On 22 June 2020, the Society for Threatened Peoples Switzerland (STP) filed a specific instance against UBS Group AG (UBS) at the Swiss NCP. The complaint concerns the bank’s financial ties with Hangzhou Hikvision Digital Technology Co. Ltd. (Hikvision), a provider of modern surveillance technology that has played a key role in the mass surveillance of the Uyghurs and other Turkic minorities in Xinjiang, China.
UBS has ties to Hikvision through investment products and activities as well as by providing nominee shareholding services in relation to the technology company. The complainant maintains that this constitutes a breach of the bank’s own Code of Conduct as well of the OECD Guidelines. Specifically, the STP alleges that, by having entered and subsequently maintained a business relationship with Hikvision, UBS has neither fulfilled its duties regarding due diligence nor sought ways to prevent or mitigate the adverse human rights impacts of Hikvision’s operations in Xinjiang.
The STP is therefore seeking mediation from the NCP to encourage UBS to withdraw from all financial transactions, products and services that include or relate to Hikvision as well as to adapt its internal policies to prevent the bank’s involvement in human rights violations in the future. Most importantly, the STP requests UBS to ensure that its entire equity business is covered by human rights due diligence processes and to incorporate clear exit clauses in its contractual agreements to allow it to withdraw from business relationships that have an adverse impact on human rights. Further, the STP also requests UBS to increase transparency on how it addresses potential and actual adverse human rights impacts to which it is directly linked.
Relevant OECD Guidelines
- Chapter II
- Chapter II Paragraph A10
- Chapter II Paragraph A12
- Chapter II Paragraph A2
- Chapter IV
- Chapter IV Paragraph 1
- Chapter IV Paragraph 3
- Chapter IV Paragraph 5
On 20 January 2021, the Swiss NCP accepted the case for further examination. In its assessment, the NCP concluded that “a business relationship according to the OECD Guidelines between UBS and Hikvision and a direct link between UBS’s products and services and the alleged human rights violations could not be excluded”. The Swiss acceptance of the case is significant because it represents the first time an NCP has recognized the responsibility banks have for their passive investments through index funds. In recent years, the asset management industry has seen a significant shift towards passive investment strategies, by which funds are typically invested in an index rather than in actively traded shares. Currently, over USD 10 trillion is invested in passively managed funds globally, so the recognition of banks’ responsibility for addressing impacts caused by these investments is important.
However, on the second element of the complaint, the Swiss NCP concluded that no business relationship between UBS and Hikvision exists in relation to UBS’s role as custodian for Hikvision shares on behalf of clients. This is despite UBS holding the title of the Hikvision shares, being listed publicly as the owner, and allowing its client (the ‘beneficial owner’ of the shares) to invest in the company in secret. According to research by the STP, UBS has maintained a business relationship with Hikvision since 2016. The bank is involved in the technology company through investment products and services and also manages shares in the name of unknown investors as a ‘nominee shareholder’. In regard to UBS acting as a nominee shareholder of shares in Hikvision, the NCP concluded that UBS is not an investor in Hikvision but rather acts as a custodian of Hikvision shares on behalf of its clients and did not actively advise clients to buy Hikvision shares. According to the NCP, “the mere management of clients’ shares as a custodian implies a business relationship between the bank and its clients, but not with Hikvision.”
This decision represents a worrying misinterpretation of the spirit of the OECD Guidelines and the UN Guiding Principles, which contain an expansive definition of business relationships: “Business relationships refer to those relationships a business enterprise has with business partners, entities in its value chain and any other non-State or State entity directly linked to its business operations, products or services.” The expansive definition of business relationships is intended to increase the scope of an enterprise’s responsibility beyond its own operations and activities to its value chains as well. In this case, UBS provides a service that is an essential part of the investment value chain, allowing the bank’s clients to invest in Hikvision.
In acting as custodian or nominee shareholder, UBS holds the title to the Hikvision shares and is listed as the owner in Hikvision’s own annual reports. Its client, the beneficial owner of the shares, remains invisible. As such, UBS is not only helping its clients to invest in Hikvision, but also helping them to do so anonymously. The fact that the bank enables its client to hold these shares in secret in this case, in a company that is aiding mass surveillance of China’s Uyghur people, including in detention camps, in what has been described as a genocide by some states, adds an additional layer of importance to what UBS does. This is a valuable service for clients, who otherwise may not dare to make those investments.
Furthermore, the Swiss NCP’s decision does not sufficiently account for specific Chinese market conditions, which mean that the only way a foreign investor or shareholder can invest in Chinese companies is via an index fund or a depositary bank. Services such as the holding of nominee shareholdings are therefore a basic prerequisite for market access in China.
For the Swiss NCP to imply that UBS has no responsibility in this regard is deeply problematic. It creates a massive, and easy, escape route for investors to avoid application of the OECD Guidelines. It clearly sets up perverse incentives whereby more investors might choose to reorganize their shareholdings in this way, making it impossible for stakeholders and rightsholders to identify who they should actually be targeting when seeking to address adverse impacts and those responsible for them. More banks might offer these services essentially as a way to screen out linkage and avoid taking any responsibility despite their crucial role in the value chain.
On 5 October 2021, third party supporters of the complainants, the Center for Research on Multinational Enterprises (SOMO) and BankTrack, sought and received confirmation from the UN’s Office of the High Commissioner for Human Rights (OHCHR) that banks do have responsibilities when it comes to the impacts of companies in which they hold shares on behalf of clients.
Following three mediation meetings facilitated by the NCP, the complainants decided to end the mediation, seeing no willingness on the part of UBS to take any responsibility on its passive investments or on developing exit clauses to enable it to exit investment scenarios found to be putting it in a position of failing to respect human rights.
The parties nevertheless agreed on the following actions:
- To engage in the future, potentially via a structured and continuous process of regular meetings and exchanges. The purpose of this engagement will be to discuss human rights issues and define measures that can have a significant impact on the advancement of the industry regarding the further inclusion of ESG criteria (related to human rights) into the management of passive investment funds.
- UBS will take a leading role in raising key issues related to ESG in the context of passive index funds within the industry. This includes e.g. the spearheading of an initiative within a major industry association. This goal will be to use dialogue procedures with index-providers and other industry members to contribute to improving the methodologies and the quality, availability and exchange of information used to establish ESG benchmarks.
- Both parties will undertake efforts to strengthen the collaboration between their organizations and other stakeholders to advance human rights in the finance sector.
On 20 December 2021, the Swiss NCP issued a final statement concluding the case, and committing to undertake follow-up on the action items in six months, seeking updates from each party and convening a meeting with the parties to discuss steps taken.