These findings are inter-related but seek to identify the root causes of FSE failure in human rights risk management and to provide a pathway towards better human rights results for our financial services, their customers, clients, employees, and for society at large.
Of the 22 FSEs we sampled, none identified human rights as a key source of non-financial risk.
Given the important role of the directors in challenging management, its role in risk governance, as well as its role in signalling what's important in the FSE's culture by 'setting the tone from the top', we must infer from the absence of any specific accountability for human rights at board level that these discussions do not occur unless there is a specific event.
||Bank of Queensland
|Bendigo and Adelaide Bank||Challenger Financial
|Commonwealth Bank of Australia||HUB24|
|National Australia Bank (NAB)||Netwealth|
|Pinnacle Investment Management||Platinum Asset Management|
|QBE Insurance||Steadfast Group|
|Suncorp Group||Westpac Bank|
Across the five areas of impact our FSEs were found to achieve only a RED or AMBER traffic light, with not one FSE achieving a GREEN traffic light.
The retail area of impact's overall coding results were RED or AMBER.
Most of our sample FSEs are entities with a direct retail customer relationship, even if retail is only one business division and they have extensive CLIS operations.
All of our retail-exposed FSEs perform badly in this area of impact in relation to Governance, Policy Positions and Due Diligence factors.
One ‘tell’ for this coding in this year’s report is how exposed one sample FSE was to the issues raised by the Hayne Royal Commission in relation to financial advice.
For FSEs that regularly encounter problems or attract censure regarding financial advice, their results in outcomes measures will typically be poor, with strong negative impacts evidence in the human rights categories of Right to Remedy and Economic Security.
None of our FSEs identified ‘human rights’ as material risks or gave meaningful recognition of the various rights covered by our six human rights categories.
Only Privacy receives adequate policy attention and due diligence actions: outcomes evidence of Privacy breaches by some of our sample FSEs indicates this particular breach will be across a number of clients, such as when a breach is referred by the FSE to the OIAC under the notifiable data breach scheme.
This area of impact also represents missed opportunities to have a positive human rights impact on two particular categories – namely, economic security and anti-discrimination.
These rights categories typically underline FSEs’ philanthropy efforts which are, as we made clear above, peripheral, but they should also underline the FSE’s commercial relations with its retail customers which are, importantly, core business concerns.
The overall coding results for this area of impact were RED or AMBER.
We had the least line of sight into this area of impact.
For some of our sample FSEs with significant CLIS business divisions, this is the domain that reflects their day-to-day business operations. Many of these FSEs have smaller levels of employees than our sample FSEs with a large retail business.
Like our other sample FSEs, supply chains are focused on services with only a small component for goods. Thus overall, their human rights footprint is largely determined by their human rights impacts in this area of impact.
Despite the lack of transparency regarding this area of impact, it frequently receives human rights attention from NGOs or industry associations. Two examples of initiatives aimed at CLIS activities of project finance and institutional investment illustrate this point.
Internationally the Equator Principles provide ‘a benchmark for determining, assessing and management environmental and social risks in [large infrastructure and industrial] projects.’
FSEs can decide to adopt the 10 Equator Principles but then also adopt standards of independent monitoring and reporting on the FSE’s performance, plus transparency via its own reporting on adoption of these principles. Within our FSE sample, ANZ, CBA, NAB and Westpac are all members.
In the field of institutional investment, the responsible investment movement focuses attention on ESG risks that arise from the investments made by institutional investors.
While the UN’s Principles of Responsible Investment are well known and some of our FSE sample are signatories to these principles, it is not the only initiative aimed at influencing the process of institutional investment decision making.
These initiatives emphasise undertaking due diligence prior to committing to the investment or making the loan.
Given the familiarity of FSEs with financial due diligence processes generally, it is surely fair to expect that they be extended to encompass all of the activities within the CLIS area of impact, as well as all five domains where FSEs can impact human rights.
Why focus on the small number of projects that fit within the Equator Principles criteria, but give no clear attention to human rights issues in the volumes of other CLIS lending, especially as it is a higher amount of total indebtedness?
Once again, there appears to be cognitive dissonance at the highest levels within FSEs when they are comfortable establishing processes for identifying and managing human rights or social risk material to lending or investment decisions, but apparently not comfortable with doing the same for the FSEs own operations.
As we found in all our areas of impact, there is a missed opportunity to have a positive impact on human rights via its CLIS activities.
While we see actions within some FSE philanthropy efforts that create business opportunities for indigenous businesses that can supply goods or services to the FSE (relevant to the Supply domain), why not widen that to include loan and insurance products for other indigenous businesses? What about products and services for women-led businesses?
While the philanthropic efforts of FSEs aim for impact, there is an opportunity to extend that philosophy to the core matter of business lending.
Overall the coding results in this area of impact were a mix of RED or AMBER.
The employees area of impact was the one area where we found most of our sample FSEs disclosed a broad suite of policies that could be said to recognise aspects of our six human rights categories, even if the terminology used was that of employment law.
Australia’s employment law system provides a base for ensuring that most rights of employees are respected in ways that reflect Australia’s core international treaty obligations concerning labour. This is supplemented by an anti-discrimination law regime both federal and state that similarly reflects Australia’s treaty obligations in that regard.
In terms of human rights policy commitments towards employees, maybe FSEs in our sample perform reasonably well, (see Figure 6 in our full report). However, problems exist in fulfilling these commitments to employees.
Historic and more recent media coverage highlight the finance sector’s poor (or at best, mixed) record of sexual harassment and wage theft/ underpayment at a number of our sample FSEs. Evidence more broadly of this poor performance is reflected in the red/amber coding for the employees domain.
The Male Champions of Change initiative (MCC) promotes the idea that sexual harassment in the workplace be addressed initially by leaders taking responsibility for establishing workplace cultures that prioritise safety, respect and inclusion for all.
The MCC’s suggested approach adopts a focus on prevention and early intervention, incident and consequence management, plus transparency in reporting to boards and external stakeholders.
As it notes in a recent report, ‘existing gender equality and workplace health and safety practices provide an excellent model to adapt, integrate and amplify.’
When viewed from the perspective of gender pay gap data, or gender workforce statistics, or the survey data on sexual harassment, the industry appears to treat female employees differently and less favourably, than how it treats male employees.
There is a need to consider how the particular gender profile of the industry and the nature of the industry itself feeds into the relevant drivers of sexual harassment in the workplace - power imbalances and their abuse, a workplace culture that tolerates sexual harassment, lack of awareness or understanding of sexual harassment, use of alcohol – and what can be done to effectively manage and thus minimise the risk of sexual harassment in financial services.
Our benchmark model indicates that this has to be more than policy, and even more than governance: it requires due diligence and an attention to monitoring and reporting on outcomes, the good and the bad.
Our FY19 reference year precedes the requirement for reporting under the Modern Slavery Act 2018 and, with the three month delay to reporting as a response to Covid-19 for FYs sending 31 March 2020 (now 31 December 2020) and 30 June 2020 (now 31 March 2021), this area of impact is a work-in-progress for many of our sample FSEs, particularly the smaller FSEs in our sample.
The coding results in this area of impact duly reflect this fact being RED or AMBER.
Our sample FSEs failed to include human rights risks as material to the core business concerns of the FSE at board level.
This applied also in the supplier area of impact where none of our FSEs paid sufficient attention to the governance of modern slavery risks by allocating specific responsibility for the matter at Board level. This is why some FSEs scored red on this domain.
Yet we can see that the larger FSEs in our sample have more developed related policies and processes around supply chains.
This is likely due to the fact that some of these larger FSEs have been reporting under the UK Modern Slavery Act requirements since 2016.
These FSEs also disclose some outcomes around their due diligence processes, although this is sometimes limited to case study examples, as opposed to data that would give an overall picture of the effectiveness of their due diligence process.
This is why these FSEs likely scored amber for this area of impact.
Disclosure of the data items by FSEs gives outsiders a better appreciation of the complexity within a supply chain while also providing a check on policy positions.
Given the guidance released in 2019 by Australian Border Force on Modern Slavery Act reporting, we anticipate to see different levels of disclosures released by our sample FSEs in future years.
That said, this guidance does provide some carve outs for investment and financial lending arrangements as part of the entity’s operations, although there is a stated expectation that some assessment must be made ‘at an overarching thematic level’ of exposure to modern slavery risks via investment activities and financial lending practices.
Our final area where FSEs have an impact on human rights is throughout society at large.
The overall coding outcomes for the society domain were largely RED or AMBER.
We examined this area of impact by focusing on the public policy contributions our sample FSEs made to law and regulatory reforms.
Our intuition for this approach is the attention given to public policy advocacy by energy and materials companies, whereby a company’s stated policy position in its own documents is to recognise climate change, while at the same time providing funding via membership fees for industry associations that deny or query climate change.
We initially identified 20 law and regulatory reform opportunities over our reference period (1 October 2018 to 30 September 2019).
From issues or consultation papers or terms of reference of law reform projects, we selected one or two specific issues that best represented the potential to impact on our human rights categories.
While most of the reforms we selected aimed to influence regulation targeting the financial services sector, seven of the 20 reforms had broader social impact beyond financial services.
Our sample FSEs were aware of reputational risk in general but do not appear yet to have made the link between that risk and their public policy advocacy in respect of social justice and human rights.
While some of our sample FSEs have policy positions that appear to support wider societal concerns such as LGBTQI rights or the rights of indigenous people, these statements do not flow through to explicit public actions.
A clear example of this lack of ‘flow through’ relates to indigenous issues.
The Joint Select Committee on Constitutional Recognition relating to Aboriginal and Torres Strait Islander Peoples, for example, which considered reforms to introduce an indigenous voice into parliament is one such missed opportunity for making relevant contribution.
Such dislocation also creates a reputational risk for those FSEs who decide to devise a reconciliation action plan but then don’t lend their voice to achieving reconciliation in other ways by supporting the aspirations of the Uluru Statement from the Heart by lending their influential voices to that cause.
Where submissions were publicly available, we occasionally observed responses from our sample FSEs and from industry associations to the same reform, but more often the message was communicated publicly by the industry associations alone. Successfully orienting finance towards human rights must indeed rely heavily on stances taken by industry as they represent a consensus view.
But equally promoting human rights awareness throughout the sector can also result from individual FSEs taking leadership positions on human rights matters that relate to the finance sector’s remit as well as to broader social concerns.
We observed several trends in performance across each of the five factors in our benchmark.
While there is evidence of some human rights awareness in terms of our FSEs’ policy positions, due diligence and outcomes (represented as green and amber in the figure below), this awareness is not reflected in FSEs’ governance arrangements, nor is it routinely reflected in practice as concrete and positive outcomes.
As noted under key finding 2 (above), none of our FSEs identified human rights risk as material to their business.
We also looked at each of our six human rights categories separately to see if one or more of them was considered at the Board level.
We did find some human rights-related issues considered by Remuneration Committees in so far as these relate to employees, and to a Nomination Committee in so far as gender diversity representation on the board.
We also found aspects of privacy discussed by IT/Technology Committees (where they exist at the Board level).
Yet, it is notable that none of the FSE boards or committees had a holistic view of human rights across the full breadth of the FSE’s business activities.
Policy governance is a very familiar practice within FSEs and so public disclosure of these policies is a way for external stakeholders to verify the FSE’s position on human rights issues. It sets expectations as to the level of the FSE’s awareness of human rights and what actions it might reasonably be expected to take in line with these stated policies.
We framed our indicators to delve into the details of each of the six human rights categories as they were relevant to each domain. Our starting position was to look for a domain specific policy and, where that failed to yield a result, step back to consider firm wide policies.
We found evidence that FSEs have narrow views of human rights, being more ready to adopt a position when it is largely reflecting legal obligations around a human rights issue or, given our sample are listed entities, positions by investor groups than to adopt a policy that would extend those human rights fields into other areas.
Human rights due diligence is a key process within the UN’s Guiding Principles on Business and Human Rights. More generally, due diligence is a process that forms the basis of risk management.
FSEs routinely deploy due diligence in their assessments of risk around client borrowing from retail clients through to multi-billion dollar finance facilities, investment returns, insurance risk, key suppliers, hiring employees, undertaking acquisitions or divestments.
So due diligence is a concept that our sample FSEs understand well. It’s a core process within financial services.
However, we found little evidence of effective human rights due diligence in relation to our six human rights categories, noting that a different process would be required for that category in each different area of impact (customers, employees).
The fourth of our five factors, Outcomes, provides a reality check for the human rights risk management approach of the sample FSEs as determined by the factors of governance, policy positions and due diligence.
Outcomes in our Benchmark are specific to the area of interest.
We had the strongest visibility of outcomes indicators for customers, employee and society, where we made extensive use of third-party sources. We had least visibility in the CLIS area of impact.
We have come to terms with the fact that some areas of interest to us are shaped by a culture of confidentiality (such as settlements with employees and customers whose complaints are resolved internally). We can never know the full extent of these matters.
The evidence from outcomes does not just convey a litany of failings, but also a narrative of missed opportunities.
We consider impact to measure longer-term trends and so not a measurable factor for this, our first Benchmark Report. However, we expect it to be featured in future annual reports.
Our sample captures a broad range of ASX-listed financial services entities, with the exception of stand-alone superannuation entities.
The decision to focus on listed FSEs reflects both the extent and the depth of disclosure provided by listed financial services entities. This is not to suggest the disclosure of these entities is uniformly of a high standard when it comes to human rights information: it isn't.
The absence of mandatory disclosures around non-financial risk in the Corporations Act, regulations and accounting standards any disclosures we found were made on a voluntary basis, with no consistency between FSEs on what information to disclose, nor how best to disclose it.