Sustainable Financing and Human Rights

Author: Akaki Kukhaleishvili, Business and Human Rights Manager
UN Global Compact Network Georgia

In the aftermath of the adoption of the Paris Climate Agreement and the UN Sustainable Development Goals (SDGs), the international community has been focusing on sustainable finance, encompassing environmental, social, and governance (ESG) aspects.

A sustainable financing mechanism necessitates an equal consideration of all its aspects. Overlooking any facet risks an imbalanced approach, undermining the overarching goal of sustainability. Creating a sustainable world requires acknowledging the vital role that a sustainable society plays. The social dimension of sustainable financing encompasses fundamental aspects of human rights, including the right to life, protection from torture, prohibition of discrimination, freedom of speech and expression, the right to a safe, clean, healthy, and sustainable environment, labour rights, the right to adequate housing, and access to healthcare and education. The significance of a holistic approach to development is underscored by the U, which emphasizes the human right to actively participate, benefit from, and contribute to the economic, social, and political progress of one’s country.

At the core of all documents about business and human rights, including the social dimension of sustainable financing, lies the “Guiding Principles on Business and Human Rights.” These principles were endorsed by the UN Human Rights Council resolution in 2011. According to the UN Guiding Principles, every company, including financial institutions, must institute robust human rights due diligence processes to ensure that companies can proactively prevent, address, and remedy human rights violations within their value chain.

The forefront advocate for sustainable financing is the European Union, actively championing the establishment of a financial system geared towards sustainable development. In recent years, the European Union has implemented new regulations, forming a crucial legal framework with a pronounced social component. Notably, the EU taxonomy introduced in 2020 stipulates that an economic activity can only be deemed environmentally sustainable if it also upholds minimum social guarantees (thereby respecting human rights). The EU Sustainable Finance Disclosure Regulation (SFDR), effective from 2021, mandates that financial market participants in the EU integrate sustainable development factors, including the principles of respecting human rights, into their reporting processes. The Corporate Sustainability Reporting Directive (CSRD), endorsed in 2023, further compels companies to report on the sustainable social and environmental risks they encounter. Currently in the approval stage, the European Union Corporate Sustainability and Due Diligence Directive (CSDDD) is poised to impact not only EU-based companies but also those engaging in business within the EU.

Over the past few years, Georgia has undertaken reforms aligned with the European Union directives through its association agreement. While there is still work to be done, noteworthy initiatives, particularly those by the National Bank of Georgia, have emerged to support sustainable financing, complementing other state efforts. The National Bank of Georgia embarked on developing a sustainable financing framework in 2017, following its association with the Sustainable Banking Network (SBN). The National Bank is committed to enhancing the financial sector’s role in the country’s sustainable development and fostering the creation of a green, social, and sustainable financing framework. This financial framework entails the consideration and management of social and environmental issues, along with associated risks, by participants in the financial sector and capital markets. Notably, the National Bank has introduced a sustainable financing taxonomy aimed at integrating environmental, social, and governance (ESG) considerations into the financial decision-making process. Furthermore, notable in this context is the guide to sustainable financing developed by the National Bank, along with the document outlining principles for reporting and disclosing environmental, social, and governance (ESG) issues, which while not mandatory, serve as significant mechanisms. The Taxonomy of Sustainable Financing of the National Bank of Georgia functions as a classification system, delineating activities that align with crucial green, social, or sustainable development objectives. These activities primarily target specific population groups and encompass areas such as infrastructure, healthcare, access to financial services, food security, education, culture, and physical well-being.

The Law of Georgia “On Public Procurement,” updated in 2023, introduces innovations with a key objective of fostering sustainable development in public procurement practices, incorporating environmental, social, and economic considerations. Notably, the purchasing organizations are now obligated to consider sustainability characteristics in procurement conditions, in cases specified by the decree of the Government of Georgia. This development represents a significant stride toward the integration of sustainable financing principles in Georgia, instilling expectations that these principles will be effectively translated into practice.

Among the initiatives implemented in Georgia, the obligation of submitting the governance report shall be highlighted as required by the Law of Georgia on “Accounting, Reporting and Auditing.” This governance report encompasses a section of non-financial reporting, which, includes essential information for assessing the impact of the entity’s activities on environmental, social, employment, human rights protection, and anti-corruption issues.

While the various initiatives discussed above acknowledge the significance of the human rights component, none of the above-mentioned documents explicitly outline a due diligence process on human rights, as stipulated in the UN guidelines. Therefore, it is crucial that state initiatives, on one hand, incorporate considerations for human rights issues, and on the other hand, let businesses proactively engage in assessing their impact on human rights, to inform the stakeholders and the public about the steps taken to protect human rights. By adopting such a comprehensive approach, companies can not only align with responsible business standards but also contribute to fostering a sustainable and responsible business environment that upholds and safeguards the principles of human rights.