Banking’s Blind Spot: Why Major Financial Institutions Are Ignoring Value Chain Human Rights in Sustainability Reports

When the first corporate disclosures under the European Union’s landmark Corporate Sustainability Reporting Directive (CSRD) began appearing in 2025, a critical examination of value chain social risk revealed a glaring disconnect across the financial sector. John E. Grova, a member of EFRAG’s Sustainability Reporting Technical Expert Group and a senior ESG adviser at SpareBank 1 Sør-Norge Forretningspartner, undertook a comprehensive review of disclosures covering 74 banks within a dataset hosted by standard-setting body EFRAG, alongside seven of Norway’s largest banking institutions.

The findings from that initial reporting cycle laid bare a profound reporting paradox. While areas such as climate change, a bank’s own workforce, business conduct, and consumer protection were overwhelmingly assessed as material by more than 90 percent of the reviewed reports, social risks further down the economic chain received scant attention. Workers in the value chain, classified under the European Sustainability Reporting Standards (ESRS) as standard S2, were regarded as material in a mere 23 percent of filings. Similarly, affected communities, designated as S3, were deemed material in only 24 percent of reports.

Drilling down to the sub-topic level revealed an even starker picture of omission. Only 12 percent of the evaluated banks identified working conditions within their value chain as material. A mere 8 percent reached the same conclusion regarding civil and political rights, while precisely zero banks identified the rights of Indigenous peoples as a material issue for their operations.

Initially, observers suggested it might be premature to draw definitive conclusions from a single, inaugural reporting year as institutions grappled with complex new methodologies. However, data from the subsequent reporting cycle has dispelled the notion of mere teething problems. Out of roughly 90 banks covered in the second cycle, only 16 percent identified the S2 category as material, while a slightly higher, yet still minimal, 27 percent did the same for S3. Two cycles in, this persistent oversight points to a systemic structural blind spot rather than a transitional reporting hurdle.

This widespread exclusion is remarkably difficult to reconcile with the official sustainability frameworks that banks routinely claim to follow. Under the ESRS, the determination of impact materiality is firmly anchored in established international due diligence frameworks. These include the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, commonly known as the UNGPs.

Consider the operational reality of modern commercial banking. A financial institution that lends at scale into sectors such as construction, agriculture, transport, shipping, and energy is directly linked to adverse impacts on workers throughout those supply chains. Similarly, a bank distributing global investment funds or actively managing assets for retail and institutional clients maintains a direct operational link to the human rights impacts generated by those underlying corporate holdings.

Within legal and compliance terminology, the phrase "directly linked" is sometimes misinterpreted as the mildest end of the risk spectrum, especially when compared to non-financial corporations operating directly in the real economy. In truth, the nature of banking exposure is simply different, not inherently lesser. It carries an explicit expectation for financial institutions to utilize their commercial leverage, escalate matters where adverse impacts persist, and ultimately consider terminating business relationships where meaningful changes cannot be achieved.

Identifying sustainability impacts without subsequently managing them falls short of actual due diligence. Furthermore, the severity of potential impacts—measured by their scale, scope, and irremediability—must take precedence over sheer volume, meaning a few severe potential human rights violations naturally outrank numerous minor administrative issues. Under the ESRS, the UNGPs, and the OECD Guidelines, severity is assessed based on actual and potential impacts, and it cannot be neutralized or obscured through averaging or netting.

Inconsistent Disclosures and Corporate Coherence

What transforms this issue from a technical dispute over methodology into a credible governance concern is the glaring inconsistency between what banks report under the CSRD and what they state elsewhere in their public disclosures.

Many of these same financial institutions have formally committed to upholding the UNGPs and OECD Guidelines across their enterprise operations. In fact, their internal environmental, ESG credit risk models explicitly classify corporate clients operating in construction, transport, agriculture, and shipping as carrying elevated social risks, including the severe risk of modern forced labor.

Disclosures originating from Norway serve as an illuminating case study. The country’s Transparency Act mandates that qualifying enterprises publish a separate, dedicated human rights due diligence statement that covers much of the same operational ground as the CSRD. When financial analysts read these two distinct reports side by side, a striking contradiction emerges: human rights risks that are blithely dismissed as immaterial in the bank’s official annual financial report are simultaneously identified, analyzed, and prioritized against the UNGPs and OECD Guidelines within its standalone due diligence statement.

The UNGPs explicitly require corporate policy commitments to be embedded seamlessly across the entire business and integrated directly into the specific functions that possess the authority to take corrective action, as outlined in principles 16 and 19. Without this operational integration, corporate human rights policies are fundamentally incoherent.

This coherence problem is further underscored by the selective nature of materiality determinations. Banks routinely manage to consider their own internal workforce, their direct consumers, and retail end-users as material—incorporating granular sub-topics such as workplace work-life balance—while simultaneously declaring that vulnerable workers in their broader value chains and local affected communities fall entirely outside the materiality threshold.

Measuring to Manage Risk

The persistent absence of categories S2 and S3 from corporate annual reports matters profoundly for at least three distinct reasons.

First, a corporate reporting statement that willfully omits a bank’s most severe potential human rights connections cannot accurately be described as a faithful representation of its true business activities. Such omissions leave investors, regulators, and civil society with a severely fragmented and incomplete picture of overall risk exposure.

Second, defining away these risks carries direct consequences for internal risk management and executive attention. Within corporate governance structures, issues defined as immaterial receive zero ongoing oversight, no dedicated resource allocation, and crucially, no board-level time. This institutional neglect sits increasingly awkwardly alongside the European Banking Authority’s guidelines on the management of ESG risks, which have legally required large European banks to formally assess social risks against the OECD Guidelines and the UNGPs.

Third, these reporting blind spots inflict direct damage on institutional credibility. Major financial institutions routinely demand that their commercial clients and corporate suppliers document responsible business conduct regarding labor standards and fundamental human rights. This expectation becomes exceedingly difficult to sustain while the banks themselves publicly report that identical labor and human rights issues within their own financed value chains fall well below the threshold of materiality.

Two specific operational blind spots follow this exact logical flaw. As green and transition finance portfolios grow at an unprecedented pace across Europe, institutions must recognize that a green corporate purpose does not displace the fundamental necessity of due diligence. The complex value chains underpinning battery manufacturing, solar infrastructure, and wind energy carry well-documented human rights risks, while the broader phase-out of fossil fuels directly impacts vulnerable workers and local communities. Despite this reality, the concept of a "Just Transition" remains little more than an afterthought or a footnote within broader climate and green finance frameworks.

At the same time, banks are largely delegating direct responsibility for retail savings products and investment funds to external fund providers. Yet, as primary distributors of these financial products, banks maintain an obligation to understand and account for product-related impacts.

Any lingering attempt to argue that the European Union’s recent Sustainability Omnibus legislation has altered what banks are fundamentally expected to report is structurally misplaced. What regulatory simplification actually changes is operational discretion, not foundational accountability.

The revised ESRS 1 framework allows a reporting enterprise to work in a top-down manner, concluding on materiality directly from its overarching corporate strategy, business model, specific sectors, and operating geographies. Practically speaking, a robust sector-and-geography assessment means that any bank lending extensively into high-risk sectors, or distributing investment funds heavily exposed to markets with documented labor compliance issues, should naturally place heavy emphasis on categories S2 and S3. Reduced regulatory prescription makes a bank’s internal reasoning and justification matter more, not less.

As investors, financial analysts, and regulatory supervisors prepare to engage with banking institutions regarding the upcoming reporting cycles, the fundamental challenges of consistency, transparency, and rigorous due diligence remain at the forefront of sustainable finance governance.