Tackling child labour: A guide for financial institutions

Our key takeaway: Child labour is on the rise despite increased corporate efforts to address child-related risks and impacts in their operations and value chains. Under the UN Guiding Principles on Business and Human Rights, financial institutions are not exempt from responsibility; in fact, they’re in a prime position to make a difference. According to Shift, the Centre for Child Rights and Business and UNICEF, these institutions can step up by enhancing their screening for risks across their portfolio companies; ask better questions and set better expectations of their clients; and consider their participation in multi-stakeholder initiatives to strengthen their approach and actions on addressing child labour. But here’s the game-changer. Financial institutions should pivot towards: 1) collaborating with business partners to address the root causes of child labour rather than adopting a zero tolerance approach and immediately disengaging when child labour is identified; 2) going beyond audits to assess risks and impacts of child labour since they seldom capture the reality on-the-ground and are typically restricted to tier 1 supply chains; and 3) looking at whether certain risks factors exacerbates the likelihood of child labour occurring. For instance, weather and climate-related events (made more frequent and severe due to climate change) increases the risks and impacts of child labour. A call to action: financial institutions wield immense power to influence rights-respecting practices across their operations and value chains. It could be as simple as asking the right questions and adopting a longer-term temporal lens to assess their risks and impacts.

Shift, The Centre for Child Rights and Business and UNICEF published Tackling child labor: A guide for financial institutions (April 2024):

• Child labour remains a significant issue: Despite increased corporate action on tackling child labour, it “remains an intractable and severe human rights impact worldwide.” According to the ILO and UNICEF in 2021, child labour figures increased for the first time in two decades. This affects financial institutions because child labour can be a salient human rights issue, particularly in their portfolio companies' operations and value chains.
  

• Financial institutions’ responsibility in relation to addressing child labour: Under the UN Guiding Principles, the OECD Guidelines, and the OECD’s Due Diligence for Responsible Corporate Lending and Securities Underwriting, financial institutions have a responsibility to respect human rights throughout their operations and value chains. Financial institutions’ own activities can directly impact children or their clients’ activities and value chains can impact children. For instance, retail banks can be used to deposit and send money obtained from the abuse and exploitation of children. Clients may be using the capital provided by financial institutions to engage in activities where the risks to children are high or which exacerbates the risks to children. In situations like these, financial institutions have a responsibility to identify, prevent, mitigate and account for these impacts.
  

• Recommendations for financial institutions: The report recommends several ways in which financial institutions can strengthen action on child labour in line with the UN Guiding Principles. These are 1) improving screening for indicators of child labour risk; 2) improving engagement with portfolio companies; and 3) participating in multi-stakeholder initiatives that include action on child labour. When it comes to the initial assessment of portfolios for risks, commercial banks may want to consider a) the nature of the operating context (e.g., a lack of living wages for families, weak child protection systems, conflict, migration and displacement, and natural disasters); b) the nature of business relationships (e.g., business models that heavily rely on labour agents); c) the nature of business activities (e.g., business models that fail to price in farmer income in sourcing decisions); and d) the presence of vulnerable groups (in this case, out-of-school children, children whose parents do not earn a living income, children of disadvantaged minorities). Financial institutions can also improve their engagement with portfolio companies by asking better questions and setting better expectations. For instance, financial institutions who adopt a zero-tolerance approach to child labour risk can “obscure the reality and stifle conversation.” It is important that they use and build their leverage with business partners to address child labour risks and impacts rather than automatically disengaging from business relationships when these issues are identified. In addition, they should expect companies to have in place child labour monitoring and remediation mechanisms, as well as mechanisms to monitor the effectiveness of the measures taken. Financial institutions should also be assessing and expecting portfolio companies’ alignment with international human rights standards, including those related to children’s rights, and for them to go beyond audits to identify risks to children. Moreover, they could ask clients about their participation in relevant multi-stakeholder initiatives, and their lobbying and policy engagement activities and whether these align with their human rights commitments. Last but not least, financial institutions should consider their own participation in relevant multi-stakeholder initiatives.