Advancing a People-Centered Approach to Sovereign Debt

Key Points

• A sovereign debt crisis is not only a financial crisis—it is also a human rights crisis. While developing countries can help fund development through sovereign debt, excessive debt can divert critical public resources away from education, health, and other essential services as more funds are spent on interest payments than on fulfilling basic human rights.
• With about 61 percent of developing countries’ debt held by private investors, their lending practices and restructuring decisions can either support or severely undermine the capacity of countries to meet their human rights obligations.
• BSR shares recommendations for sovereign investors on aligning investment practices with the UNGPs and other relevant human rights standards—from assessing the country context before investing and during debt restricting negotiations to engaging peer investors and using leverage in support of human rights.

Due to several factors, including the rapid increase of global interest rates, depreciation of local currencies, higher risk premiums, among others, , many developing countries, particularly developing economies with the weakest credit ratings, are unable to fulfill their financial obligations to external creditors, sparking a “silent debt crisis” and leading to default, restructuring, and the requirement to refinance about US$60 billion in external debt annually. This means allocating twice as many resources to servicing public debts while diverting scarce resources away from socioeconomic development. In the recent World Bank Group Spring Meetings, the IMF called for the urgency in dealing with complex trade-offs between increasing sovereign debt, slower growth, and new spending pressures. Following a decade-long sovereign debt market boom, global public debt is expected to rise by an additional 2.8 percent of GDP by 2025 and to reach 100 percent of GDP by 2030. 

This financial crisis is also a human rights crisis. While sovereign debt can help fund sustainable development, excessive public debt and high interest rates burden developing countries. By 2023, 3.3 billion people lived in countries spending more on interest payments than on critical public expenditures including 54 developing countries that allocated over 10 percent of government revenues to interest payments, outpacing growth in critical public expenditures, such as education, health, and other human rights-related expenditures. At the Spring Meetings, participants emphasized that growth must translate into better livelihoods through effective fiscal and monetary policies, transparency, and good governance.

This is key for private creditors, who own 61 percent of developing countries’ debt, and whose lending terms are more volatile and expensive than concessional financing. Private creditors have also financed repressive regimes responsible for severe human rights violations. This represents a twofold problem for responsible finance because sovereign bond investors may: 

• Restrict governments’ ability to deliver human rights by demanding lending conditions mostly favorable to creditors, such as higher interest rates and a lack of concessions in times of financial difficulty, or irresponsible debt restructuring, and/or;  
• Finance governments that systemically violate human rights and perpetrate crimes against humanity.  

While countries have the ultimate duty to protect human rights, investors can impact human rights and have a responsibility to respect them in their operations and value chains. Yet the UN Working Group on Business and Human Rights finds that many investors fail to connect human rights standards and due diligence with responsible investment practices. The PRI (Principles for Responsible Investment) adds that few sovereign debt investors recognize how their investments impact human rights or the resulting material risks to their portfolios.  

While some sovereign bondholders set human rights expectations for debtors and engage governments on issues like deforestation impacts on Indigenous Peoples, the majority fail to do so. This is due to several challenges, including perceived encroachment on sovereignty, limited leverage compared to corporate stocks and bonds, and potential reputational backlash from cutting government funding.

When governments can no longer afford interest payments, debt restructuring agreements may lead to further cuts in spending on essential services for the population, exacerbating socio-economic inequalities and undermining human rights. A study of 19 sovereign debt restructurings in 13 countries (Barbados, Belize, Chad, Côte d’Ivoire, Ecuador, Grenada, Greece, Jamaica, Mongolia, Mozambique, St Kitts and Nevis, Seychelles, and Ukraine) found that investors often ignore the human rights situation in debtor countries during negotiations, requiring countries to make financial decisions that may limit their ability to meet human rights obligations.  

Despite these findings, the UN Guiding Principles on Business and Human Rights (UNGPs), Organisation for Economic Co-operation and Development‘s guidance on responsible business conduct for institutional investors, and EU-wide regulations outline processes for investors to respect human rights. In turn, the 2011 UN Guiding Principles on Foreign Debt and Human Rights focus on debt repayment and countries’ fiscal capacity to uphold human rights, urging lenders to conduct due diligence to ensure that the loans do not impair the borrower’s ability to fulfill human rights. These provide the foundation for investors to embed human rights considerations into their strategies and more effectively account for the implications of their sovereign investments. 

Recommendations for investors 

BSR recognizes the challenges sovereign investors face in addressing human rights in their sovereign bond portfolios. BSR encourages investors to take the following steps to align investment practices with the UNGPs and other relevant human rights standards:  

1. Embed human rights in investment practices. This involves integrating human rights considerations into investment policies and processes, publishing a human rights policy, and communicating expectations to bond issuers and affected stakeholders.

2. Assess the country’s context and human rights profile before investing and continuously thereafter, including during debt restructuring negotiations.

• Understand the debtor’s human rights performance, the strength of the rule of law, and the socio-economic context. Use credible human rights indicators and data from reputable sources like the UN’s Universal Human Rights Index and the Human Rights Measurement Initiative while seeking input from affected stakeholders.
• During debt restructuring, assess how negotiating positions may impact the debtor’s capacity to meet human rights obligations and avoid exceeding the human rights debt tolerance threshold. 

3. Use leverage to influence behavior changes among debtors. While sovereign bondholders have less influence than equity investors, multiple opportunities exist:

• Raise human rights considerations with governments,emphasizing the importance of tax and social spending, and strong democratic institutions attracting foreign investment. Creating lending conditions tied to sovereign human rights performance may be possible.  During the Spring Meetings, participants highlighted the need for transparent, accountable sovereign debt decisions and empowering parliaments, civil society, and citizens to align borrowing with public interest.
• Participate in debt relief programs and restructuring negotiations in good faith, including through a formal social dialogue. Avoid predatory or obstructive behaviors that limit governments' efforts to fulfill human rights obligations and seek debt agreements that are financially sustainable and respect human rights cognizant of the country’s context (e.g., see proposal under the Debts of Vulnerable Economies Fund Principles).  
• Influence and collaborate with peers to increase leverage over debtor countries. Communication between asset owners and managers regarding their expectations of debtor countries will raise awareness of this important topic in the industry.  
• Consider taking a human rights-based approach to divestment if the leverage methods discussed above are not effective. Sovereign investors would need to consider the potential negative impact of divestment on human rights within the country. 

Given the complexities of sovereign debt investment, it is important to anticipate regulatory and stakeholder expectations, including national and regional legislative developments in the EU and elsewhere that seek to ensure responsible business and investment strategies uphold human rights. Please contact us to learn more about BSR’s approach to helping your company navigate human rights and sustainability opportunities and challenges associated with sovereign debt. 

This article was originally published at the BSR website "Sustainability Insights" and is written by Manuela Corredor Vasquez, Manager Human Rights and EETI, Paloma Muñoz Quick, Director Human Rights Standards, and Kindra Mohr, Associate Director Human Rights Standards at BSR.