Transforming Business and Human Rights Paradigm of Transnational Investment

Dr. Kinnari Bhatt

Corporations should give due consideration to long term risk analysis and engender a corporate mindset that prefers sustainability over a race to the bottom through economic exploitation of the environment or the social fabric.

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Transnational investment has developed into the prominent means for facilitating vast financial investment into various kinds of projects.[1]These investments are channeled into financing the construction, development and operations of hydro-power, natural gas,  infrastructure and petroleum exploration projects. These projects are  entirely for-profit economic activity for the ultimate sale of natural resources and energy products, and involve constellations of powerful public and private actors (the state, private sector and development finance institutions). Crucial to these arrangements, is the state’s role  to facilitate the development project at stake, such as- by providing environmental and land permits or taking a financial equity stake in a project. Attraction of foreign investment, skills and technology, reduction of public sector borrowing by relying on private funding of projects and the possibility of developing non-priority projects are all factors that attract a host state.

These development projects can be conceptualized as sitting at an interesting cross section of public and private law and straddling public and private domains. In the context of an state led enterprise, public and private roles and responsibilities begin to blur and fragment as the government becomes less interested in implementing public interest laws. At the same time private developers will see the business advantage of stepping into more traditional state centered roles like resettlement and the provision of benefits to local communities. A glimpse of this blurring of roles can already be seen in aspects of the environmental and social performance standards of global financial institutions, such as the World Bank or the International Finance Corporation.[2] Those standards now set a global legal framework for the management of investment related ‘risks’ on livelihoods, environment, health, safety and security, land and property, culture and gender dynamics.[3]

In principle, Environment Impact Assessments (EIA) and Social Impact Assessments (SIA) act as legal safeguards against infractions on the rights of local communities by, for example, including the participation of those affected by development projects into project decision making at an early stage to ensure their rights and interests are protected.  The drafting of EIAs and SIAs has now been accepted as a vital component of a company’s obligation to conduct due diligence. Widely accepted by the business community during the negotiations of the UN Guiding Principles on Business and Human Rights,[4] that due diligence obligation has now become the salient legal strategy through which companies demonstrate their respect for human rights. However, multiple concerns have been raised about the way these legal regulations are implemented on the ground.


Deterministic Assessment

A crucial concern relates to the timeline followed by private investors for implementing impact assessments. As per my professional experience, these important assessments are not done properly and despite legal provisions, often lack impact due to economic constraints, power politics and corruption This leads to the unfortunate situation where economic interests dictate outcomes of law.

For example, companies conduct SIAs etc at the wrong stage of the project, usually,  when the company is in the midst of or has already approved project financing. This stage is too late for the social or environmental impact assessment of the project because all the financial institutions, local governments, private corporations, shareholders are by then committed to the forward motion of the project; having sustained economic risk in the project, they are overwhelmingly interested in its execution.

Hence, assessments are done at the time money has to leave the door. The contractual framework is under a lot of pressure for successful execution as construction contractors have been hired, legal formalities have been concluded, pre-project investment and operational costs have already been paid. The loans’ dividend claims are dependent on the project being built. The creditor’s risk is an important factor in increasing the pressure on the contractual framework.

One solution would be to ensure that all assessments are conducted before all permits and other logistical and financial planning is done so as to prevent a deterministic procedure. There should be full transparency of the information provided to the financial institutions with regard to the impact assessment. It would prevent them from making financial investments or extending debts without correct assessment of sustainability of the project.

Furthermore, corporations also need to be judicious in these economic decisions and err on the side of caution when it comes to following taking consent of local communities or considering the environmental impact. This is indeed a complex policy decision as they have to balance social responsibility and self-regulation with immediate economic gain. Corporations should give due consideration to long term risk analysis and engender a corporate mindset that prefers sustainability over race to the bottom through economic exploitation of the environment or the social fabric.


Who does these Assessments?

There are wide ranging problems relating to procedure used to conduct these assessments. These include the restrictive nature of the public consent mechanism given to local communities. There is also the issue of the neutrality of the entities that conduct these assessments and processes. The contractual arrangement of an independent consultant is generally insufficient. This is because of the deep disconnect with local laws, authorities and social situation, as well as doubts over the independence of that consultant as he/she is typically engaged by the project company. Furthermore, these entities tend to be consulting firms who conduct very formulaic, short term and superficial assessments.

There is a need for individuals who have a deep understanding of the local context and the sensitivities of indigenous communities. There is a clear role for the State to play in this regard, although its ‘public law’ capacity is in the context of a development project, largely overshadowed by project practice and power. There is an urgent need for public accountability, collective action and stronger domestic and international laws to regulate the state and ensure that it facilitates these assessments in a manner that serves communities and enterprise.

There is a good space for domestic and international civil society, and organizations like the UN to audit the impact assessment for every transnational investment project beyond a threshold of say, 50 million dollars. This is especially important in light of the clandestine and opaque nature of operations in this area through which practice overshadows the law.


Role of Corporate Lawyers

There is however much work to be done and mindsets needs to change. Corporate lawyers who advise companies need to incorporate sustainability and human rights consideration into early stages of a planned project. However, there are practical constraints to lawyers giving this advice to corporations due to the expectation that attorneys give expedient and short-term solutions to problems. If they start advising corporations to follow the UN Guiding Principles on Business and Human Rights, the corporation would view these as extraneous expenses and perhaps, will replace them. Thus, there is a push back amongst lawyers themselves. The situation would be different if the UNGPs were binding legal commitments.

Hence, lawyers become part of the problem. So, whilst it is their legal responsibility to guide their clients about the human rights and sustainability ramifications of their business projects, they have little incentive to do so. This is a reason why corporate lawyers in the field of Business and Human Rights are quite rare. This fact is apparent from the lack of participation of corporate lawyers in the UN BHR Summit or in the UN Working Group.


Reforming Financing Mechanisms

 I can share an anecdote from my personal experience as a corporate law associate in 2009 when the Lehman brothers were investing in a power project in India and had sought my firm’s legal advice before financing the project. It turned out that the land upon which the power plant was to be built was contested by certain local communities. However, the bankers were so obsessed to get the project cleared despite our advice on the legal risk of investing in a project where the primary land lease contract is contested, that it became challenging to convey our advice. This is because of the myopic mentality of the bank. Incidentally, the Indian lady at the bank was so concerned about her bonus that she tried her best to ensure that the Credit Committee approves the loan, despite the risk that the project could end up in a protracted public interest litigation in an Indian court for decades.  This not only illustrates the short-term mentality of financial institutions but also how this myopia is facilitated by financial incentives that link bonuses to closure of deals, regardless of the context of a project. It signals how the bonus culture in banks also needs to be reformed as it can have perverse impacts on public law issues and lead to long-term financial losses. So, there is need for greater awareness  in these institutions.


The Problem of Political Will of the Global North

The heart of the problem is that while mechanisms like the UNBHR summit exist to raise sensitization about concerns regarding human rights, environmental risks etc, its relevance is severely limited as corporations, financial institutions and the Global North generally are disengaged from this conversation. These are the very powers who need to reform their outlook towards investments and business. Their presence at the summit was lacking.

Moreover, the inadequate representation of financial institutions, international development banks from the Global North and Global South and states, was a clear indication of the actual impact of global efforts. This raises the important question of priorities for these States and the institutions that they dominate.  It can only be hoped that collective action forces these powerful international actors to engender a culture of responsibility and sustainability.


[1] Sonarajah M, The International Law on Foreign Investment, 4th edn, Cambridge University Press 2018. S Leader & DM Ong, Global Project Finance, Human Rights and Sustainable Development (Cambridge University Press 2011);

[2] https://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-At-IFC/Policies-Standards/Performance-Standards.

[3] Cernea M, ‘The ‘Ripple Effect’ in Social Policy and its Political Content: A Debate on Social Standards in Public and Private Development Projects’, in Likosky M, Privatising Development: Transnational Law, Infrastructure and Human Rights (M. Nijhoff Publishers 2005).

[4] Deva Guiding Principles on Business and Human Rights: Implications for Companies, European Company Law, Volume 9, Issue 2, April 2012. Bonnitcha, McCorquodale; The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and Human Rights, European Journal of International Law, Volume 28, Issue 3, 13 November 2017, Pages 899–919.


Dr. Kinnari Bhatt is a senior legal professional and academic. She has worked as a project finance lawyer in London in addition to being a consultant for the World Bank. She is publishing her thesis as a book with Cambridge University Press, titled  “Concessionaires, Financiers and Communities – Implementing Indigenous Peoples’ Rights to Land in Transnational Development Projects”


Image Credits- internationalrivers.org

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