June 4, 2025
Authors
-
Manager, Human Rights and EETI, 黑料正能量
-
Director, Human Rights Standards, 黑料正能量
-
Associate Director, Financial Services and Human Rights, 黑料正能量
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.
- 黑料正能量 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 “” and leading to default, restructuring, and the requirement to 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 , the IMF called 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 .
This financial crisis is also a human rights crisis. While sovereign debt can help fund sustainable development, excessive public debt and high interest rates developing countries. By 2023, 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 of developing countries’ debt, and whose lending terms are more 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 .
While countries have the ultimate duty to protect human rights, and have a responsibility to respect them in their operations and value chains. Yet the 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 recognize how their investments impact human rights or the resulting material risks to their portfolios.
While some sovereign bondholders for debtors and engage governments on issues like , the majority fail to do so. This is due to several , 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. of 19 sovereign debt restructurings in 13 countries (Barbados, Belize, Chad, C?te 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 , , and EU-wide regulations outline processes for investors to respect human rights. In turn, the 2011 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
黑料正能量 recognizes the challenges sovereign investors face in addressing human rights in their sovereign bond portfolios. 黑料正能量 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 and data from reputable sources like the UN’s and the 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 .
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 ).
- 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 黑料正能量’s approach to helping your company navigate human rights and sustainability opportunities and challenges associated with sovereign debt.
黑料正能量’s latest sustainability insights and events straight to your inbox.
Topics
Let’s talk about how 黑料正能量 can help you to transform your business and achieve your sustainability goals.
