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?
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:
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.
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.
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.
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. […]
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 […]
“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 […]
Shift welcomes the publication of the Draft Report on Minimum Safeguards by the Platform on Sustainable Finance, and its call for feedback on the content and recommendations. The report bypasses simplistic approaches and grapples with the challenge at the center of this endeavor, which is how to assess the adequacy of a human rights due diligence process – and how to do so at scale.
There is no single or simple way to meet this challenge, not least because current data in the public arena on companies’ social performance is not up to the task. At the same time, the report rightly notes that developments relating to EU reporting requirements are set to change that reality, and should increase the availability of high-value information. Of course, in many cases, this will still require that analysts and assurance providers have the skills to contextualize and assess that information.
We believe the report’s recommendations point in the right direction, but may require further elaboration in some instances. We also recognize that a first version of the safeguards will be – and should be explicitly acknowledged as – a starting point grounded in today’s best ‘art of the possible’, that will need to further evolve in the years to come, as available data and experience with social indicators improve.
This document contains our comments on the Draft Report on Minimum Safeguards, which were submitted to the Platform on Sustainable Finance.
Shift welcomes the publication by the ISSB of a draft Climate standard for public consultation. Our organizational expertise is in the human dimensions of sustainability, including as they relate to climate change and climate change strategies.
July 2022 |
Comments by Shift on the ISSB Exposure Draft (General Requirements)
Climate change can have knock-on effects across regions and sectors, through interconnected socioeconomic and financial systems. The Bank for International Settlements (BIS) describes climate change as “a new type of systemic risk that involves interacting, nonlinear, fundamentally unpredictable, environmental, social, economic and geopolitical dynamics”. It goes on to state: “With the complex chain reactions between degraded ecological conditions and unpredictable social, economic and political responses, with the risk of triggering tipping points, climate change represents a colossal and potentially irreversible risk of staggering complexity.”
It is in light of these important interconnections that we submit these comments to the ISSB to urge that the draft standard be revised to reflect a more holistic picture that integrates the human dimensions and implications of climate change, climate mitigation, and climate adaptation. Without this, we will not only fail to achieve a just transition to carbon-neutral economies but will see continuing barriers to the success of undertakings climate change strategies, with consequences for business and the providers of capital, among others.
Shift welcomes the opportunity to contribute our perspective on the Exposure Draft published by the International Sustainability Standards Board (ISSB): IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
July 2022 |
Comments by Shift on the ISSB Exposure Draft (Climate-Related Disclosures)
This document contains our comments on the former in which we offer inputs from the perspective of the leading center of expertise on the UN Guiding Principles on Business and Human Rights. The UNGPs are the global authoritative standard concerning how companies impact employees, workers, communities, and consumers.
Shift looks forward to continued engagement with the ISSB as it carries out is important and timely work.
Shift welcomes the publication of the first draft set of European Sustainability Reporting Standards and commends the European Financial Reporting Advisory Group on producing a rich and important set of draft standards in a short period of time. While we are responding separately to a number of the survey questions circulated as part of the consultation process, we recognize that these do not allow for the full expression of views on the draft standards and therefore submit this letter also to complement our survey responses. In it we address issues related to:
The architecture of the cross-cutting standards
The articulation of the materiality assessment process
Providing clarity on the central role of due diligence
Focusing on the materiality process rather than ‘rebuttable presumptions’.
Alignment with international standards and the definition of value chains
The relevance of governance and business models to information on due diligence
Relevance of governance disclosures to alignment with due diligence standards
Relevance of business models as source of impacts in the context of due diligence
The significance of engagement with affected stakeholders
Value of clearly distinguishing affected stakeholders and their particular relevance
Need for cross-cutting disclosures on engagement with affected stakeholders
The value of the architecture of the social standards
Value of division into standards based on stakeholder group
Need for performance metrics for all stakeholder groups in future standards
Thank you very much to MEPs Heidi Hautala and Lara Wolters for the invitation to be with you all today, and congratulations to the Commission for taking on this challenge and to Commissioner Reynders in particular for his leadership.
March 2022 |
Shift’s Analysis of the EU Commission’s Proposal for a Corporate Sustainability Due Diligence Directive
The launch of the Commission’s Proposal for a Corporate Sustainability Due Diligence Directive is a truly pivotal moment in our progress towards markets that require and reward sustainable business practices. It builds on the efforts of many stakeholders to advance greater respect by business for people and planet since the adoption of the UN Guiding Principles and the OECD Guidelines over a decade ago.
As the architect of the UNGPs and our founding chair, John Ruggie always said, “the GPs are not merely a text; they were intended to help generate a new regulatory dynamic in which private and public governance systems play mutually reinforcing roles and move us towards a more effective global regime.” In the last few years, we have seen the public regulation side of this dynamic start to advance at the national level – particularly but not only in Europe, creating the need for the EU to help level the playing field on due diligence. The Commission has championed this initiative, as have leaders in the European Parliament, in individual member states, in civil society and in the business and investor community.
As the last week has demonstrated, the EU is a powerful force when it stands up for its values – including respect for the fundamental dignity of those who are vulnerable or whose rights are threatened. At its core, the EU is a market-oriented project; so it is vital that the rules of that market fully reflect and reinforce EU values, including on human rights. Given the scale of the challenges facing us in relation to climate change and global inequality, we need this market alignment more urgently than ever. That is why it is so important not just to get this Directive through (though we certainly need to do that), but to get it right.
The Directive’s stated ambition is to ensure that companies in the single market contribute to sustainable development by preventing and addressing adverse impacts in their operations and value chains. Done right, the Directive is an opportunity to scale quality due diligence processes focused on the most severe human rights and environmental risks; to encourage the creative use of leverage by companies to tackle these risks; to enhance internal governance on sustainability; and to expand pathways to remedy for those harmed. But to seize these opportunities, the Directive must be more firmly grounded in the international standards on sustainability due diligence, the GPs and OECD Guidelines, which EU member states have endorsed and which are informing global developments.
Today, I want to highlight 3 key concepts from the international standards that Shift believes need to be better embedded in the Directive if it is going to meet its own objectives and more clearly align with those standards. The 3 concepts are: Severity, Leverage, and People. I’ll take each in turn.
The Directive needs to use severity of risk to people as the organizing logic for due diligence, not what is closest or easiest for business to address.
Limiting the scope of due diligence on business relationships to a set of narrowly defined relationships – whether that is by tiers in the supply chain or by characterizing them as ‘established business relationships’ – risks creating perverse incentives. It encourages companies to focus on relationships that are important to the business or where the business has existing leverage, but which are not necessarily the source of greatest sustainability risks. And it can even encourage companies to game these definitions to avoid business relationships coming into scope. That’s why states did not adopt that logic in the UN Guiding Principles.
The Commission is rightly concerned about making due diligence manageable for business. The good news is that the international standards already do that, and the past decade of practice shows us how: by prioritizing attention to the most severe risks regardless of where in the value chain they occur and expecting companies to take reasonable steps to use and build leverage to address them.
To make this work, the Directive needs to separate the scope of the duty to do due diligence from the scope of civil liability. Administrative supervision and civil liability are both essential forms of enforcement and we welcome the inclusion of both in the draft. But they are most effective when used in a complementary way. So, through administrative oversight, the Directive can encourage due diligence to the full scope of the value chain, with prioritization based on severity. Then through civil liability, it can provide for remedy for harms in a narrower set of prescribed business relationships, for example established business relationships. Indeed, this complementary approach is what the Parliament itself has proposed. For as long as we continue to tie the scope of due diligence to the scope of liability, we will continue to debate where to draw arbitrary lines in the value chain that limit due diligence, rather than debating how best to incentivize the allocation of corporate resources towards the most severe risks.
The Directive needs to rely less on what is easiest to measure and more on what is meaningful in demonstrating and assessing corporate compliance. In other words, it needs to focus less on contracts and audits, and more on leverage.
There can be no doubt that after the last thirty years, the weight of evidence shows that ‘command and control’ approaches to managing human rights, including labor rights, risks in global value chains have limited impact. At the same time, they generate significant costs both for companies relying on these policing-style approaches but also for business partners that are subject to them. A clause in a contract can be an essential foundation for leverage – but it is only a foundation.
Instead, the Directive should require companies to look at their own potential contributions to generating risks to people – particularly purchasing practices. And it should expect companies to use the full range of approaches to leverage to address the most severe risks, from commercial to capacity-building to collaboration with peers, NGOs and wider multistakeholder initiatives. Companies should target their efforts where they matter most rather than taking a uniform approach to all business relationships regardless of their risk profile.
Importantly the Directive does stress the role of the Board in overseeing due diligence and ensuring that its results inform corporate strategy. This is very positive; we believe it can go further in specifying additional aspects of the governance of sustainability risks that are both measurable and meaningful in assessing a company’s seriousness in this area, such as whether the Board approves high-level targets for human rights and environmental risks, beyond climate targets alone.
The Directive needs to put people, and specifically affected people, more clearly at the heart of sustainability due diligence.
Meaningful engagement with affected stakeholders or their legitimate representatives, including unions, is essential to what makes due diligence under the international standards effective in practice. And it is what differentiates it from transactional due diligence. As John Ruggie said, “you are not looking to buy a piece of property and wanting to make sure there is title to it; you are undertaking a long-term relationship with people whose lives, opportunities and activities you can affect”.
While it may seem challenging to translate this into a legally binding duty, there are several clear opportunities to do so in the draft. The first way is by integrating a requirement forproactive engagement with affected stakeholders into key moments in the due diligence process, particularly during identification and prioritization of impacts and in tracking effectiveness. This would complement the engagement that occurs through complaints procedures, which Commissioner Reynders highlighted, but which is purely reactive in nature. A second way is by going beyond the narrow example of financial compensation to adopt a human rights understanding of remedy, the many forms it can take and the many ways in which companies can play a role in enabling it, starting by asking those affected what would put things right.
So, at Shift, we want to see even more focus on severity, leverage and people. We’ve produced a fuller analysis of the proposal which explains these points in detail and also highlights concerns about the scope of companies covered and about special carve-outs for the financial sector, which you can find here.
In conclusion, we believe this is an opportunity with few parallels. We greatly welcome the Commission’s initiative, and we look forward to working with all stakeholders as the debate moves forward to strengthen the Directive in line with its own ambitious aims and with international standards.
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 of potential or actual adverse human rights and environmental impacts connected with companies’ own operations, subsidiaries and value chains.
( Corporate Sustainability Due Diligence Directive, Recitals at (14))”
Shift welcomes the EU stepping into a leadership position on the need for mandatory measures to increase the breadth and depth of human rights and environmental due diligence, given the urgency of the sustainable development challenges facing us all.The Commission’s initiative is an opportunity with few parallels in terms of its potential to drive sustainability into the heart of how business gets done.
( The UN Guiding Principles on Business and Human Rights (UNGPs) are the authoritative global standard on how to prevent and address business-related human rights harms. They expect states to adopt a smart mix of measures, mandatory and voluntary, national and international, to drive meaningful change in business behavior. The OECD Guidelines for Multinational Enterprises (OECD Guidelines) are aligned with the UNGPs and cover a broader range of topics in addition to human rights, including the environment, and are supported by general and sector-specific guidance. The ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy reinforces these expectations specifically in relation to due diligence regarding labor rights.)”
With the right framing, a Directive could advance better outcomes for people and planet by scaling quality due diligence processes that focus on the most severe human rights and environmental risks, encouraging creative forms of individual and collaborative leverage by companies to tackle risks across their value chains, enhancing internal governance and accountability on sustainability risks, and expanding pathways to remedy for those harmed by business activity. However, for these significant opportunities to be realized, and for the Directive to meet its stated ambition, it is critical that the Directive is firmly grounded in the key international standards on sustainability due diligence adopted by the UN and the OECD.
In analyzing the Commission’s proposal, we compare central elements of the draft Directive against the soft law standards contained in the UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises. We focus on those areas where we believe that a lack of alignment with the international standards will hinder the Directive’s ability to meet its stated objectives, and we provide our initial thoughts on how they could best be addressed. This analysis presents our five key reflections on the matter.
As the move towards mandatory human rights and environmental due diligence (HREDD) measures gathers pace in Europe, it is timely to look ahead to how accountability for new corporate duties may be enforced. A wide range of stakeholders are interested in how to ensure that these new measures have their intended result: that is, that they lead to better outcomes for people and planet. The design of eventual enforcement measures will play a key role in answering this question.
In response to this, Shift and the Office of the UN High Commissioner for Human Rights (OHCHR) decided in early 2021 to collaborate on a project to explore effective accountability for new mandatory HREDD regimes, grounded in the UN Guiding Principles on Business and Human Rights (‘UNGPs’), through two complementary approaches: civil liability for certain human rights harms and administrative supervision. We focused in particular on the role of administrative supervision of new corporate duties, which has received less attention in the debate so far yet will clearly form an important part of national approaches under recently adopted legislation in countries like Germany, the Netherlands and Norway, as well as under future European Union (‘EU’) legislation.
This policy paper has three objectives:
Exploring administrative supervision as a complement to civil liability for harms for enforcing corporate duties to do HREDD, with potential relevance to many jurisdictions, including beyond Europe;
Looking ahead to how effective enforcement of HREDD can be given strong foundations in new EU legislation to support effective transposition into national laws;
Developing practical guidance for policy-makers in Europe on how to avoid common pitfalls in other areas of corporate regulation and what needs particular emphasis in designing administrative supervision of new HREDD duties.
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