Rights as Usual

This post is by Jennifer de Lange, Amsterdam Centre for Transformative Private Law, University of Amsterdam.

A Hare was making fun of the Tortoise one day for being so slow.
“Do you ever get anywhere?” he asked with a mocking laugh.
“Yes,” replied the Tortoise, “and I get there sooner than you think. I’ll run you a race and prove it.”

Since the launch of the 2018 Sustainable Finance Action Plan, the EU has steadily been working on its plan to integrate sustainability into the financial system. On the surface, at least, this appears predominantly to involve the integration of environmental (and more specifically climate) sustainability throughout EU financial regulation. Indeed, one could be forgiven for believing that the Corporate Sustainability Due Diligence Directive (CSDDD), adopted in spring 2024 was the first regulation to make a significant contribution to the promotion and protection of human rights in the financial system. Certainly, the CSDDD can be described as a landmark advancement for human rights, demanding as it does that companies identify and address human rights abuses within their value chains.

However, an analysis of the raft of EU sustainable finance regulations adopted since 2018 reveals a different story. Human rights in fact appear to have been running a remarkably steady race, such that they have quietly gained increased significance within the regulatory framework that governs finance in the EU. 

This blog reflects on the specific contribution made to the advancement of human rights by the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), the EU Green Bond Standard Regulation, and various amendments to exiting financial markets legislation including the Benchmarks Regulation, the Markets in Financial Instruments Directive (MIFID) and fund regulations (together the EU Sustainable Finance Framework).  

Analysing human rights inclusion in financial regulation

In order to analyse the extent to which human rights are incorporated in the EU Sustainable Finance Framework, it is necessary to build a basic understanding of what human rights are and how law (and regulation) might seek to promote and protect the same. This enables the unaccustomed finance lawyer (including the author of this blog) to recognise human rights protections as they may appear in financial regulation. 

A brief overview of human rights literature however reveals that there is no consensus on what ‘human rights’ exactly are. Certainly, there are a plethora of internationally agreed principles, protocols and conventions as well as national and regional documents setting out or incorporating some version of human rights. However, there are also some rather fundamental disagreements and ongoing debates around issues such whether a ‘human’ right can be held by a non-human and how (and whether) human rights, such as the right to a healthy environment, ought to be classified pursuant to Vasak’s generational depiction of rights.

Equally, it appears that there are a variety of ways in which the law can help to promote and protect human rights. Legislative strategies may, for example, impose positive obligations, introduce certain prohibitions or mandate the publication of human rights-related information. Further, legislative enforcement may be left to individuals or delegated to regulatory bodies empowered to act in the interests of the public.

Thus adopting one conception of how human rights ought to be reflected in legislation and one expectation with regards to how legislation can ‘best’ promote and protect the same, would serve limited value as a basis for analysing the way in which human rights are represented in the EU Sustainable Finance Framework. An alternative method of analysis is simply to explore which (if any) of the various human rights debates (have been addressed in the EU Sustainable Finance Framework  and to identify the legislative strategies employed. This is the method of analysis adopted for the purpose of this blog.

Human rights in the race, albeit not at the forefront

With regard to the meaning and content of human rights reflected in the EU Sustainable Finance Framework, an analysis reveals that despite an obvious focus on environmental sustainability, the framework is certainly not entirely agnostic to human rights.

The SFDR, for example, is often described as having introduced disclosure requirements for ‘light green’ and ‘dark green’ financial products. Yet a closer look shows that the regulation actually takes a rather broad approach to the concept of sustainability. Disclosures are, in fact, required with respect to financial products that promote sustainable characteristics or seek to invest in sustainable investments, which have a broader definition than just ‘green’. In both cases, ‘sustainable’ is defined in relation to goals that are not only environmental. According to article 2(17) SFDR, for example sustainable investments pursuing a social objective include those contributing to tackling inequality fostering social cohesion, social integration and labour relations, or investing in human capital or economically or socially disadvantaged communities. Moreover, the SFDR requires that disclosures are made with respect to the principal adverse impacts of investment advice and decisions on ‘sustainability factors’, defined to include human rights.  

Furthermore, references to existing human rights standards have been used throughout the EU’s suite of sustainable finance regulations to construct a minimum standard for sustainable activity and sustainable financial products. For example, although the Taxonomy Regulation focuses on the identification of “environmentally sustainable economic activity”, pursuant to article 18(1), no economic activity can actually be classified as ‘environmentally sustainable’ unless it is carried out in compliance with the OECD’s Guidelines for Multinational Enterprises on Responsible Business Conduct (MNEG), the UN Guiding Principles, the International Labour Organisation (ILO) Declaration, the eight fundamental ILO conventions and the International Bill of Human Rights. Similarly, no benchmark may be labelled ‘Paris-aligned’ pursuant to the Benchmark Regulation unless the companies included in that benchmark comply with the prescriptions of the UN Global Compact or the MNEG.

Human rights are, therefore, imported into EU sustainable finance regulation by reference to existing international standards. This practice of defining human rights by reference to existing standards has two obvious advantages. First, it has allowed the EU to avoid debates surrounding the nature and meaning of human rights, and to instead call on the work that has been done by human rights advocates over generations. Second, the approach means that the human rights protections embedded in the sustainable finance framework are rather dynamic. Indeed, to the extent that existing, referenced standards are amended and improved, it seems reasonable to assume that the most recent version of the relevant standard will be relevant. As such, human rights developments are automatically reflected in the Sustainable Finance Framework (at least to the extent that updates are made to existing standards rather than via new treaties, principles or protocols). 

In conclusion, human rights are clearly embedded within the EU’s sustainable finance framework, albeit not as the star athlete (such position having been largely reserved for climate issues).

Legislative strategies – a marathon not a sprint?

In terms of the legislative approach to the promotion and protection of human rights reflected in the EU sustainable finance framework, an overwhelming commitment to a disclosure strategy is evident. Moreover, much of this disclosure has a semi-voluntary, or minimally-mandatory, character. The SFDR contains no obligation, for example, for an issuer to offer a financial product that contributes to a social or environmental objective. Rather, if the issuer chooses to so market a product, then certain disclosure obligations apply. Similarly, no party must pursue environmentally sustainable economic activities pursuant to the Taxonomy Regulation. Rather, they may be bound to make certain disclosures regarding the extent to which they pursue such activities (or do not). The EU Green Bond Standard is equally designed to ensure that information regarding sustainability (including to some extent, human rights) is available to the market, should an issuer wish to label its product as compliant with that standard. Finally, amendments to measures such as MiFID require investors to disclose their own ‘sustainability preferences’, should they have any.

As a result, the regulations enacted under the sustainable finance framework do little to directly protect human rights. The framework certainly does not contain a requirement that all economic activity must observe the minimum standards, for example. Nor does it set down expectations that a certain percentage of a company’s economic activities ought to qualify as ‘environmentally sustainable’ (and therefore by definition meet the minimum standards). Likewise, although certain parties are, pursuant to the SFDR, bound to disclose the ‘principal adverse impacts’ of their investment decisions or advice, there is no obligation in the SFDR to take steps to avoid or reduce those impacts. 

The rationale for this minimal-mandatory approach is rather familiar to those with a financial regulatory background, however. Ultimately, it rests on the belief that by supplying the relevant information, so far as possible in standardised and thus easily comparable forms, ‘the market’ will be best placed to steer scarce investment capital towards socially desired goals. This steering is not expected to occur immediately, but rather to manifest over time as the market becomes accustomed to sustainability information and develops the tools to recognise sustainable investment and the desire to invest in the same. The soundness of such policy is perhaps a matter for another post.  In any case, the approach is certainly one that conceives of the shift towards sustainable investing as a marathon rather than a sprint.

Conclusions: the tortoise trundles forwards

An analysis of the way in which human rights have been integrated into EU sustainable finance regulations and the legislative strategies that have been employed in this endeavour reveal that it would be incorrect to conclude that pre-CSDDD regulatory efforts were human rights-agnostic. However, it is equally apparent that the facilitative but ultimately minimally-mandatory sustainable finance framework that has been created better reflects the approach of the tortoise to achieving its end goal, than the hare.

Nevertheless, should political appetite in the future allow a change of pace, there are however ways that the sustainable finance framework could be utilised to accelerate the progress of the tortoise. Minimum quotas could be designed for example, requiring significant financial parties to ensure they offer certain sustainable financial products or to invest a portion of their available capital in sustainable investments. Alternatively, investments in economic activities which are not environmentally sustainable (and therefore do not observe certain human rights minimum standards) could be prohibited, penalised or limited.

In any event, an analysis of the EU’s approach to sustainable finance has revealed a gradual anchoring of human rights into the regulatory framework in a way that provides good grounds for optimism that the patient, consistent human rights tortoise may eventually win its race.

The article on which this blog is based will be published shortly under the same title as this blog post.