Archives: Resources

Designing an EU Due Diligence Duty that Delivers Better Outcomes

What is the CS3D?

Starting in 2022, the European Union has been negotiating a draft Directive on Corporate Sustainability Due Diligence (CS3D), with discussions on a final law expected to begin by mid-2023. The draft Directive aims to ensure companies active in the single European market contribute to sustainable development by preventing and addressing negative human rights and environmental impacts.

How can we ensure the directive delivers for people and planet?

In our latest report, From Policing to Partnership: Designing an EU Due Diligence Duty that Delivers Better Outcomes, we set out clear recommendations to better align the core content of the duty to do due diligence in the draft Directive with the authoritative international standards for sustainability due diligence.

While the new duty will only apply to certain companies headquartered or operating in the single market, their business partners and other companies in key sourcing and production markets outside the EU will have an essential role to play. Our report is based on interviews with businesses and other stakeholders in Bangladesh, Kenya, Tanzania, and Thailand on the challenges and opportunities facing local companies in meeting their EU business partners’ human rights and environmental expectations, and in preventing and addressing human rights impacts in their operations.

The report looks at some of the current dynamics between EU companies and their non-EU business partners in managing human rights risks, and explores the opportunity the Directive presents to shift from a top-down ‘policing’ approach to one based on collaboration and mutual responsibility, in line with the international standards. It aims to bring the perspectives of companies in key markets into the current debate to provide vital insights into the kinds of practices and behaviors that should be incentivized in the new Directive – and those that should be discouraged – if we truly want it to deliver better outcomes for people and planet.

This report is divided into two main sections:

Section B, What did we hear? provides an overview of current behaviors and practices that are often not conducive to meaningful human rights due diligence.

Section C contains two parts:

  1. What is different about the international standards? benchmarks some of the problematic practices encountered against the international due diligence standards. It highlights what would signal more meaningful due diligence approaches, as compared to those that currently seem to dominate many of the relationships between EU companies and their business partners.
  2. What is the opportunity? underscores the potential for the CS3D to define a carefully crafted due diligence duty that incentivizes a shift towards practices that are more aligned with meaningful due diligence.

This research is part of a project funded by the Ministry for Foreign Affairs of Sweden.

Human Rights Due Diligence: The State of Play in Europe

What’s at stake?

Beginning in 2017, several European states including France, Germany and the Netherlands began to adopt versions of human rights due diligence legislation. This created momentum for the European Union (EU) to help level the playing field.

In 2022, the EU began negotiating a draft Corporate Sustainability Due Diligence Directive (CS3D). The draft CS3D represents a significant opportunity to advance better outcomes for people and planet by scaling uptake of quality human rights and environmental due diligence and enhancing corporate accountability for due diligence failures. However, realizing this potential depends on the Directive being firmly grounded in the international standards on sustainability due diligence – the UNGPs and OECD Guidelines. At Shift, we are committed to helping ensure that this happens through our close involvement in the regulatory debate.

What is the process at EU level?

European law-making involves the three EU institutions: the Commission, Council and Parliament. The European Commission released its proposal for a Directive in February 2022. The Council of the EU issued its position on the proposal in a ‘general approach’  in December 2022, and the European Parliament is expected to settle its position in June 2023. The three institutions will then begin joint negotiations on a final law, with the final result expected before the European Parliamentary elections in early 2024.

Once a final Directive is adopted, EU Member States then have a certain period of time to transpose it into their national laws, after which enforcement would commence.

For an up-to-date list of mandatory Human Rights Due Diligence initiatives in Europe, visit the Business and Human Rights Resource Mandatory Due Diligence portal.

Core Resources

Our Analysis of the Debate

3 resources
May 2023
Designing an EU Due Diligence Duty that Delivers Better Outcomes

What is the CS3D? Starting in 2022, the European Union has been negotiating a draft Directive on Corporate Sustainability Due Diligence (CS3D), with discussions on a final law expected to begin by mid-2023. The draft Directive aims to ensure companies active in the single European market contribute to sustainable development by preventing and addressing negative human rights and environmental impacts. […]

Download
March 2022
Shift’s Analysis of the EU Commission’s Proposal for a Corporate Sustainability Due Diligence Directive

On 23 February 2022, the European Commission released its ‘Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence. Its overall objective is to ensure that companies active in the internal market contribute to sustainable development …through the identification, prevention and mitigation, bringing to an end and minimization […]

Download
February 2021
“Signals of Seriousness” for Human Rights Due Diligence

This discussion draft is intended for the consideration of the European Commission and other stakeholders as the Commission develops proposals on mandatory human rights and environmental due diligence (mHREDD) and considers how national regulators would implement any such legislation. Shift is submitting this draft together with our formal response to DG JUST’s consultation on a […]

Download

Previous Comments and Analysis by Shift

  • Rachel Davis’ March 2022 COMMENTS to the European Parliament RBC Working Group on the release of the Commission’s proposal
  • Our March 2022 ANALYSIS of the Commission’s proposal for a draft Directive
  • Our October 2021 Key Design Considerations for the Enforcement of Mandatory Due Diligence, developed in collaboration with the Office of the UN High Commissioner for Human Rights
  • Our August 2021 viewpoint on how legislating a new standard of conduct CONNECTS TO OUTCOMES FOR PEOPLE
  • Our July 2021 viewpoint on the relationship between HUMAN RIGHTS AND ENVIRONMENTAL DUE DILIGENCE 
  • Our June 2021 viewpoint on the need to include SMEs in the scope of new regulations while allowing them APPROPRIATE FLEXIBILITY
  • Our April 2021 recap of the mHRDD debate in Europe (see below)
  • Our February 2021 RESPONSE to the European Commission’s initial consultation on the need for an initiative on sustainable corporate governance
April 2021: Shift’s Vice President, Rachel Davis, shares a quick summary of where things are at in the debate on mandatory HRDD in Europe

Submission to the International Finance Corporation/Multilateral Investment Guarantee Agency (IFC/MIGA) Consultation on the proposed “Approach to Remedial Action”

DOWNLOAD

At Shift, we have worked for several years with a wide range of financial institutions and their stakeholders seeking to embed the UN Guiding Principles on Business and Human Rights (UNGPs) into their practice, as well as supporting the integration of the UNGPs into the work and tools of various financial industry associations and initiatives. One of our areas of focus has been defining and operationalizing the concept of the ‘remedy ecosystem’ and the important role financial institutions can play in enabling remedy, including in the context of the innovative Dutch Banking Sector Agreement.

From March through April 2022, Shift supported the initial conversations of the IFC/MIGA interdepartmental Working Group on IFC/MIGA’s approach to remedial action by providing initial scoping and research on remedy as reflected in the UNGPs. IFC/MIGA subsequently carried out further analysis and then developed and published a proposed “Approach to Remedial Action” for public consultation. We are pleased to make this submission to that consultation.

We recognize that this is an extremely important topic for IFC/MIGA to be tackling in terms of its potential to deliver meaningful outcomes for people in connection with IFC/MIGA’s own investments and also in the signals that such an approach can send to other financial institutions, particularly national and regional development finance institutions.

IFC/MIGA’s proposed “Approach to Remedial Action” (the Approach) references extensively the concepts of the remedy ecosystem and enabling remedy. On the positive side, we note with appreciation that the Approach considers “prospective and anticipatory measures” throughout the project cycle that could lessen the need for and/or increase preparedness for remedy. However, the Approach is grounded in an assumption that IFC/MIGA’s involvement in remedy will typically take, absent “exceptional circumstances”, the primary form of “facilitating or supporting” its clients’ provision of remedy.

In this submission, we provide some background on the development of these concepts, grounded in the international standards on human rights due diligence (the UNGPs and the OECD Guidelines for Multinational Enterprises), and highlight examples of application of these concepts by financial institutions that we would encourage the IFC/MIGA to consider further. Both the Approach and the External Review reference these authoritative frameworks; moreover, a growing number of bilateral development finance institutions (DFIs) have made commitments and advancements in practice with reference to these standards over the last decade. They are increasingly being incorporated, in whole or in part, into existing or emerging regulations and legislation governing responsible business conduct. Most pertinently, the concepts of the remedy ecosystem and enabling remedy emerged from processes that took these standards as a core reference point.

This submission covers:

  1. The Centrality of the Connection to Harm Analysis to Concepts of Enabling Remedy
  2. The Remedy Ecosystem and Enabling Remedy
  3. The Relevance of Proximity to Harm?

We hope that the IFC/MIGA will draw on this, and other feedback, to reorient the core elements of the Approach to align more fully with the existing International Standards and developing practice among other financial institutions.

Climate Change Background

This document is a non-technical introduction to some key climate change concepts for readers who are less familiar with climate change. It explains how climate change could affect businesses and is designed to accompany Shift’s report Climate Action and Human Rights: How the UN Guiding Principles can help companies respect human rights when responding to climate change.

  • Part 1 provides an overview of the causes and main drivers of climate change, explains why the 1.5°C and 2°C targets are important and why limiting climate change cannot be postponed. 
  • Part 2 explains the relevance of the Paris Accord targets and highlights the scenarios used in the most recent IPCC reports and their relevance. 
  • Part 3 explains the impact that climate change may have on businesses, the concept and relevance of net zero targets and greenhouse gas accounting. 

What data do investors need to manage human rights risks?

With almost 1 in 4 asset owners using international human rights standards to guide their responsible investment activities last year, investor demand for “better S in ESG” data is growing. Investors are not only considering the impacts on people that arise or could arise from their business activities and investee companies, but they are also trying to understand how risks to people can create financial and reputational risk.

Working together, Shift and UN PRI, the world’s leading proponent of responsible investment, set out to identify the key challenges facing investors in understanding and addressing how portfolio companies manage human rights risks within their operations and value chains. In this paper, they outline four key areas for improving the quantity and quality of information accessible to investors. Download the full report to learn more about how these gaps can be addressed, and how they relate to the latest developments in reporting standards.

Embedding the UN Guiding Principles in Finland’s State Financing of Private Sector Activity Abroad

Between 2018-2021, THE FINNISH GOVERNMENT engaged Shift to support a comprehensive approach to integrating the UN Guiding Principles into the work of the main programs and agencies that provide state financing to Finnish businesses investing abroad. This included Finland’s national development finance institution and export credit agency, and several tailored programs, including one focused on private equity.

Shift’s support aimed to strengthen alignment between the policies, processes and practices of these agencies and programs and the expectations of the UNGPs, by embedding a human rights lens in their due diligence approaches. Read the final program report to learn more about the key takeaways – and three tools developed as part of Shift’s wider Valuing Respect Project that can help any financial institution – whether public or private sector – strengthen its human rights efforts.

Enhancing the S in ESG: Tools for Investors and Lenders to Drive Better Evaluation and Engagement on Human Rights

Investors and lenders are responding to financial incentives and external pressure to better consider human rights impacts connected to their investment and financing activities. These impacts are at the core of a company’s social performance or the “S” in ESG. However, despite increasing internal support for more explicit consideration of social performance, existing “S” data skews heavily towards well-known industry and geographic risk profiles and “observable basics” in the form of documented policies and processes, or numbers of audits, issues found, grievances or media stories about a company. 

At best these types of information signal minimal compliance with aspects of international standards of business conduct, well-known reporting frameworks and recent legal developments. But they offer little insight into whether a company has made or will make progress towards achieving improvements in its business practices and the resulting outcomes for workers, communities, and consumers. At worst, conclusions drawn from some of the “S” data can mislead financial institutions to allocate money and attention to the most talked about companies, versus those that bring the highest exposure to financial institutions due to the severity of risks to people and business. 

For three years, as part of our Valuing Respect Project, Shift worked with companies, investors, and civil society organizations around the world to research and co-create improved ways to evaluate business respect for human rights. The resulting, publicly available products can be used by investors and lenders in: 

  • Focusing their screening and engagement activities on whether portfolio companies are wired – at the level of their business model, strategy, and culture – to anticipate and address the most severe risks to people connected to their operations and value chain. 
  • Designing and measuring the impact of strategies that aim to effect changes in the behavior of investees and clients so as to achieve better outcomes for people and business. 

This series provides an overview of the indicators and tools developed, and how investors and lenders are beginning to draw from them to facilitate and strengthen their work.

These tools were produced as part of a multi-year program of expert support to the Finnish Government, focused on integrating the UNGPs into the activities of the main state agencies and programs supporting Finnish private sector investment abroad. This work is summarized in the final program report.

3 resources
December 2022

Business Model Red Flags

Investors and lenders may be missing a key source of risk in their portfolios, as well as the opportunity for more sophisticated and effective engagement, if they fail to consider how a company’s business model can lead to negative impacts on human rights.

Learn More
December 2022

Leadership and Governance Indicators of a Rights Respecting Culture

Lenders and investors that can identify the appropriate leadership and governance characteristics that drive a rights-respecting culture, can better understand and influence the extent to which their portfolio companies think and act about impacts on people. This resource offers an introduction to Shift’s Leadership and Governance Indicators.

Learn More
December 2022

Indicator Design Tool – a tool for Financial Institutions

The Indicator Design Tool provides financial institutions with a structured way to design and measure their efforts to use leverage with portfolio companies. At the core of the tool is an approach known as Theory of Change thinking: a well-established practice for designing, monitoring and evaluating interventions.

Learn More

Comments by Shift on the ISSB Sustainability Reporting Standards

The case for developing a ‘social’ standard as a matter of priority

As the International Sustainability Standards Board (ISSB) considers its forward workplan, looking beyond its first draft standards on Climate and General Requirements, it should be a priority for the Board to develop a thematic standard on ‘social-related’ disclosures. This can provide a much-needed, coherent frame for the future integration of sector-specific standards that build on the work of the Sustainability Accounting Standards Board (SASB) and others regarding, for example, health and safety, and diversity, equity and inclusion, along with other aspects of human capital. But a general standard on social-related disclosures is a necessary precursor to addressing those more granular issues.

In these comments, we elaborate on the case for a thematic ISSB standard on social-related disclosures, before touching briefly on the alternative ways such a standard could be framed. Finally, we highlight a number of ways in which this standard should complement but go beyond ISSB’s ‘General Requirements’ draft standard to address the particular risks and opportunities associated with social issues.