents a valuable opportunity to address this priority. The IWG was initially formed by the US and China in early 2012 with the mandate to “develop a set of new horizontal international guidelines on official export credit support that promote international trade, and that, taking into account varying national interests and situations, are consistent with international best practices.” Since then it has grown to 18 participants including OECD and non-OECD countries such as Brazil, South Africa and the Russian Federation. India is an observer in the process. As far as information is available, neither environmental nor social impacts of ECA activities are currently on the IWG agenda. However, these issues are certainly consistent with the mandate of the IWG.
Putting global rules for social impacts on the agenda

Integrating concern for the environmental and social impacts in the context of export credit financing is now an established part of international best practice, as confirmed by the OECD Common Approaches, therefore these issues can be addressed in the context of the current mandate of the IWG. Furthermore, China and the US have both publicly committed to implementing the UNGPs, which would include integrating respect for human rights into the work of government-backed entities such as ECAs. Therefore, both these countries would be smart to introduce the discussion around social impacts in multilateral contexts such as the IWG, given the globally competitive nature of ECAs and the resulting difficulty of implementing high standards unilaterally.

Even if China and the US are unconvinced that their commitment to the UNGPs requires their bringing this to the agenda, their own self-interest should. Within the global trading system, the long-term legitimacy of government-backed ECAs may hinge on whether these agencies are able to achieve growth and job creation while not putting the environment and human rights at risk. The first step may be for a global consensus to be achieved regarding the core purpose of these agencies as those that, among other specific purposes, facilitate trade and investment that is supportive of states’ commitments on sustainable development and human rights.

Governments who operate under the Common Approaches and others who now employ good practices on environmental and social due diligence should bolster the efforts to build this global consensus. They can do this by demonstrating and disseminating good practices that they employ with success and by spearheading empirical and case study research to document the impact of social and human rights policies on the ability of ECAs to remain competitive in the global market. These practical steps will help overcome arguments that social and human rights standards will hinder competitiveness of ECAs and impose unnecessary burdens.

There is a lot of work to do, but the urgency of the issues and the opportunity of the IWG means the time has come to initiate the discussion. While some commentators have baulked at the slow pace of the IWG’s progress, building international consensus in the area of export credits have never been fast or easy. The histories of the development of both the OECD Arrangement and the Common Approaches provide ample evidence that while building multilateral consensus is slow, it is possible.

Andrea Saldarriaga is co-Lead of the Investment & Human Rights Project at the London School of Economics and Political Science (LSE). She is an international lawyer whose practice has focused on international arbitration, international investment law and human rights. Andrea is furthermore a fellow of the Vale Columbia Center on Sustainable International Investment, a member of the International Investment Agreements expert network of UNCTAD and teaches business and human rights at ESSEC Business School in Paris and ESCP Business School Europe. Andrea Shemberg is co-Lead of the Investment & Human Rights Project at the LSE. She is a common law and international human rights lawyer and previously served as Legal Advisor to the UN Secretary-General’s Special Representative on Business and Human Rights, John Ruggie. In addition to the LSE project, Andrea is an Advisor to the Global Business Initiative on Human Rights and teaches at the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, Scotland. The authors would like to thank Holly E. Wesener, Research Assistant, Institute for Public International Law, University of Bonn for her research support.