Financing Your Business? Human Rights Issues to Consider

Your company is about to enter into an arrangement with an outside financing source, such as a commercial bank, a governmental financing agency or investors (private or public), to secure new capital that can be used to continue existing operations, acquire and integrate new technologies, underwrite expansion into new markets or support other activities that will ultimately enhance the value of your company’s brand and reputation.  Until recently, companies and financing sources rarely applied a human rights lens to their negotiations and the terms of the financing; however, the landscape has changed and consideration should be given to a variety of human rights-related issues.  Investors have publicly called on their portfolio companies to respect human rights and commercial banks and governmental agencies have added human rights due diligence to their requirements.  Financing agreements now routinely include representations and covenants relating to human rights issues and impacts and companies need to take them seriously and not treat them as “boilerplate”, since investors and banks expect reporting on such matters and will conduct audits to ensure that they are not publicly linked to companies that have a poor human rights record.  Human rights should also be considered in negotiating the economic terms of the financing arrangement.  For example, while it may be appealing from the company’s perspective to provide that a lender is only entitled to repayment from profits, such a condition often leads to pressure from lenders down the line as they grow weary of waiting for a return of their investment and begin to look for other ways to force repayment.  When lenders begin to make demands, a company may be tempted to lower wages to cut costs, reduce or eliminate investment on workplace safety and/or demand excessive overtime from workers to accelerate revenue generation, all of which lead to adverse human rights impacts.  Similar issues can arise with equity investments that include promises of distributions from profits in the form of mandatory dividends.  All commitments to financing sources should take into account potential human right risks, including systematic risks in the countries in which the company is operating that may be out of the company’s reasonable control (e.g., countries with risk of civil conflict, high levels of corruption and/or weak rule of law), each of which should be discussed and disclosed in advance.  In turn, companies need to be prepared to explicitly commit to compliance with laws, regulations and internationally-recognized standards relating to labor practices, ethical behavior (e.g., anti-corruption) and other human rights topics.