Our key takeaway: Banks are expected to extend their environmental and human rights due diligence to custodian shareholdings. OHCHR finds that banks have human rights responsibilities under the UN Guiding Principles when it comes to the impacts of companies in which they hold shares on behalf of clients (i.e., when they act as nominee shareholders, with the banks’ clients being the beneficial owners).
The UN Office of the High Commissioner for Human Rights (OHCHR) published its response to a request from NGOs BankTrack and OECD Watch “regarding the application of the UN Guiding Principles on Business and Human Rights [UNGPs] where private sector banks act as nominee shareholders”. (This clarification of responsibility was requested following the Swiss OECD National Contact Point’s assessment that Swiss bank UBS had no business relationship with Hikvision, a company involved in China’s mass surveillance and genocide of Uygurs, because it was a custodian for Hikvision shares on behalf of clients):
- A financial institution acting as a nominee shareholder is in a ‘business relationship’ with the investee company: The OHCHR confirms that a financial institution (FI) acting as a nominee shareholder has certain obligations to address its human rights impacts through its business relationship with clients, “proportional to, among other factors, its size, and may vary depending on whether, and the extent to which, it conducts business through a corporate group or individually.” A nominee “is understood to be a natural person or an institution whose name is titled on securities or other property to facilitate certain transactions or transfers while leaving the actual or legal owner as the beneficial owner.” A beneficial owner may remain anonymous under the law but “retains control over investment decisions,” though FIs acting as custodians still have a responsibility to respect human rights through this relationship—regardless of the legal regimes that govern the terms of the relationship between FI and beneficial owner. Per the OHCHR: “The Guiding Principles do not require that the FI provides the service to the investee company rather than to the client in order to establish a business relationship, but only that there is a direct link between its service and the investee company. Here that direct link is created by the fact that the service entails holding and trading shares in the investee.”
- What this responsibility means in practice: FIs must have a human rights policy and carry out human rights due diligence (HRDD) to identify human rights risks and show how these risks are addressed, with priority given to the highest risk services and clients. The OHCHR emphasises that a structured lack of visibility into the practices of an investee company does not equal a lack of responsibility on the part of the nominee to conduct HRDD: “Nominee shareholding may pose particular challenges in identifying human rights risks connected either to the beneficial owners or to the investee company. FIs may need to take this into account when deciding to act as a nominee shareholder.” What’s more, legal channels allowing beneficial owners to remain anonymous does not release a nominee from its obligation to communicate transparently about its human rights risks and responses.
- Using a two-pronged approach to discharge this responsibility: The OHCHR outlines a hierarchy of actions for FIs to conduct HRDD, starting with “[assessing] risks connected to beneficial owner clients.” Subsequently, “[w]here an FI identifies risks associated with clients, including with regard to their ability or willingness to address risks to which they are connected to by way of investee companies, or where there is a particularly high risk section of its nominee shareholder portfolio (e.g., high-risk operating contexts or business models), the FI should undertake due diligence on higher risk investee companies.” Likewise, where FIs find adverse impacts they will need to build and use their leverage with both clients and investee companies—though the particular structure of nominee shareholding may determine the degree of leverage an FI has. FIs should start with their clients, for example by including human rights clauses in contracts, by alerting clients of risks in existing or potential investee companies, advising on actions and proxy voting and tracking effectiveness. However, “[w]here the nominee shareholder cannot use or build leverage with the beneficial owners sufficiently to address the impact, it will engage investee companies.” For example, this could entail participating in sector-wide collaborative initiatives, multi-stakeholder engagement platforms, advocacy with governments and regulators and public statements. Ultimately, if FIs determine that they have no leverage, they may also consider terminating the relationship (accounting for the potential secondary human rights impacts of doing so).
For more, see UN Office of the High Commissioner for Human Rights, OHCHR response to request from BankTrack and OECD Watch for advice regarding the application of the UN Guiding Principles on Business and Human Rights where private sector banks act as nominee shareholders (August 2021)