Environmental, social and corporate governance (“ESG”) is growing in importance, particularly amongst investors. As such, we are witnessing a wave of international guidance, new regulatory requirements and obligations, and industry standards to which businesses must comply. Most recently, new obligations for businesses have focused on the topic of mandatory human rights and environmental due diligence.
It is clear that businesses that make ESG a significant factor of their operations will stand to benefit, but what specific guidance and obligations must they consider?
In June 2020, the UN Office of the High Commissioner for Human Rights released a document, ‘Mandatory Human Rights Due Diligence Regimes’, which considered human rights due diligence to be “an ongoing, cyclical process” and an essential part of fulfilling the “corporate responsibility to respect” (as defined in the UN’s Guiding Principles on Business and Human Rights (the “UNGPs”)).
The UNGPs require all businesses, in consideration of social responsibility and ethical accountability, to implement a holistic approach to address human rights and forced labour risks, including modern slavery, and to consider how these risks affect a business and its operations.
The UN Principles for Responsible Investment, which introduced plans to embed the UNGPs into investment activities, also emphasised the importance of companies conducting appropriate due diligence and managing their supply chains accordingly.
Reporting obligations have also come through national legislation. In the UK, the Modern Slavery Act was introduced on 29 October 2015. It required businesses to report on slavery and human trafficking with regard to their business and supply chains, and to produce an annual statement.
France has also adopted similar legislation. In 2017 it introduced the Corporate Duty of Vigilance Law. This requires the largest French companies to publish annual public vigilance plans which may feature impacts linked to their own activities, those of their subsidiaries, and those suppliers and subcontractors with whom they have an established commercial relationship.
Despite international and national regulations, many companies still lag behind on ESG compliance. The Corporate Human Rights Benchmark findings for 2020 identified that whilst there has been some progress from previous years, challenges still remain. They reported that “only a minority of companies demonstrate the willingness and commitment to take human rights seriously,” and that there is a “disconnect between commitments and processes on the one hand and actual performance and results on the other”.
The COVID-19 pandemic has only exacerbated these failings, producing further inequalities and unacceptable practices across global chains.
Furthermore, in Europe, reports have identified that a mere one third of EU companies carry out human rights or environmental due diligence checks in their supply chain. Consequently, there are urgent calls not only for businesses to do more to ensure that they fulfil their ESG commitments, but for the European Commission and national governments to propose new legislation to hold companies accountable for human rights and/or environmental abuses across their supply chains.
What should we expect from the EU?
On 29 April 2020, European Commissioner for Justice Didier Reynders announced that the EU planned to develop a legislative proposal by 2021 requiring businesses to carry out due diligence in relation to the potential human rights and environmental impacts of their operations and supply chains.
On 6 October 2020, the Commissioner announced that whilst details were still being discussed, the proposals would be “cross-sectoral” and would cover human rights, social and environmental matters. The new framework, which is expected to be tabled by June 2021, would require companies to address, mitigate and prevent human rights risks throughout the entire operations system of a company.
The European Parliament also launched its own recommendations for a new EU Directive on Corporate Due Diligence and Corporate Accountability. Whilst it is rare for the European Parliament to publish a draft directive ahead of the Commission publishing its own findings, this step is perhaps indicative of the importance of the issue and the need for a more coordinated response. The draft directive also offers some guidance as to the position that may ultimately be adopted.
It is expected that some of the key points will be that:
- It will have application to all EU companies and any non-EU companies selling goods or providing services in the EU;
- It will follow processes set out in the UNGPs which seek to prevent adverse effects on people;
- It will implement steps to mitigate environmental and governance risks; and
- It will include sanctions for non-compliance, including criminal in severe cases.
What can businesses do now?
Even without the new legislation finalised, effective due diligence is incredibly important for any business helping to create value, manage and respond to risks, and pre-empt potential issues including reputational or regulatory concerns.
Businesses should therefore use this time to get ahead. There are a number of ways in which business can prepare, including adopting the following measures:
- Conducting a human rights impact assessment and taking appropriate countermeasures;
- Reviewing and updating compliance policies;
- Rolling out training programmes on the upcoming new rules and how they may impact the business and its employees;
- Integrating human rights considerations into existing policies and strategic planning processes; and
- Reviewing the role, resources, and expertise of the legal and compliance departments who will be integral to addressing these new challenges.
Similarly, businesses can reflect upon the practices incorporated in the UNGPs and the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises, which both provide recommendations for responsible business conduct, including across human rights and environmental matters.
Being proactive now will allow businesses to be more responsive to potential problems in the future, creating a more resilient and risk aware business that is better positioned to respond to challenges and potential risks before they arise.
Fulcrum is working with a number of clients to identify, neutralise and mitigate risks relating to ESG considerations within their businesses, including human rights and environmental due diligence. If you would like a no-obligations consultation about how we might be able to assist you in the same way, please get in touch here.
For further ESG reading, click here and here.