The ‘other’ dialogue at the G20 Summit: International Responsibilities of Institutional Investors

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G20 Summit 2013The forthcoming G20 Leaders’ Summit on 5-6 September 2013 (pictured above left, credit) will expectedly focus on US President Barack Obama taking advantage of bilateral and multilateral talks at this forum to press the case for intervention in Syria to other world leaders.

Against the urgency of proposed Syrian intervention, however, the Summit does promise to take up quietly equally urgent issues on global economic and regulatory governance.  What would be of interest to international lawyers is the Summit’s upcoming consideration of the September 2013 G2O/OECD High-Level Principles of Long-Term Investment Financing by Institutional Investors.  These Principles proclaim to

“help policy makers design a policy and regulatory framework which encourages institutional investors to act in line with their investment horizon and risk-return objectives, enhancing their capacity to provide a stable source of capital for the economy and facilitating the flow of capital into long-term investments.  The principles address regulatory and institutional impediments to long-term investment by institutional investors and aim to avoid interventions that may distort the proper functioning of markets.”

The Principles are designed to complement existing international ‘soft’ standards and guidelines such as, among others, the United Nations Principles for Responsible Investment, the Santiago Principles for Sovereign Wealth Funds, the OECD Principles for Public Governance of Public-Private Partnerships, and the OECD Guidelines on Multinational Enterprises.

Institutional investors – particularly sovereign-owned or controlled entities – pose unique questions of international responsibility and the attributability of their conduct to their sovereign owners or sponsors.  The Principles tacitly accept that institutional investors are not mere passive financiers given their long-term investment horizons and activities across different States.  To this end, the Principles call upon States to ensure that institutional investors are “adequately regulated and supervised, taking into account their specificities and the risks they face, and in line with relevant international standards” (Principle 1.6).  The institutional investor likewise has the responsibility to “identify, measure, monitor, and manage the risks associated with long-term assets as well as any long-term risks – including environmental, social, and governance risks” (Principle 3.4).

A key recommendation borne out by the experience of global and financial crises since 2008 is for States to enable institutional investors to properly assess investment risks through a financial regulatory framework that avoids “excessive or mechanistic reliance on external investment or creditworthiness analysis (such as credit agency ratings)” (Principle 4.1), as well as ultimately establishing an “international information platform accessible to investors that would provide comparative information on existing or foreseen long-term investment projects” (Principle 7.2).  Institutional investors would have the corresponding duty to disclose “with sufficient granularity information on the extent to which their investment strategies are in line with their investment horizon and how they address long-term risks”.  (Principle 7.3)

The foregoing recommendations to the G20 Summit clearly indicate a shift in the recognition of institutional investors as active subjects (and not merely objects) of international economic regulation.  While institutional investors exhibit different layers and degrees of State ownership and control, it cannot be said that they are automatically private actors insulated from questions of international responsibility.  Depending on the terms of its originating legislative or administrative charter or corporate registration documents, the institutional investor’s conduct could well be attributed to its sovereign state sponsor in any of four ways – as a “State organ” (Article 4 of the ILC Articles of State Responsibility); “an entity exercising elements of governmental authority” (Article 5 of the ILC Articles); or whether the sovereign State sponsor funding the institutional investor effectively “directs or controls” the investor’s conduct (Article 8 of the ILC Articles) or adopts and ratifies the same (Article 11 of the ILC Articles).

Beyond the issue of attribution, however, the varying public-private structures of institutional investors also raise the more important issue of potential breaches arising from their participation in offshore investment operations that ultimately violate international economic, social, cultural, environmental, and labor standards.  While it would seem almost intuitive that financing such violating conduct amounts to a form of participation in, or complicity with, the actual perpetrators of violations, this is a gray area that inimitably entails questions of fact and law on a case to case basis.  In its Commentary to the Draft Articles on the Responsibility of States for Internationally Wrongful Acts, the International Law Commission was careful to delineate the conduct of corporate entities from their State owners, permitting attribution only where the ‘corporate veil’ is a “mere device or a vehicle for fraud or evasion….where there was evidence that the corporation was exercising public powers, or that the State was using its ownership interest in or control of a corporation specifically in order to achieve a particular result”. (ILC Commentary, p. 48, para. 6).

Finally, the consideration of the proposed Principles at the G20 Summit this week should timely revive  discussion of whether States’ duties to “respect, protect, and fulfill” (see UN Guiding Principles for the Implementation of the ‘Protect, Respect, and Remedy’ Framework) international human rights standards translate to continuing and binding international legal duties to extend meaningful oversight to the extraterritorial conduct of its institutional investors.  Beyond former Special Representative John Ruggie’s proposals on direct corporate responsibility for human rights violations, States’ more direct linkages with institutional investors certainly concretizes the question of international responsibility.  What would perhaps be of interest for purposes of assessing potential international responsibility arising from the conduct of institutional investors would be the 2011 Maastricht Principles on Extraterritorial Obligations of States in the Area of Economic, Social and Cultural Rights.  The 2011 Maastricht Principles proposed that States’ extraterritorial obligations in relation to the International Covenant on Economic, Social and Cultural Rights refer to “obligations relating to the acts and omissions of a State, within or beyond its territory, that have effects on the enjoyment of human rights outside of that State’s territory” [Principle 8(a), Italics added.]  The Commentary to the 2011 Maastricht Principles (see 34 Human Rights Quarterly 2012, pp. 1084-1169 penned by Olivier de Schutter, Asbjorn Eide, Ashfaq Khalfan, Marcos Orellana, Margot Salomon, and Ian Seiderman) illustrates such an extraterritorial obligation through a State’s obligation to ensure “that a corporate actor domiciled within its jurisdiction does not provide loans to projects leading to forced evictions.  The obligation arises…because the state has the legal and factual power to regulate the corporation’s conduct.”  [p. 1101, para. II.8.(2)]

The G20 Summit this September 2013 would most probably be remembered for the diplomatic exchanges reached by world leaders on action to be taken (or not) in view of the reported gassing of hundreds of Syrian civilians, women, and children.  It also has the potential to be remembered for its ‘other’ dialogue on how to make States and their counterpart institutional investors internationally responsible and accountable actors throughout their global operations within and across international value chains – all of which create daily pedestrian impacts on the enjoyment of international economic, social, cultural, and environmental rights around the world.  The potential or actual international responsibility, breach, and attribution of conduct of institutional investors to their sovereign State sponsors is also something for the international lawyers to mull this week as the G20 Leaders’ Summit begins.

*I will be discussing these issues along with sovereign wealth financing paradigms, together with other colleagues in international economic law, at the University of Warwick’s Workshop on International Law, Natural Resources, and Sustainable Development from 11-13 September 2013.  The Workshop is organized by Professors Julio Faundez and Celine Tan of the University of Warwick.  More details on the papers and topics covered are available here.

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