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Human rights CSOs warn on trendy “blended finance” category

In a recently-released human rights audit of the Intergovernmental Committee of Experts on Sustainable Development Finance’s report (hereinafter “the Report”), RightingFinance (RF) evaluated from the perspective of international human rights law principles such as equality, participation and maximum available resources, the portions of the report devoted to private finance. The emphasis placed on “blended finance,” alongside investment climate issues and regulation of private investments were important issues that the response by RightingFinance addressed.

The Committee’s report, delivered last August, is an important input into the intergovernmental deliberations that will decide on means of financing the Sustainable Development Goals.

RightingFinance supported the Committee for taking on board longstanding concerns with the reliance on private capital. The Committee’s report endorsed capital account management tools to deter “hot money” and “a toolkit of instruments to manage capital inflows, including macroprudential and capital market regulations, as well as direct capital account management.” After the global financial crisis, these tools, hitherto stigmatized by lending institutions such as the International Monetary Fund, have been seen in a more favorable light, which the Committee did well to take note of. Still, it is worth noting that  several trade and investment agreements, existing and under negotiation, promote banning their use, a problem the Committee did not address.

Another aspect the groups welcomed was that the Committee treated with caution the conventional belief that in financial inflows more is always better, by recognizing that above certain thresholds financial sector growth may increase inequality and instability.

But the Committee took the worrisome approach of equating strengthening the institutional environment for private investment with “easing bottlenecks,” an expression usually associated with a bias towards deregulation. RightingFinance recalled that human and worker’s rights groups have criticized the chilling effect of such approaches on regulations that may be required to protect a range of rights and public policy concerns, including guaranteeing labor rights.

RightingFinance welcomed the Committee’s support for private companies’ reporting on environmental, social and governance impacts, and for appropriate regulations to strengthen such requirements. But in spite of wondering “whether largely voluntary initiatives can change the way financial institutions make investment decisions,” the Committee came out only stating that “policymakers could consider creating regulatory frameworks that make some of these practices mandatory.”

“The UN Guiding Principles on Business and Human Rights already go farther than [such reporting requirements],” RightingFinance said. Even the UN Guiding Principles themselves, it noted, which were approved by consensus in the Human Rights Council, are considered so weak and insufficient as an accountability framework that the Council had to launch a process to negotiate a complementary set of binding international rules for companies.

A section of the Report was dedicated to “blended finance” – instruments that combine public and private finance, such as loans or equity investments provided by Development Finance Institutions, and traditional Public Private Partnerships. As financial institutions tend to be under pressure to disburse funds, and now to catalyze funds from the private sector, at all costs, the voice of the Committee was very important in setting the human rights boundaries to such interventions.

RF praised the Committee’s call for blended finance projects to be “transparent and accountable” and the link made to their sustainable development impacts and addressing poverty, environment, and gender aspects in the project design phase. But it did not mention human rights, and referring to the design is an unwarrantedly narrow reading of human rights law. Full participation by, and transparency towards, those affected should apply to negotiation, implementation and monitoring of projects, RF said.

Also, the Committee recognized that the for-profit sector will demand often upward of 20-25 per cent returns, but it seemed to consider it sufficient that such costs be “offset by efficiency gains or other benefits to make their use attractive.” RF criticized the Committee for skirting the question, crucial from a human rights perspective, of who are the efficiency gains and benefits for, or whether high returns are achieved at the expense of the lack of observance of human rights or due process guarantees. Neither did the Committee analyze properly the issue of additionality which, neglected, could mean public resources are wasted subsidizing investments that would have happened anyway.

RF also reiterated its call for strict standards on what the Committee calls “implementing partnerships” – those where a wide range of stakeholders including governments, civil society, philanthropic institutions, development banks and private for-profit institutions – act together. Upholding the primacy of human rights obligations entails, at a minimum, private actor partners should, ex ante, meet specific criteria, RF stated. Whether the private actor has a history of allegations of human rights abuses, involvement in acts of corruption and full compliance with tax responsibilities are some of the issues to examine in such assessment.

Given the growing role of private companies in lobbying the governments up to whom it will be to agree to the final form of the post-2015 outcome, CSOs have justified concern that involvement of the private sector will have few, if any, conditions attached, and worsen impunity for abuses by the sector.

Invoking the intransferable human rights obligations of governments might well become the last resort for affected people and communities in a post-2015 framework that fails them. Partnerships continue to be, after all, voluntary arrangements that cannot by any means crowd-out States’ existing obligations of cooperation to achieve human rights.

 

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