A group of 105 investors representing over $5 trillion in assets, known as Investor Alliance for Human Rights, recently called on international governments to mandate corporate human rights due diligence – that is, the obligation to identify and manage human rights risks in corporate operations and supply chains. The due diligence legislation landscape is expanding quickly, with a number of national laws already in place, whose paths were paved by calls from civil society and business leaders. Among the most recent is the Child Labor Due Diligence Law of the Netherlands, which 29 leading Dutch companies demanded in a joint letter in 2017. Now, the European Commission promises mandatory due diligence legislation in 2021. But how has business come to take a leading role in the corporate human rights movement? The investor case for human rights due diligence shows why business leaders care – and why your company should get ready to meet the new expectations of human rights management in supply chains.
Companies Rarely Follow Voluntary Guidance on Human Rights
Comprehensive international standards are available to guide corporate approaches to human rights, including the UN Guiding Principles on Business & Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct. Yet, human rights abuses in the workplace continue and indicate that companies have not been rigorous enough in implementing voluntary guidelines. The Corporate Human Rights Benchmark, a multi-year index on corporate human rights performance, observed low scores across industries, with human rights due diligence as the lowest-scoring sub-theme in 2019. In a human rights paradigm that has focused on carrots more than sticks, companies free-ride on a lack of legal liability. But sustainable investors, who incorporate environmental, social, and government (ESG) criteria into investment decisions, are increasingly moving into the investing mainstream. ESG investors now represent more than $30 trillion globally, and they have set out to bring human rights due diligence to the public agenda.
The Investor Case for Human Rights Due Diligence
In a voluntary system, individual companies’ due diligence efforts can cause them disproportionate costs and challenges. They will also be unable to realize the full economic benefits of human rights due diligence if supply chain partners do not share in their commitment. Investors for Human Rights make three arguments to change the status quo:
- Benefits for business, investors, and the economy: Human rights due diligence enhances corporate risk management, results in higher risk-adjusted returns for investors, and promotes overall economic growth;
- A level playing field for global businesses: As governments around the world have started to implement different due diligence requirements, policy coherence is needed to allow for a more consistent and predictable risk management along complex value chains;
- Investors’ responsibility to respect human rights: Investors increasingly recognize their own responsibility as business actors to respect human rights, and mandating companies to perform and disclose human rights due diligence enables investors to meet this responsibility.
Investors have outlined why mandatory disclosure is required to overcome liability free-riding.
Backed by the funds they represent, investors have emerged as a progressive voice in the corporate human rights discourse – and their calls are being heard by a growing number of governments.
Human Rights Due Diligence Legislation on the Rise
Over the past decade, various due diligence laws emerged, such as the Modern Slavery Act 2015 in the U.K., California’s Transparency in Supply Chains Act, and Australia’s Disclosure Act. While Europe is leading the implementation to date, EU laws not only impact national corporations. National laws also affect international trading partners and suppliers of products or services, and can include export credit agencies, sovereign wealth funds, and development finance. A range of stakeholders are impacted by these legislative changes, and the number of affected companies is expected to grow as new regulation follows suit around the globe.
“It is not a question of if but when [human rights due diligence] laws will be in place, and how they will impact current business operations and practices,” says human rights counsel William Anderson about the ongoing trend towards due diligence legislation. At EcoVadis, based on our experience from over 100,000 supplier assessments, we have noticed a heightened attention on human rights issues, highlighted in our Sustainability Risk and Performance Index. This focus reflects current regulatory trends – and companies’ preparations to meet upcoming demands to their supply chain due diligence.
New Due Diligence Expectations Raise Unknowns
Companies are accustomed to due diligence aimed at the financial risks of business decisions. ESG investors consider human rights due diligence a natural continuation of this process, enabling companies to better manage supply chain risks and vulnerabilities. Once legislation enters the equation, ‘traditional’ due diligence, focusing on financial and legal risks, and human rights due diligence increasingly become one.
But for many companies, the transition to human rights due diligence comes with unknowns. Companies may have never assessed – not to mention disclosed – their human rights risks before, and are at a loss of how to get started. Further uncertainty is added by the expected regulatory requirements, whose full extent over different legal zones and impact on global supply chains is yet to be known.
How to Prepare for Upcoming Regulation
While national regulations are still under consideration, companies can get ahead by understanding their supply chain better and finding out where they stand in terms of human rights risk management. Working on your existing supplier relationships now will let you leverage those relationships and react to changing requirements more flexibly once you are mandated to do so. By focusing on understanding the current supply chain due diligence landscape better, companies can explore strategies to react to existing – and future – requirements.
Once you are ready to start your human rights due diligence journey, software-based solutions can help to break down the process. The EcoVadis Intelligence Suite opens up the technological capabilities to disclose sustainability risk management along the entire supply chain.
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