PRI warns sovereign debt investors about human rights

The UN body encourages engagement, due diligence; The World Bank describes the sustainability bond framework.

Two new reports provide sovereign debt investors with guidance on factoring human rights and climate-related risks into investment decisions.

The UN-backed Principles for Responsible Investment (PRI) released their report “Human Rights in Sovereign Debt: The Role of Investors” which highlighted potential gaps between the attractiveness of the sovereign obligation of a country and its human rights record. The report says sovereign nations are the ultimate guarantors of human rights, so the bonds they issue are a “logical direction for responsible investors”, but this has required greater attention from governments. investors.

PRI said that despite the UN Guiding Principles on Business and Human Rights (UNGPs) clarifying the links between business and human rights, there is no specific guidance regarding the role of investors , including those that finance sovereign debt. This means that investors often have to make judgments about where to put capital.

The report gave examples of where the political stability and human rights records of sovereign issuers might be considered too toxic for investors, including Venezuela and Belarus.

The PRI report indicates that there are many obstacles to the consideration of human rights by investors, including the lack of leverage compared to investors in corporate bonds and the potential effects of reduction in public funding.

Other issues included the difficulty of finding an alternative asset to buy in various situations.

“The PRI recognizes that signatories are at different stages of integrating human rights as a component of responsible investing,” the report states. He recommended a three-step process to ensure respect for human rights principles when investing in sovereign debt, starting with the adoption of policies that show a commitment to respect human rights. . The second step was to perform due diligence, including data collection and analysis to make informed decisions, and engagement efforts.

The third step was to provide access to remedies when business-related human rights abuses take place on the territory of a sovereign state. “The remedy could involve an apology, financial or non-financial compensation or punitive sanctions. States can also implement measures or adopt policies to address a wider range of human rights issues,” he said.

Honoring human rights

The PRI document goes on to tell investors to “lend with conditions” and to improve communication and broad engagement with sovereign issuers.

“Sovereign debt investors face unique challenges when considering human rights,” PRI’s statement on its report said. “Like all bond investors, they do not own a stake in the issuers, which makes engagement more difficult than for equity investors. Additionally, lobbying a state over human rights abuses can raise political sensitivities around issues of sovereignty.

Last month, the PRI announced the launch of an initiative to help investors address human rights and social issues through stewardship activities. He will follow the steps outlined in his recent paper Why and How Investors Should Act on Human Rights.

The Global Reporting Initiative (GRI) also launched sustainability reporting standards in October 2021, which targeted the flow of human rights-related information to investors while simultaneously improving overall transparency and governance. business impacts on the environment and society.

Climate-related exposures

Separately, the World Bank has provided institutional investors with guidance on how to assess the contribution of government-issued sustainability-linked bonds (SLBs) to addressing climate change and biodiversity loss in its new report. “Striking the Right Note: Key Performance Indicators for Sovereign Sustainability – Report on Linked Obligations.

“Governments around the world are looking for new financial instruments to tackle the triple crisis of unprecedented levels of debt, climate change and loss of nature,” said a blog post accompanying the launch. “Sovereign bonds – accounting for nearly 40% of the US$100 trillion global bond market – are the largest asset class in the portfolios of many institutional investors,” he added.

The World Bank has highlighted SLBs, which incentivize borrowers to achieve sustainability key performance indicators, as a growing part of the corporate debt market now seen as a key area for sovereign issuers.

Last year, the Assessing Sovereign Climate-related Opportunities and Risk (ASCOR) framework was launched to help investors manage their ESG exposures in the sovereign space. ASCOR was designed to “enable investors to measure, monitor and benchmark the current and future climate change governance and performance of sovereign issuers in a fair and appropriate manner”.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

The UN body encourages engagement, due diligence; The World Bank describes the sustainability bond framework.

Two new reports provide sovereign debt investors with guidance on factoring human rights and climate-related risks into investment decisions.

The UN-backed Principles for Responsible Investment (PRI) released their report “Human Rights in Sovereign Debt: The Role of Investors” which highlighted potential gaps between the attractiveness of the sovereign obligation of a country and its human rights record. The report says sovereign nations are the ultimate guarantors of human rights, so the bonds they issue are a “logical direction for responsible investors”, but this has required greater attention from governments. investors.

PRI said that despite the UN Guiding Principles on Business and Human Rights (UNGPs) clarifying the links between business and human rights, there is no specific guidance regarding the role of investors , including those that finance sovereign debt. This means that investors often have to make judgments about where to put capital.

The report gave examples of where the political stability and human rights records of sovereign issuers might be considered too toxic for investors, including Venezuela and Belarus.

The PRI report indicates that there are many obstacles to the consideration of human rights by investors, including the lack of leverage compared to investors in corporate bonds and the potential effects of reduction in public funding.

Other issues included the difficulty of finding an alternative asset to buy in various situations.

“The PRI recognizes that signatories are at different stages of integrating human rights as a component of responsible investing,” the report states. He recommended a three-step process to ensure respect for human rights principles when investing in sovereign debt, starting with the adoption of policies that show a commitment to respect human rights. . The second step was to perform due diligence, including data collection and analysis to make informed decisions, and engagement efforts.

The third step was to provide access to remedies when business-related human rights abuses take place on the territory of a sovereign state. “The remedy could involve an apology, financial or non-financial compensation or punitive sanctions. States can also implement measures or adopt policies to address a wider range of human rights issues,” he said.

Honoring human rights

The PRI document goes on to tell investors to “lend with conditions” and to improve communication and broad engagement with sovereign issuers.

“Sovereign debt investors face unique challenges when considering human rights,” PRI’s statement on its report said. “Like all bond investors, they do not own a stake in the issuers, which makes engagement more difficult than for equity investors. Additionally, lobbying a state over human rights abuses can raise political sensitivities around issues of sovereignty.

Last month, the PRI announced the launch of an initiative to help investors address human rights and social issues through stewardship activities. He will follow the steps outlined in his recent paper Why and How Investors Should Act on Human Rights.

The Global Reporting Initiative (GRI) also launched sustainability reporting standards in October 2021, which targeted the flow of human rights-related information to investors while simultaneously improving overall transparency and governance. business impacts on the environment and society.

Climate-related exposures

Separately, the World Bank has provided institutional investors with guidance on how to assess the contribution of government-issued sustainability-linked bonds (SLBs) to addressing climate change and biodiversity loss in its new report. “Striking the Right Note: Key Performance Indicators for Sovereign Sustainability – Report on Linked Obligations.

“Governments around the world are looking for new financial instruments to tackle the triple crisis of unprecedented levels of debt, climate change and loss of nature,” said a blog post accompanying the launch. “Sovereign bonds – accounting for nearly 40% of the US$100 trillion global bond market – are the largest asset class in the portfolios of many institutional investors,” he added.

The World Bank has highlighted SLBs, which incentivize borrowers to achieve sustainability key performance indicators, as a growing part of the corporate debt market now seen as a key area for sovereign issuers.

Last year, the Assessing Sovereign Climate-related Opportunities and Risk (ASCOR) framework was launched to help investors manage their ESG exposures in the sovereign space. ASCOR was designed to “enable investors to measure, monitor and benchmark the current and future climate change governance and performance of sovereign issuers in a fair and appropriate manner”.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

Carol M. Barragan