Human rights due diligence

Human rights due diligence in supply chains: What businesses need to know

Chipman Koty

How corporate due diligence legislation paves the way for the EU to adopt a binding law on the matter this year

The legislative initiative, which passed by a 504 to 79 majority, paves the way for the EU to adopt a binding law on the matter later this year.

This new law on corporate due diligence will set the standard for responsible business conduct in Europe and beyond,” said Dutch MEP and rapporteur Lara Wolters. “We refuse to accept that deforestation or forced labour are part of global supply chains.”

If passed, the EU law will be the latest – and potentially the most significant – in a series of similar human rights due diligence (HRDD) laws that governments worldwide have adopted in recent years. Broadly speaking, HRDD laws make businesses responsible for environmental, social, and governance (ESG) abuses committed by overseas subsidiaries and suppliers, thereby limiting their capacity to be complicit in activities that are illegal in their home countries.

The new EU law underlines an important trend: environmental and human rights issues that were previously the domain of voluntary corporate social responsibility (CSR) initiatives are increasingly being governed by hard laws with rules and penalties. As compliance becomes more demanding, businesses will need to adopt ESG principles across their organisational functions rather than limit them to isolated CSR and procurement teams.

Why are HRDD laws emerging now?

The recent emergence of HRDD laws stems from advocacy efforts by activists and politicians who argue that more forceful action is needed to address modern slavery and other ESG abuses in global supply chains.

For example, a report released by the UN’s International Labour Organisation and the Walk Free Foundation in 2018 found that an estimated 40.3 million people worldwide are living in modern slavery, 71 percent of whom are women and girls. Their labour exists in a number of supply chains, including in agriculture, mining, and clothing, among others, generating about US$150 billion per year.

Growing awareness of issues like modern slavery, as well as recognition that poorly enforced self-reporting is inadequate to solve them, has led to the creation of more stringent regulation. This process gained momentum after the UN adopted the United Nations Guiding Principles on Business and Human Rights in 2011.

California’s Transparency in Supply Chains Act of 2010, the UK’s Modern Slavery Act of 2015, and France’s Duty of Vigilance Law of 2017 are influential laws that have served as models for other countries. Since then, governments in Australia, Belgium, Canada, Finland, Germany, the Netherlands, Switzerland, the EU, and elsewhere have passed or are developing similar laws.

Some governments have also recently passed laws specifically targeting the use of forced labour in the Chinese region of Xinjiang, most prominently the US Uyghur Forced Labor Prevention Act.

What are the requirements of HRDD laws?

The specific contents of HRDD laws vary, but contain many common features.

For businesses, the UK’s Modern Slavery Act is notable for Section 54, “Transparency in supply chains,” which requires businesses with an annual turnover over £36 million to publish an annual statement on slavery and human trafficking. The statement must include the steps the organisation has taken to ensure slavery and human trafficking are not occurring in its business or supply chains, such as detailing due diligence processes, exposure to high-risk areas, and employee training policies. California’s Transparency in Supply Chains Act contains similar disclosure requirements for retailers and manufacturers with annual gross receipts over US$100 million.

While these laws were groundbreaking upon their release, they also proved limited in their effectiveness. Research by PwC, for instance, found that corporate statements released in connection to the UK’s Modern Slavery Act were on average less than 1,000 words long, while 70 percent missed at least one of the recommended reporting areas, suggesting that compliance efforts were superficial.

France took the disclosure requirements in these early laws a step further in the Duty of Vigilance Law by requiring HRDD measures to be “adequate” and “effectively implemented”. Importantly, any interested party can request a judge to order a company to implement a vigilance plan, while victims can seek compensation for damages.

While not all subsequent HRDD laws are as rigorous as those in France, they have incorporated elements to make reporting more comprehensive and to penalize non-compliance, including the EU’s proposed law. The UK is set to make similar changes after an independent review of the Modern Slavery Act in 2019 recommended the government make due diligence mandatory, require reporting on all criteria, enact publishing deadlines, and introduce stronger enforcement and penalties for violations.

How can businesses prevent human rights abuses in their supply chains?

The spread of HRDD laws worldwide demands that businesses bolster their ESG and due diligence policies. This is also true for businesses not yet affected by such laws, as inadequate standards can cause reputational damages and disappoint investor expectations.

Meaningfully addressing human rights abuses in supply chains requires a comprehensive approach that goes beyond efforts limited to CSR and procurement teams, while extending policy actions to lower tier suppliers. Many companies conduct due diligence and audits on tier-1 suppliers, but they rarely do so for tier-2 and beyond, which is where most infractions occur. This process can be difficult, but businesses can begin by mapping their suppliers and identifying those that carry the highest risks.

Similarly, HR teams may conduct ethics training and set up whistle-blowing mechanisms within their companies, but generally do not make them available to suppliers. If businesses cannot work directly with suppliers in this way, they may opt to prioritise suppliers who have similar systems in place.

Further, businesses that coordinate human rights initiatives across corporate functions can avoid incentive structures that undermine one another and impede progress. For example, financial considerations or distribution models may favour suppliers that are fast and affordable, but these factors also put them at higher risk of having human rights violations. Avoiding these situations begins with management, who can establish clear and measurable KPIs that take into account social impacts in addition to standard business considerations.

Due to limited capacity, some SMEs may find it challenging to conduct HRDD in their supply chains. Companies lacking internal resources can cooperate with relevant industry associations to develop best practices, or engage an outside auditor to conduct a study on their behalf.

While the emergence of HRDD may require changes to business structures, their increasing universality stands to make compliance more efficient. Instead of dealing with a patchwork of disparate regulations, a more consistent regulatory environment will provide greater opportunities for businesses to concentrate on developing effective corporate policies.

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