How should corporates respond to the significant increase in human rights legislation?

With the increase in emerging human rights legislation, notably the proposed EU Corporate Sustainability Due Diligence (CSDD) Directive which is likely to impact UK businesses with operations in Europe, the new Norwegian Transparency Act, the German Supply Chain Act and others, GoodCorporations’s first Business Ethics Debate of 2023 explored how companies should respond to emerging human rights legislation. The debate, hosted by Baroness Young of Hornsey, gathered senior representatives from a range of leading corporates across a number of sectors, and representatives of ethical and responsible conduct membership organisations.

Bennett Freeman, an Associate Fellow of Chatham House, formerly Senior Vice President for Sustainability Research and Policy at Calvert Investments and U.S. Deputy Assistant Secretary of State for Democracy, Human Rights and Labour, opened the debate by presenting the transition from the voluntary approach to human rights due diligence to today’s growing momentum for corporate accountability grounded in mandatory requirements. Whilst he strongly welcomed this development, he also stressed that the pace for improvement remains frustratingly slow as human rights abuses persist and called on the UK to take the lead on human rights due diligence laws. This would prevent human rights abuses by British companies at home and abroad and create a level playing field with other countries and companies.

Companies were asked if they felt broadly comfortable with their efforts to respond to the changing human rights legal landscape. Whilst the majority felt there was more to do for them to be prepared, those that felt confident about their processes identified the following as key steps:

  • Addressing human rights legislation pre-emptively: Several companies had been prioritising human rights issues ahead of any legislative changes, conducting audits and human rights due diligence, as well as striving to set higher standards than set out in individual laws. While this can be hard to do, going above what is legally required creates an advantage of being prepared for any upcoming legislation.
  • Monitoring legislative developments: Closely following international best practice and the development of the EU legislative framework helps companies to remain aligned with changing legislation and standards and take appropriate action.
  • Human rights policies: Human rights policies and codes of conduct need to be part of a comprehensive framework to guide employees and ensure respecting human rights is embedded into company practice. Having a company mandate that encompasses human rights-related values such as sustainability or wellbeing also helps in driving progress within the company.
  • Human rights measures: Whilst policies are a good place to start, it is implementation that is the real challenge. Measures companies have adopted to do this include conducting due diligence, risk assessments and human rights impact assessments, monitoring suppliers, appointing dedicated ESG or human rights teams, introducing value-based programmes focusing on health and safety and modern slavery, engaging with stakeholders, and adopting targeted initiatives to trace supply chains. Some companies relied on external support of human rights practitioners to carry out these measures.

Despite some existing good practice, everyone acknowledged that there is room for improvement. Companies and membership organisations shared what they consider to be the main challenges in implementing human rights legislation. These included:

  • Specificity of regulations: Regulations in Europe are numerous and tend to be very specific which can leave businesses battling to keep up with regulation in the face of an avalanche of rules.
  • Difficulty in implementation: Despite genuine efforts to address human rights abuses, highly complex supply chains make it very likely that abuses are occurring but going undetected, even in the UK. Resource constraints and the large scope also makes implementation more difficult.
  • Inadequate due diligence: There is a risk of due diligence becoming a tick-box exercise. Moreover, human rights risk assessments conducted by most organisations still look more at the impact on the company rather than on people, with the result that they are not actually appropriately focusing on human rights risks.
  • Limitations of social audits: Cases often arise from sites that have previously been audited or certified, reflecting the larger failure of simplistic social audits. Emphasis should be on due diligence and thorough human rights impact assessments rather than limited scope social audits. Corporates need to investigate harder.
  • Right to remedy: The right to remedy and associated questions about legal liability can arise when a company has violated its human rights obligations. Deciding on an approach to remedy and appropriately implementing it can be challenging. The current human rights legislation lacks clarity in this area, leaving companies with little guidance on what steps to take.
  • Lack of transparency and accountability: There can be a tendency within companies to think that they are not accountable for impacts in their wider value chain and that they do not require to understand impacts and risks outside of their operations and direct suppliers. Some companies have not yet adopted a mindset of trying to improve their human rights practices and are instead seeking to cover up any wrongdoings. Human rights practitioners have a particular challenge here to change perceptions.

Attendees also discussed the effectiveness and limitations of human rights legislation.

Ways in which human rights legislation is effective

  • Fosters conversations: Emerging legislation sharpens the focus on human rights and facilitates internal conversations, especially in legal and procurement departments. This helps to drive the human rights agenda within the organisation.
  • Accelerates progress: New legislation helps to build momentum to create more resilient supply chains and make progress, particularly in the human rights – environment nexus. The extra-territorial reach of the legislation and reporting requirements also drive activity.
  • Creates level playing field: Harmonised regulation will ensure that firms can compete fairly because they operate on similar standards. This means companies will not be at a disadvantage if they follow human rights due diligence and reporting requirements.
  • Influences board and management buy in: Board and management sometimes block efforts by the company ethics and compliance teams to conduct appropriate human rights due diligence. The increase in human rights laws helps to persuade boards and management of the importance of robust human rights due diligence.
  • Enlarges scope of due diligence and reporting: The emerging legislation will make the content of disclosure obligations more stringent. One of the most challenging elements is to report on the outcomes of due diligence (monitoring) and the impact of buying practices as well as measures put in place to minimise and remedy impacts. These changes will require significant new action by most corporates.

Ways in which the effectiveness of human rights legislation is limited

  • Nature of requirements: Regulations need to recognise the context of businesses and how they operate differently. Imposing blanket requirements can be counter-productive and it is challenging for companies to make sure they meet all reporting requirements.
  • Risk aversion: A higher involvement of lawyers and litigation against companies can increase risk aversion. There is a risk that companies will become more nervous about revealing the findings of their due diligence and thus become less transparent. Companies may also decide not to invest or work in areas where people desperately need work because of concerns about potential human rights risk.
  • Implementation vs frameworks: Legislative frameworks are important, but they are not enough. What matters is making sure that they are implementable to truly enable the prevention of human rights abusesin supply chains.
  • Unintended consequences: Not all regulation will have the intended effects. The UK government’s poor design and policing of the seasonal workers scheme is an example of when a regulation designed to facilitate migration and employment has increased the risk of human rights abuses, in this case forced labour on UK farms. Legislation needs to be carefully drafted and reviewed before coming into force.

GoodCorporation’s view

The evolving human rights legal landscape presents both opportunities and challenges. Companies and other organisations need to strengthen their processes to identify, prevent, mitigate and account for potential adverse human rights impacts in their operations and supply chains. This will allow them to demonstrate that they are taking adequate action to prevent human rights harms in line with emerging human rights due diligence legislation and the UN Guiding Principles on Business and Human rights, as well as other international best practice and standards. It is also an opportunity to show that companies take human rights seriously and care about people.

However, the increasing complexity and fragmentation of global supply chains make the implementation of human rights due diligence legislation challenging. Many companies are committed to undertaking stronger due diligence (monitoring) to prevent human rights abuses in their supply chain, but adverse human rights impacts often go undetected. Emerging legal frameworks require companies to carry out due diligence of the entire value chain, but this is challenging given the huge number and geographical spread of suppliers. This means that in practice organisations need to identify their highest risk suppliers first to ensure those are adequately dealt with.