Shift’s response to the European Commission’s Proposal for a Corporate Sustainability Reporting Directive

New York, NY

Shift – the leading center of expertise on the UN Guiding Principles on Business and Human Rights – welcomes the proposal by the European Commission to amend the Non-financial Reporting Directive (NFRD) and related Directives to develop a renewed sustainability reporting regime in Europe (the Corporate Sustainability Reporting Directive, CSRD). The legislative proposal follows the report by the Project Task Force of EFRAG (EFRAG PTF), on which Shift commented in March 2021.

In addition to supporting the statement by the Alliance for Corporate Transparency, Shift highlights the following positive points and suggests where certain elements require further attention:

Double materiality

Positive development

The current NFRD offers a unique and unprecedented approach to materiality: it requires entities to report both on impacts on people and the planet by businesses, as well as on risks to the business itself. As the EFRAG PTF pointed out, it is critical that the new reporting regime provide clear direction and guidance, so that companies report not only on where impacts and risks overlap, but on the full range of sustainability impacts and risks, in line with international standards. The proposed CSRD is “removing any ambiguity” (p. 13) that this should be the case. Moreover, it makes clear that the materiality assessment should include risks and impacts across the full value chain (p. 43, among others) and that reporting entities should disclose the process that they use for determining their material issues (p. 43).

Points needing further attention

It is critical that the EU and its member states find coherence between what they are mandating companies to do on human rights and environmental due diligence (HREDD), and what they are expecting them to report on. While the explanatory memorandum of the proposal refers (p.5) to the Sustainable Corporate Governance Initiative (which is due to issue Commission proposals on mandatory HREDD this summer), the need for alignment with this forthcoming legislation should be strengthened in the CSRD itself (once the mandatory HREDD proposals are issued) if it is to be translated into the standards. This is particularly important where it relates to prioritization, and the new reporting regime should establish clear methodologies to prioritize sustainability issues under an impact materiality lens that are in line with the EU and international standards referenced in the proposal.


“Social” Issues

Positive development

The proposed CSRD includes a new list of more detailed sustainability topics and subtopics that entities would be required to report on, organized around the three ESG pillars. The Commission did not follow GRI in re-naming the second pillar “People” rather than the often misunderstood and misrepresented category of “Social”; however, it is noteworthy that issues critical for addressing inequality and vulnerability of workers and others in company operations and value chains, will now need to be reported on by all companies. This includes:

  • Equal opportunity, including related to gender, equal pay for equal work and people with disabilities;
  • Working conditions, including wages, social dialogue and collective bargaining;
  • Respect for human rights broadly with a reference to core international and EU standards.

The proposal also identifies several sub-topics under the “governance” pillar (e.g., lobbying activities, payment practices) that are often critical for understanding human rights performance.

Points needing further attention

While the current NFRD positions human rights in a problematic way (separating ‘social and employee matters’ as a distinct category rather than as a subset of human rights), the new proposal does not necessarily provide more clarity and structure. Shift encourages the CSRD to adopt the EFRAG PTF’s recommendation to organize the people/social pillar on the basis of who could be affected, which would provide a much-needed organizing construct: starting with the stakeholder groups that can be impacted and then articulating sub-topics for the types of impacts those people can experience. At a minimum, it should recognize that they are not abstract ‘sub-topics”, but represent impacts on actual people that need to be explicitly identified by the reporting entity in order to be appropriately managed and reported on.

Excerpt from the EFRAG report, p. 102

EFRAG Governance

Positive development

If and when the CSRD would be adopted by the EU, EFRAG would be tasked with developing the more specific EU Sustainability Reporting Standards (level 2), building on the parameters set out in the proposed legislation (level 1). To this end, EFRAG has proposed an update of its governance, which according to the proposed CSRD, should include, “a balanced representation of experts from national authorities, civil society and the private sector,” (p. 9) and that its advice to the Commission for adopting new sustainability reporting standards should be, “developed…with the expertise of relevant stakeholders” (p. 53).

Points needing further attention

EFRAG’s traditional constituent stakeholders come from different institutional backgrounds (business, audit/assurance, investor etc) and have experience in financial reporting. Many of those same organizations have experience with financially material sustainability issues. But expertise in the material impacts of business on people and the environment, and what makes for meaningful reporting about them, often sits elsewhere. ‘Balanced representation’ therefore needs to mean more than just equal numbers from each constituency if it is to cover the very issue that makes the CSRD a holistic reporting proposition – the concept of impact materiality. Getting this right will determine whether the pioneering concept of double materiality succeeds or fails once it moves from paper to practice.


Ensuring relevant reporting

Positive development

Throughout the proposal, it is emphasized that the new sustainability reporting standards, “shall require that the information to be reported is understandable, relevant, representative, verifiable, comparable, and is represented in a faithful manner” (p. 45, emphasis added). The word “relevant” is critical here, since earlier communications around the NFRD at times overemphasized comparability (as many current reporting initiatives still do), often at the expense of ensuring relevant and meaningful reporting on people matters.

Points needing further attention

To give real substance to this criterion, the new reporting regime should build on the EFRAG PTF’s proposals that it, “should develop guidance on principles governing the quality of information”, including by setting criteria for the quality of indicators, “that test the validity of the insight the resulting information can provide to users and the potential for unintended consequences from their application” (proposal #14 & 15, p. 66-67). 

No Need to Reinvent Wheels: Drafting Meaningful Human Rights Due Diligence through Model Suggested Supply Chain Contract Clauses

The American Bar Association (ABA) is the largest voluntary association of lawyers and law students in the U.S. and the world. It was the first national bar association to have formally endorsed the 2011 UN Guiding Principles on Business and Human Rights (UNGPs) and has made the elimination of modern slavery and child labor in supply chains a signature goal. I have been an ABA member for many years, starting as a former corporate lawyer who worked for a large multinational company, and continuing when I moved to the field of business and human rights. 

I am therefore happy to report that in March of 2021, a Working Group of the ABA Business Law Section published its Model Contract Clauses to Protect Workers in International Supply Chains (Model Clauses). This version offers contract lawyers the opportunity to use contract language that would explicitly operationalize human rights due diligence in supply chain contracts, in order to make clear that abuses of workers’ rights occurring in global supply chains is a shared responsibility of buyers and suppliers. Group 33 Created with Sketch. (The Model Clauses are for informational purposes, do not constitute legal advice and are not official ABA policy.)  

This version offers contract lawyers the opportunity to use contract language that would explicitly operationalize human rights due diligence in supply chain contracts, in order to make clear that abuses of workers’ rights occurring in global supply chains is a shared responsibility of buyers and sellers.

The traditional approach of buyers’ legal counsel towards the problem of human rights issues in business supply chains has often been to shift most responsibility to suppliers. This resulted in the creation of supply chain contracts that require suppliers to meet prescribed human rights standards (often in the form of boilerplate codes of conduct for suppliers), breach of which could entitle the buyer to the full range of contract remedies (including damages, rejection or resale of the goods, termination of the contract, and indemnification), whether or not the buyer’s own decisions or actions contributed to the breach. 

This is sometimes referred to as a “top-down compliance” approach because it is based on representations and warranties of performance that the supplier must adhere to in the contract. However, this approach is in tension with human rights due diligence under the UNGPs, which provide that since buyers can contribute to human rights impacts by suppliers (e.g., by repeatedly making last-minute quantity and design changes without due consideration of the potential impact on workers, as suppliers scramble to meet those changes), they should share responsibility for addressing the impacts. Group 33 Created with Sketch. (In addition, even where the buyer does not cause or contribute to the impact, it should exercise or try to build its leverage to prevent the impact where it is directly linked to the buyer’s goods or services.)  

Not only is such an approach problematic under the UNGPs, but substantial research has shown that it is not effective to improve supply chain human rights performance; i.e., it often ignores the root causes of human rights abuse, and does not prevent its recurrence. By failing to do so, a top down compliance approach can perversely encourage suppliers with low margins and inadequate financial and managerial capacity to meet contractual human rights standards to cheat, in order to keep the customer’s business.  This approach by buyers has sometimes been called “paying for a bus ticket expecting to fly.”

A top down compliance approach can perversely encourage suppliers with low margins and inadequate financial and managerial capacity to meet contractual human rights standards to cheat, in order to keep the customer’s business. 

The Model Clauses seek to address this problem by shifting from a top-down compliance approach to a human rights due diligence approach. A key driver for the changed draft is the need to prepare lawyers to be able to align their clients’ contracts with the likely enactment of mandatory human rights due diligence legislation in the EU, which will affect US companies that do business in the EU.

The Model Clauses are not intended to be a binding standard. It is suggestive only, and does not constitute legal advice. It is not official ABA policy. Rather, it is aimed at buyers who truly want to align their supply chain contracts with the UNGPs, but don’t yet know quite how to do so. As opposed to reinventing the wheel, the Model Clauses provide a suggested model for doing so. 

Multistakeholder Consultation: The Model Clauses are the product of extensive research and consultation with a wide variety of different types of lawyers in the ABA, including commercial, business, and human rights lawyers. The Working Group also solicited wide input from civil society and businesses.  Its goal was to develop contract language that is practical, reasonable and readily operationalized. 

The Model Clauses incorporate changes in two key areas, which I discuss below:

  1. Moving to a Human Rights Due Diligence Regime

First, the Model Clauses explicitly incorporate language that would require buyers and suppliers to perform the contract in accordance with the human rights due diligence provisions of the UNGPs. The suggested language would flow this responsibility through the entire supply chain. It would make clear that seeking to prevent human rights impacts in the supply chain is a shared responsibility of buyers and suppliers at all supply chain levels. 

  1. Shared Responsibility to Understand and Remedy Human Rights Impacts.

Second, the Model Clauses would recognize the shared responsibility of buyer and supplier to remedy human rights impacts. It would oblige the suppler to have in place adequately funded and governed nonjudicial operational level grievances mechanisms, and to develop and implement a plan to remedy adverse human rights impacts resulting from their performance of the contract. Buyer and seller would cooperate to understand the causes of the impacts. And if it is determined that buyers contribute to them, the buyer would be obliged to cooperate with the supplier to contribute to the remedy of the impact. In order to encourage amical resolution of disputes between buyers and suppliers, the Model Clauses would provide for nonjudicial dispute resolution mechanisms prior to litigation.

To implement these changes, the Model Clauses suggest two model Schedules: a Schedule P (human rights contract performance standards) and a Schedule Q (buyer’s code of conduct).

Schedule P would list contractual standards of human rights performance necessary and appropriate to the contract, such as references to the UNGPs and to the OECD Guidelines for Multinational Enterprises and guidance documents on their implementation; to specific human rights legislation and multistakeholder initiatives; to the company’s own human rights policies, supply chain codes, and so forth.

Schedule Q is a proposed buyer’s code of conduct. It would detail the contractual responsibilities of buyers concerning their commitment to respect human rights, buyer selection of suppliers, negotiating the contract, performing and renewing the contract, remediating human rights impacts, and disengagement/responsible exit. Schedule Q is intended to explicitly embody in the contract the expectations that buyers will not undermine the human rights performance of suppliers, as referred to earlier.

In essence, the Model Clauses are designed for buyers’ counsel whose clients want them to implement human rights due diligence in their supply chain contracts. Since human rights due diligence is being reflected or incorporated in the law, particularly in the EU, this is very timely. Lawyers would not have to reinvent the wheel when seeking to integrate respect for human rights into supply chain relationships.


This viewpoint contains the personal views of the author only, not that of any person or entity, including Shift or the ABA. The author was an advisor to the Working Group of the ABA Business Law Section.

Statement on recommendations by EFRAG to the European Commission on sustainability reporting standards and governance

New York, NY

Shift – the leading center of expertise on the UN Guiding Principles on Business and Human Rights – welcomes the report published this week by EFRAG following the mandate from the European Commission, that sets out recommendations for European sustainability reporting standards. The report contains a range of critical recommendations for the work of a future standard-setter for EU-mandated sustainability reporting:

  • First, it highlights the principles and the process for implementing ‘double materiality’ to determine what information a company should report: both information about the company’s most significant impacts on people and the environment (impact materiality); and information about sustainability matters that affect the company’s ability to create value (financial materiality). The Task Force recognizes from past experience that companies need clear guidance on implementing double materiality, so they report fully on their material impacts, and not only on those that are also financially material.
  • Second, the report proposes a welcome shift away from a vague category of ‘social’ information to an approach that starts with the stakeholders most at risk (“affected stakeholders“) and then looks at how the company’s business may affect them – for instance through health and safety, forced labor practices or loss of access to clean water. This gives companies a clear way to prioritize the issues they need to report on, in line with international standards.
  • Third, the recommendations highlight the need for indicators and metrics that offer genuine insight to the users of reporting (“characteristics of information quality”). Too few of the typical ‘social’ indicators do so today. The report underlines the need for all indicators to be assessed against some key criteria to avoid perverse consequences and false conclusions. And it emphasizes the value of companies setting and reporting against good quality, outcome-oriented targets that reflect the change they intend to make and enable them to measure and disclose progress.

David Vermijs, who co-chaired the Task Force’s workstream on conceptual guidelines, commented, “These are critical recommendations that need to be front and center in the work of the future EU standard-setter. They set the foundation for ensuring that sustainability reporting both helps companies focus on what matters most when it comes to their sustainability performance, and enables their stakeholders to get a true picture of how well they are progressing.”

Shift notes that some of the Task Force’s recommendations will benefit from continuing consultation, including how the new standard-setter can support and accelerate greater ambition and convergence in reporting standards at the international level – including the integration of impact materiality and with regards to “reporting areas” – and the extent to which ‘intangibles’ can be brought within the framework of sustainability reporting.

“Perhaps most important at this point,” commented Caroline Rees, Shift’s President, “is the matter of the standard-setter’s future composition. While we welcome the separate report published on this issue, it leaves open some critical questions as to whether and how the new body will include the necessary deep expertise in the full range of sustainability issues, including and in particular regarding impacts on people. Getting this right will be key to the success of the whole endeavor.”

For media inquiries, please contact communications [at] shiftproject [dot] org.

Planning for Risk Mitigation: Assessing Human Rights in Strategy Development and Roll out

When human rights practitioners develop strategies to identify and prevent risk to people, they often feel like their hands are tied: the business is already operating in a certain way, in given markets with different levels of risk, selling a line of products that already exists and partnering with suppliers that have already been decided by other functions. They then spend effort and resources trying to superimpose human rights considerations onto an approach that is already wired to impact people.

But what if that were not the case? What if a company could build human rights risk planning into the design of a new strategy, or soon-to-launch product or business model transformation? Companies could develop a product or roll out a strategy with the necessary safeguards in place to mitigate risks to people, to improve company decision-making, and to potentially re-shape business behaviors. Crucially, an early and full view of the potential impacts across the ecosystem in which a new product, service or strategy sits would also enable a company to bring in the right peers and partners to address them.

This ambition shaped Ericsson’s approach – to examine human rights risks connected to the rollout of their new flagship technology: 5G.

LISTEN TO | Théo Jaekel, Corporate Responsibility Expert at Ericsson explaining why 5G is critical to the telecom industry and to his company.

5G is the latest evolution of mobile technology standards. While we’ve become familiar with the iterative release of mobile technology innovations, 5G it not just the “latest version.” It promises to exponentially increase the capacity and efficacy of networks and to enable many new user scenarios and capabilities: data will be king (as opposed to voice and SMS); download and upload speeds will be faster, and devices will connect to wireless networks quicker. 5G will also provide the fuel for the Internet of Things (IoT), Augmented Reality, Virtual Reality and Big Data. In short, it is a quantum leap for the ICT sector and, most likely, for all of us as well.

But news coverage of 5G has not always been as optimistic. The legitimate concerns about the way this new technology may affect us – whether due to privacy breaches, the increased automation of jobs and the need for “just” worker transitions, or the potential for citizen surveillance – have often been obscured by various conspiracy theories, including misleadingly linking cell towers to the coronavirus pandemic.

In this context, ahead of the upcoming large-scale rollout of 5G, Ericsson aimed to encourage an informed discussion of these human rights risks and the company’s involvement with them. Along with Shift, the company embarked on a distinct human rights assessment, looking not at what the impacts were, but at what they could be.

The exercise started with desktop research on the new technology, which led to the mapping of the 5G value chain and then layering on the potential impacts on affected stakeholders whose rights could be at risk. This resulted in a set of salient human rights impacts (those human rights at risk of the most severe negative impacts) that could be tested internally with key company stakeholders in a workshop setting, along with a group of expert, external organizations.

Through that exercise, Ericsson was able to identify risks before they happened. For example:

  • Through the value chain, Ericsson identified ways in which privacy could be at risk if the new technology enables apps to gather an exponentially greater amount of data without the knowledge or consent of users, and then sell it to digital advertisers to help them target their messaging more effectively.
  • 5G will enable machines to take on more specialized and professional work, potentially impacting significant portions of the working population (blue and white-collar workers alike) in the future. This will require a concerted response by businesses and governments to ensure a ‘just transition’ for workers through new skills development.
  • 5G technology is also likely to support increased surveillance capabilities, including more precise geolocation data, which could be misused for illegitimate purposes, such as enabling governments to target specific groups or shutdown networks in more discrete ways.

The identified impacts are not necessarily unique, or indeed solely attributable to 5G. But, the potential for many of the impacts is heightened by the way in which 5G breathes life into a myriad of other emerging technologies such as Artificial Intelligence, Virtual Reality, Augmented Reality and Big Data. By understanding this, Ericsson is better prepared to manage and/or mitigate their occurrence.

LISTEN | Senior Advisor David Vermijs offers examples of the breadth of impacts that could be connected to the roll out of 5G

Proactive, early-stage risk identification comes with its own challenges, specifically because not all potential risks (or the related unintended consequences) can be anticipated until a product or strategy hits the market. A business will have to fine-tune its approach as roll out continues. However, this effort will allow the company to embed safeguards into the product or strategy, identify channels for leverage with other entities, and be better positioned to engage with stakeholders in future conversations.

So, what can other companies learn?

Taking a pre-emptive approach – while preferable – may not always be possible. Yet, there are important lessons from this exercise that practitioners may want to consider regardless of where their company is on their human rights journey:

  1. Make the business case for why it is important for human rights to get a seat at the table in product and strategy development and rollout. While practitioners may not be able to turn back time, they can make the case for why it is important to identify risk at an early stage of future product and strategy design. A proactive approach can:
    • Enable companies to identify potential impacts before they occur and be better positioned to tackle otherwise unforeseen risks, including risks to the business.
    • Help identify systemic issues that are often difficult to see through a more traditional audit.
    • Help the company build partnerships at an early stage, positioning it as a convener for partners, peers and other stakeholders to use collaborative leverage when needed.
    • Show stakeholders who are reticent that the company understands their concerns and is willing to take action.
    • Help the company develop a relationship of trust with civil society organizations and other stakeholders that can be essential in the planning, executing, monitoring and evaluation of human rights actions.
  1. Assessing risk is the foundation, not an end result. While this sort of approach to identify risk is innovative, it will have limited effect if it is not followed by concrete steps to mitigate the identified risks, and consistent efforts to test whether the initial assessment was accurate, or if there are other risks that arise from the actual rollout of the technology.

Ericsson’s assessment was made publicly available on March 2, 2021 and may be found here.

Introducing Shift’s Financial Institutions Practitioners Circle

New York, NY

Shift, the leading center of expertise on the UN Guiding Principles on Business and Human Rights, is delighted to announce the launch of our Financial Institutions Practitioners Circle, a space carefully designed for a small number of leading practitioners from banks and export credit agencies (ECAs) to discuss common human rights challenges and co-create cutting-edge solutions that put people first.

The first generation of the FIs Circle will gather virtually for the first time in early March and will include a limited number of practitioners from institutions in the financial sector who have demonstrated a serious commitment to advancing their understanding and implementation of the UN Guiding Principles.

Discussion and learning in the FIs circle will be facilitated by experts from Shift, who will also contribute creative solutions that we have been fine-tuning in our one-on-one engagements with financial institutions. Together, through group workshops and discussions, practitioners will foster leading practice by sharing and co-creating approaches to putting the responsibility to respect human rights into practice in the FIs context.

Shift is committed to disseminating the learnings from this group for the benefit of a wider audience of FIs practitioners and other stakeholders.

LEARN MORE>

Participant selection

Shift is currently evaluating candidates for the first generation of the FIs Circle. Admissibility is determined through an in-depth discussion, based on where the organization is on their human rights journey and, regardless of its level of maturity, its commitment to sharing its experiences and improving performance.

To learn more about the FIs Circle, or to inquire about joining, please email communications [at] shiftproject [dot] org.

Shift Submission to IFRS Consultation on a Sustainability Standards Board

In December 2020, Professor John Ruggie submitted his views to the IFRS Foundation for their consultation into the proposed establishment of a Sustainability Standards Board (SSB) to develop global reporting standards on sustainability. Professor Ruggie urged the Foundation not to limit the initial work of a future SSB to environmental issues and suggested that:

  • The urgency of today’s inequality crisis, including environmental justice issues, requires a parallel effort to integrate the underlying human rights issues into a new standard-setter’s work.
  • The IFRS Foundation take care to ensure that the framing and presentation of a new standard-setter are clear regarding the constraints of its mandate to issues that have demonstrated narrowly-defined financial materiality, and that they do not imply that it covers all sustainability issues of critical importance with regards to companies’ social and environmental performance.

Audio | Can the UN Guiding Principles Unlock the Power of other Narratives to Transform how Business Impacts People?

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ABOUT


It is perhaps a cliché to say that the COVID-19 pandemic has surfaced the urgent need to reimagine the relationship between business and people. Over the past few months, we’ve seen how the workers that companies depend on the most – essential workers – are also very often the ones that are most vulnerable to harm. We know things need to change. But, what conversation should we have to move things forward?

Is it a political conversation about how structural inequality leads to lack of opportunity in our societies? Is it a discussion about how companies should report not only to shareholders, but to stakeholders affected by the business? Should we first talk about the interconnection between people and planet in building a sustainable future? Or is it about the incentives that investors create in how they measure business performance?

The answer, perhaps, is all of the above.

The truth is, for some time now, we’ve had multiple conversations happening at the same time about how we can transform the way business impacts people. And, while they are all very much needed, the truth is that these “narratives” that we use to try to persuade decision-makers, end up competing for limited attention. The risk, of course, is that they end up diluting each other.

How can we make sure that we make the essential points that each narrative has to offer, while offering a cohesive story that bridges them together?

In this short conversation, Caroline Rees (Shift) and Phil Bloomer (BHRRC) discuss how Business and Human Rights may offer a unique way to navigate this broad array of civil, political, economic, social and cultural impacts on people, both through their focus on those impacts that reach the point where they undermine people’s dignity and equality, and through their underpinning in the UN Guiding Principles on Business and Human Rights, which provides a standard for what we can and should expect of business as well as governments.

As we approach the 10th anniversary of the UN Guiding Principles, these two leaders in the business and human rights space talk about how we can and must seize this unique moment to define a shared vision that brings the power of these narratives in ways that can bring about the change we need.


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Statement on the Publication of the Report ‘Recommendations for an IOC Human Rights Strategy’

New York, NY.

In March 2019, we were asked by the International Olympic Committee (IOC) to offer expert advice on how the organization could meet its human rights responsibilities.

Human rights are about valuing and ensuring individual dignity. And respect for peoples’ dignity is fundamental to the values enshrined in the Olympic Charter. As we assessed what the IOC had in place, we found many examples of how the organization has carried out important work on human rights, even if it has not always been described as such. But this work has typically happened in silos, independently of an overarching or coordinated approach on human rights. Recently, this has begun to change as the IOC has become more explicit about the centrality of human rights in its own operations, its role as custodian of the Olympic Games, and its leadership of the Olympic Movement. However, more remains to be done.

Our assessment included consultation with a broad range of IOC staff as well as with expert stakeholders – from human rights NGOs to trade union representatives – whose perspectives informed our understanding of the human rights challenges and opportunities across the Olympic Movement.

Our final report – delivered to the IOC in March 2020 – sets out our recommendations on how the IOC can meet its human rights responsibilities and demonstrate leadership on human rights for the Olympic Movement as a whole through a comprehensive strategy that builds on Agenda 2020 and is aligned with UN human rights standards. Today, we welcome the IOC’s decision to publish our report in full – we believe that this demonstrates the organization’s commitment to engaging with its human rights responsibilities and shows needed leadership on human rights for the Movement.

We are also encouraged that the IOC has announced that from January 2021, it will move forward on building its internal capacity on human rights and start developing an overarching strategy, in line with our recommendations. We also commend the IOC’s commitment to explore an amendment to the Olympic Charter.

While we know that some of our recommendations remain challenging for the IOC to implement, we appreciate that the organization is making them public and inviting dialogue on them. We look forward to continuing to engage with the IOC as it moves forward.

For media inquiries regarding this statement, please contact communications [at] shiftproject [dot] org.

On Mandatory Due Diligence, SMEs Don’t Need a Free Pass; they Need Flexibility

This article originally appeared in this compendium by the Business and Human Rights Resource Centre

As the debate on mandatory human rights due diligence (mHRDD) at the EU-level starts to move from the if to the what and the how, a key concern that policymakers must grapple with is the size of businesses covered by any incoming legislation.


While our work with some forward-thinking small and medium-sized businesses suggests that they boast some significant advantages over their larger counterparts when it comes to realizing their responsibility to respect human rights, legislators will need to act with care not to disadvantage them. The first step would be to anchor mHRDD in the UN Guiding Principles’ understanding that while the responsibility to respect human rights applies to all businesses, the means through which a company meets that standard will vary according to its size.  

Here are five key considerations to support such an approach being reflected in new legislative developments:

  1. Half of the world’s population works for a small or medium business

First, let’s look at the numbers: SMEs account for about 90% of all businesses and contribute up to 50% of total employment in the world. That is why, if legislation aims to drive positive outcomes for people in the context of business activity, it must reach the businesses people work for and interact with. What’s more, we see that the support amongst larger businesses for mHRDD increasingly hinges on the inclusion of SMEs in any such regimes, given the interest of multi-nationals in the level-playing field and the increased leverage with resistant suppliers that mHRDD promises.

  1. Prioritization of salient issues

Most stakeholders recognize that companies – regardless of size – need to prioritize their salient human rights issues. For small businesses with limited resources, prioritizing action on the most severe risks to people is even more crucial to get traction. For instance, we’ve spoken to businesses in the apparel, food, retail and cleaning sectors that have made progress by focusing on addressing the problem of low wages, believing this will have knock-on effects on a host of other rights. The expectations hardwired into legislation ought to reflect the need to enable businesses to prioritize action on human rights impacts based on their severity and that the complexity of company processes for identifying and taking action on impacts will be affected by the size of the company in question.

  1. A focus on the quality of relationships with business partners

In comparison to larger businesses, SMEs tend to have fewer suppliers and customers, which can enable deeper and better-quality relationships. In work that we’ve done with forward thinking SMEs, we’ve seen how they often spend a lot more time selecting business partners that are the right fit and putting more up-front investment into finding those who share their values and tend to perform well on human rights. For small businesses that aim to respect people, partnership with suppliers is a necessity not a choice.


However, there is a risk that legislation on mHRDD incentivizes an approach where a buyer ‘polices’ its supply chain through a process of monitoring and social audits. This approach would fail to encourage the right behaviors for any business, but would particularly impact SMEs. As policymakers consider how best to articulate the standard of human rights due diligence, they should encourage practices that focus on relationship-building, not policing, to work towards better outcomes for people. 

  1. Expectations on action need to move beyond commercial and legal leverage

SMEs often lack the cold, hard commercial leverage of larger multi-nationals, and must think more creatively. For instance, we’ve seen how one medium-sized business has rolled out programs on freedom of association and worker voice in the most challenging contexts, despite having less than 5% of the product buy from suppliers. This business achieved buy-in through explaining the benefits of the program, and drawing on the trusted relationship it had developed, rather than requiring suppliers to participate.

Under any form of mHRDD, the nature of a company’s involvement with a human rights impact, and the strength of the action it has taken to prevent it from occurring, is likely to determine the assessment of the consequences the company faces. Such assessments must consider the wide spectrum of avenues to effectively influence business partners, rather than honing in narrowly on the extent to which a company has deployed legal or commercial leverage, which SMEs are unlikely to possess.

  1. Respect for human rights is more than a mechanical due diligence process

One of the advantages that committed SMEs have over their larger counterparts when it comes to human rights is a greater facility to nurture a culture that supports people and their ability to speak up for themselves. For SMEs, people truly are their most important asset. The very lack of resources and stretch that skeptics cite as reasons why SMEs may find it difficult to respect human rights means that smaller businesses have to respect, trust, motivate and empower their employees to succeed. From talking to executives in SMEs, it is clear to us that committed leaders are able to instill values of empathy and empowerment through face-to-face interaction with employees, listening to them and modelling desirable behaviors. 

Experience shows that even the most sophisticated human rights risk management processes will bear little fruit if they are not fully embedded in company culture, lived by the business’ leaders, and supported by effective governance structures. Here, values-driven SMEs have an advantage and legislation should support that relative strength, setting the expectation not just for a mechanical due diligence process, but one that lives and breathes, informing company behavior and decision-making.

Structuring legislation to encourage and compel companies to adopt and scale rights-respecting business practices and behaviors is no small task. But the legislation will have limited impact for the people that need it the most if it does not consider how best to incorporate SMEs within its scope. Doing so means ensuring an adaptable framework that sets a clear standard of conduct, but allows businesses of all sizes to reach that standard drawing on their unique strengths and expertise.

Shift’s David Vermijs to participate in task force that will produce recommendations on the potential development of EU non-financial reporting standards

We are proud to share that Shift’s Senior Advisor, David Vermijs, is among the 40 selected members of the multi-stakeholder task force appointed by the European Reporting lab to produce recommendations on the potential development of EU non-financial reporting standards. This forms part of the preparatory work for a revised version of the EU Non-Financial Reporting Directive, due in 2021.  

During the first phase of the project, David is co-leading a workstream that will analyze and assess the conceptual framework for potential reporting standards, including approaches to materiality, linkages to the SDGs, and the structure and types of relevant information.

Good reporting standards have a critical role to play in both reflecting and shaping responsible business conduct.

Good reporting standards have a critical role to play in both reflecting and shaping responsible business conduct. A separate EU initiative is currently developing plans for mandatory human rights and environmental due diligence. This is expected to align with the standard of conduct for companies set out in the UN Guiding Principles on Business and Human Rights.

A revised Non-Financial Reporting Directive and robust reporting standards can create coherence for companies between what they are expected to do and to report when it comes to managing their impacts on both people and the planet. Effective reporting is in particular critical for markets to be able to recognize and reward those companies that are consistently progressing in their efforts to identify and address the most critical risks to people in their operations and value chains.

The EU initiative is therefore both critical and timely. It should also support a move towards more coherent and consistent standards at the global level.