Oil, mining and retail companies may bear the brunt of human rights campaigns because of their operations and supply chains in impoverished developing countries. But the banking sector is increasingly coming under scrutiny for its role in financing projects that may involve human rights abuses.

Environmental groups have recently called on banks including Goldman Sachs, Merrill Lynch and HSBC not to sell bonds worth more than $2bn (£1.1bn) on behalf of the China Development Bank and the China Export Import Bank. They argued the bonds would be used to finance controversial infrastructure projects including the Three Gorges Dam.

In subsequent contacts with the financial institutions, the environmentalists have been told the China

Development Bank has given an oral assurance that the proceeds will not be used for the dam, says Peter Bosshard, policy director of California-based International Rivers Network. "We would still like to see a written representation from CDB that extends beyond the Three Gorges project," he says. "We would also like to learn how the lenders will monitor the implementation of the assurances made by CDB."

Some pressure groups focus specifically on the financial sector, including BankTrack, an alliance of 15 organisations including Friends of the Earth and the Rainforest Action Network. It monitors the impact of private finance and campaigns for it to be "strictly accountable to society at large". The Bankwatch network in central and eastern Europe scrutinises international financing of projects in the region.

Campaigners are not the only ones turning up the heat. Institutional investors, particularly those involved in socially responsible funds, are asking more questions about governance, ethics and human rights.

The International Finance Corporation (IFC), the World Bank's private sector lending arm, is considering human rights in its update of the safeguards it uses to manage social and environmental risks in developing country projects. "While, two or three years ago, human rights might not have been on the agenda of financial institutions, the landscape is rapidly changing," it says.

Then there is the continuing risk of litigation. Ed Fagan, the US lawyer famous for suing Swiss banks on behalf of Holocaust survivors, is seeking $20bn for victims of apartheid under the US Alien Tort Claims Act. The companies in his sights include Barclays, NatWest and Standard Chartered.

Financial groups are also being scrutinised over working conditions in their own supply chains, especially where jobs are outsourced at home or abroad. HSBC recently came under fire from trade unions over a delay to a promised wage increase for low-paid contract cleaners at its headquarters at London's Canary Wharf. In response, the bank said it could not comment on the pay and conditions of the contract company's staff.

Given these rising pressures, banks cannot afford to sit back and ignore human rights issues, says a new study by KPMG and F&C Asset Management, a European investment manager with £118bn of funds under management. "They are likely to continue to be drawn into the human rights debate, if not willingly, then by default."

Some are already acting. Last month ABN Amro, the largest Dutch bank, disclosed that it would screen countries for their records on human rights and corruption in order to reduce its exposure to high-risk investments. ABN stressed the dilemmas involved in balancing conflicting interests. One example was its decision to back the BP-sponsored oil pipeline across Azerbaijan, Georgia and Turkey in the face of concerns from pressure groups about the risk to communities and the environment.

The study says the sector's response to its emerging vulnerability over human rights is piecemeal. "Human rights are definitely rising up the corporate agenda, although they are still managed in a largely ad hoc manner and there is little industry consensus on how to tackle the challenges they pose." Key concerns include employee rights, security of staff, supply chain management, litigation, loan default and "reputational risk resulting from being seen to be complicit with human rights abuses committed by customers".

Surprisingly, it says, there is little evidence that banks are systematically including human rights issues in their assessments of sovereign or project risk. "All indications are that financial institutions will have to refine their approach to human rights risk management in the near future."

F&C, newly formed from the merger of F&C Management and Isis Asset Management, says it plans to use the findings in its talks with financial companies about social and environmental risk management. "This study will serve to enhance understanding of the various factors that can affect long-term commercial success and financial valuations," it says.

The report, Banking on Human Rights, examines the practices of nine leading banks, including Barclays, HSBC, Morgan Stanley and UBS. The banks - the others being ABN Amro, Credit Suisse, Rabobank, Royal Bank of Scotland and Standard Chartered - were chosen because of their public commitment to human rights and geographic scope.

The study highlights examples of good practice, starting with an over-arching strategy for managing human rights, led from the top. At Barclays, for example, responsibility for human rights lies with Chris Lendrum, vice-chairman. At RBS, Sir Fred Goodwin, chief executive, is responsible.

Rabobank has an ethics committee chaired by the chief executive. Its strength is its transparency and top-level backing, says the report. Its weakness is that the onus to bring a case lies with individual employees.

One dilemma that the ethics committee handled was over the financing of a trader who dealt in oil from Sudan. The committee agreed the bank should terminate the relationship because oil revenues were fuelling the country's civil war and contributing to massive human rights abuses.

Training for all staff on the relevance of human rights is important, as is specific training for those most exposed to the issue, such as credit officers in high-risk countries, the study says. ABN Amro, for example, ran two-day seminars for project finance staff in three regions on how to implement the IFC's Equator Principles for sustainable financing.

Some banks are consulting human rights groups when drafting policies and training manuals. Credit Suisse and ABN Amro both seek feedback from Amnesty International. HSBC works with the World Wildlife Fund on communicating the link between environmental and human rights risks to staff at the sharp end.

"The encouraging fact is that some banks are starting to realise the wide range of ways that human rights can impact their business, so they are developing some innovative ways of managing them," says Mike Kelly, head of corporate social responsibility at KPMG. "We are seeing new types of partnerships being formed that wouldn't have been dreamt of five years ago."

He adds: "Financial institutions really need to understand and manage human rights issues if they are to protect shareholder value, comply with future legislation and develop competitive advantage."