Remarks by Shift’s VP, Rachel Davis at the event “EU Human Rights and Environmental Due Diligence in Global Value Chains”, hosted by the EU Parliament Working Group on Responsible Business Conduct

March 2, 2022

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.

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.

“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.

1. Severity.

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 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”

2. Leverage.

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.

“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.

3. People.

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 for proactive 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.   

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 of potential or actual adverse human rights and environmental impacts connected with companies’ own operations, subsidiaries and value chains . Group 33 Created with Sketch. ( 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 . Group 33 Created with Sketch. ( 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.

Enforcement of Mandatory Due Diligence: Key Design Considerations for Administrative Supervision

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:

  1. 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;
  2. Looking ahead to how effective enforcement of HREDD can be given strong foundations in new EU legislation to support effective transposition into national laws;
  3. 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.

Statement of Cooperation between EFRAG and Shift

The PTF-ESRS announced the signing of a Statement of Cooperation with Shift. Both organizations will put together their experience and expertise to encourage the swift development of European sustainability reporting standards in the social domain and at the same time the progress of converged standards at international level. Each organization will contribute to key technical projects of its counterpartin the social domain.

Audio | Getting Contractual Provisions on Human Rights, Right


As the mandatory due diligence debate heats up in Europe and we look ahead to more countries turning the responsibility to respect into a corporate duty, companies will increasingly need to focus on setting clear expectations of their business partners. Putting the right provisions into contracts is going to become even more important.

In this conversation, Shift’s Rachel Davis and John F. Sherman III discuss a recent project of a Working Group of the Business Law Section of the American Bar Association (ABA) that is trying to get ahead of the trend of new legislation and put companies on the right path in how they approach the role of contractual requirements.

You may also read more about the Model Clauses in a viewpoint by John Sherman, here.

This episode’s speakers


Rachel Davis is one of Shift’s co-founders and has led work at Shift over the last decade on standard-setting, human rights and sports, financial institutions, conflict and international law.

As Vice President, Rachel shapes our strategy and oversees a range of our collaborations with companies, governments, investors, civil society and other partners. Rachel leads Shift’s work to influence STANDARD-SETTERS of all kinds to integrate the UN Guiding Principles into the rules that govern business, including engaging with governments and the European Union on mandatory human rights due diligence. Learn more


As Shift’s General Counsel and Senior Advisor, John F. Sherman III focuses on the role of corporate lawyers in the implementation of the Guiding Principles in their role as wise legal counselors.

John is an internationally recognized thought leader on this subject. He chairs the business and human rights working group of the International Bar Association. He writes frequently in professional and academic journals and is a sought-after speaker at legal conferences and workshops, advocating for lawyers’ role in ensuring companies do business with respect for human rights. John is a founder of the IBA CSR Committee and was its co-chair from 2008 to 2010. Learn more

Legislating for Human Rights Due Diligence: How Outcomes for People Connect to the Standard of Conduct

As the move towards mandatory due diligence measures gathers pace in Europe there are many important points being debated about how best to turn the expectations in the UN Guiding Principles on Business and Human Rights (UNGPs) into a binding corporate duty. An important point of contention concerns the relationship between requiring companies to carry out human rights due diligence (HRDD) processes and the outcome of those efforts in human rights terms.

HRDD is often characterized as an ‘obligation of means’ – meaning that it is the quality of the process that matters. This is often contrasted with an ‘obligation of result’ – meaning that it is whether or not you achieve a particular outcome that matters. Treating this as a strict binary, some stakeholders assert that results are therefore never relevant to an assessment of the quality of a company’s due diligence. Meanwhile, others argue that results should be definitive in such assessments. At Shift, we are committed to helping advance a constructive discussion about mandatory HRDD. We think both positions miss some critical nuance in how due diligence-based standards of conduct typically function in practice, and in how the concept of due diligence is used in the UNGPs. This matters if we want to ensure that new legislation is going to be as effective as possible.

The responsibility to respect human rights is a standard of conduct – a level of behavior that we expect companies to meet, reasonably adapted to the specific human rights risks connected to their operations and value chain relationships. The intent of this standard is to prevent and address harms to people; due diligence is the means through which the UNGPs expect companies to achieve that objective (as stated in the commentary to Guiding Principle 15 Group 33 Created with Sketch. ( Business enterprises need to know and show that they respect human rights. They cannot do so unless they have certain policies and processes in place. Principles 16 to 24 elaborate further on these. ) ).

The UNGPs adopt a common sense understanding of the term due diligence and connect it to the objective of preventing and addressing harm. As the definition in OHCHR’s Interpretive Guide states:

Due diligence has been defined as “such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case.” In the context of the Guiding Principles, human rights due diligence comprises an ongoing management process that a reasonable and prudent enterprise needs to undertake … to meet its responsibility to respect human rights

In other words, HRDD is not just a set of processes disconnected from outcomes: HRDD aims to avoid specific harms and should be appropriately adapted to that task. It may not always succeed in doing so (as discussed further below), but that is its objective. It follows that the outcomes of due diligence will always be a relevant factor in assessing the reasonableness or adequacy of due diligence in any particular case.

This means that any legal definition of a new corporate duty should logically start with what the standard of expected behavior is intended to achieve – respect for human rights – and make clear that due diligence is the means through which that expectation should be met. It should also make clear that the ‘outcomes’ (or results) of human rights due diligence that are relevant are the outcomes for people. Developing a policy commitment is not a ‘result’ in and of itself, nor are carrying out audits or conducting training for staff. The fact that they may be more easily measurable should not lead to confusion about what they actually demonstrate. They are activities that can indicate that a company is seeking to meet the standard of conduct, but they are not, without more, evidence of outcomes for people.

In our work at Shift to support the development of effective due diligence requirements, we have found it helpful to highlight two ways in which the outcomes of HRDD are relevant to assessing the reasonableness of a company’s efforts. The first is about outcomes in a specific case; the second is about outcomes over time.

First, there are many legal standards that involve assessing the ‘reasonableness’ of a person’s conduct relative to a particular risk by considering both the objective of the standard and how a person seeks to meet it in practice. For example, consider how we would assess whether a person met the standard of ‘driving safely’ in a specific case. We would of course consider how a person drove the car, but our assessment of whether they were indeed driving ‘safely’ would not only depend on whether they checked their mirrors, stopped at red lights and wore their seatbelt, but also whether they had any accidents or broke the speed limit. In other words, we would consider both how they drove and the outcomes of their driving. If they had an accident, and we were trying to determine whether they caused or contributed to it, we would look at the overall quality of how they were driving, as well as any third party or contextual factors, to determine whether they failed to live up to the standard of expected conduct in those specific circumstances.

The second way in which outcomes are relevant concerns the nature of due diligence as an evolving standard of conduct. Legal standards that rely on an assessment of what is ‘reasonable’ behavior are designed to evolve over time; what is considered safe driving today will look different as our understanding of what is more or less effective in preventing road accidents also evolves. This is why tracking the effectiveness of a company’s human rights efforts is a vital step in due diligence: it helps ensure that due diligence is not reduced to endless cycles of the same processes that produce no meaningful change in outcomes for people over time. This is also why Guiding Principle 20 Group 33 Created with Sketch. ( In order to verify whether adverse human rights impacts are being addressed, business enterprises should track the effectiveness of their response. Tracking should:
(a) Be based on appropriate qualitative and quantitative indicators;
(b) Draw on feedback from both internal and external sources, including affected stakeholders.
emphasizes the role of feedback from affected stakeholders, because a company’s understanding of the effectiveness of its due diligence efforts needs to be informed by the perspectives of those who are or may be impacted. 

Clearly then, the outcomes of due diligence do matter in assessing its reasonableness or quality. However, there will be situations where due diligence is judged to be appropriate – it may even have been considerable and extensive – but impacts still occur.

Clearly then, the outcomes of due diligence do matter in assessing its reasonableness or quality. However, there will be situations where due diligence is judged to be appropriate – it may even have been considerable and extensive – but impacts still occur. For example, a company may have a strong non-discrimination policy in place, supported by extensive training and awareness raising about the risks of gender, racial and other forms of bias; it may have and use accountability and disciplinary measures to incentivize compliance with and address breaches of the policy; it may have effective grievance mechanisms that are trusted by complainants; it may have leaders that are themselves diverse and demonstrate respect for others in practice; and yet it can still be that someone in the company sexually harasses another person or makes a hiring decision informed by racial prejudice. So due diligence must manifestly aim at achieving the outcome of no harms; however, the occurrence of a harm is not in itself sufficient evidence that the due diligence was inadequate.

But this becomes more challenging if harms recur or persist. While a due diligence standard allows that it can take time to achieve improved outcomes, particularly in complex cases involving multiple actors and systemic impacts, at some point it is not possible to maintain that a company’s due diligence processes are appropriate to the nature of a specific impact if the same harms continue to happen without any change in the company’s approach. In such cases, the severity of the harm will be a critical factor in determining what is a resonable timeframe for seeing progress.  

In conclusion, focusing on a binary between a legal obligation of ‘means’ versus one of ‘results’ risks oversimplifying the relationship between process and outcomes in assessing the quality of a company’s HRDD. Instead, it may be more helpful to explore the various ways in which the outcomes of due diligence will be relevant to assessing its reasonableness in practice and how this can be appropriately reflected in legislation. This is a critical conversation to have if we want to design effective laws that will set the right incentives for business while ensuring that new corporate duties actually lead to improved outcomes for people in practice.

Towards ‘Sustainability Due Diligence’: Synergies between Environmental and Human Rights Due Diligence

Today in 2021, there should be little need for a discussion on whether human rights and the environment are intrinsically connected. The question is rather, how can businesses best address risks to people and planet in a holistic way and how can the policy environment enable this transition?

The question is rather, how can businesses best address risks to people and planet in a holistic way and how can the policy environment enable this transition?

Companies operating today can no longer treat their climate, other environmental and human rights risks in silos: there are too many interconnections between these areas for this approach to work. Rather, what we need is for companies to be empowered, equipped and incentivized to adopt a comprehensive sustainability approach to risks to people and to the planet. The upcoming EU legislation under the Sustainable Corporate Governance Initiative offers a golden opportunity to design a due diligence structure to do just that. And importantly, there are already examples of harmonized due diligence that can serve as a foundation on which new legislation can build.

Here we offer some key reflections that we believe can help inform a harmonized due diligence obligation.

We have applicable international frameworks already

The UN Guiding Principles on Business and Human Rights (‘UNGPs’) provide a clear and authoritative reference point for what is expected of companies when it comes to human rights due diligence. The OECD Guidelines for Multinational Enterprises (‘OECD Guidelines’) echo the UNGPs’ expectations on human rights and extend the due diligence framework set out in the UNGPs to environmental impacts and risks (as well as other relevant risks). An overarching 'sustainability due diligence' Group 33 Created with Sketch. (This term draws on a research-based concept of sustainable value creation within planetary boundaries, as described further in the SMART project’s reform proposals for EU company law and corporate governance.) framework should clearly build on these soft law due diligence standards and methodologies, and create further connections and synergies between them.

An overarching ‘sustainability due diligence’ framework should clearly build on these soft law due diligence standards and methodologies, and create further connections and synergies between them.

Companies navigate the relationship between international expectations and national requirements in both areas

In the area of human rights, companies are expected (under the UNGPs and OECD Guidelines) to look at internationally recognized human rights standards set out in core UN and ILO instruments which inform their due diligence approach and define the baseline against which they assess their impacts on people.

National laws also regulate human rights: they may compel company actions in a range of areas, such as discrimination, labor arrangements and health and safety. However, if these standards fall below, or conflict, with international standards, companies are still expected  to meet, or seek to meet, international standards. Notably, the UNGPs expand these expectations to the company’s business relationships, whereas applicable law typically focuses on the company’s own operations. 

We find a similar picture when looking at the environmental side. Companies are expected under the OECD Guidelines to take due account of the need to protect the environment – referencing in turn principles and objectives contained in international agreements. Similarly, companies can rely on national environmental laws, but this is often insufficient on its own to meet international environmental expectations of business – and, again, may not extend beyond the company’s operations.

Of particular note, a recent court case in the Netherlands held an energy company (Royal Dutch Shell) to international climate standards (the 2015 Paris Agreement) rather than to national standards. The court also relied on international expectations contained in the UNGPs, rather than applicable national law, to conclude that the company had a responsibility for scope 3 emissions, beyond its own operations.

In both areas then, companies are increasingly accustomed to navigating international and national standards.

In both areas then, companies are increasingly accustomed to navigating international and national standards. On the environmental side however, and in contrast to the human rights side, there is no comprehensive body of international standards on the protection of the environment. This can be addressed by EU regulators defining the adverse environmental  impacts that companies should be assessing as part of their due diligence and specifying the key principles of environmental law that companies should have regard to in carrying out their due diligence (such as the precautionary principle).

Growing convergence around the scope of responsibility

Companies are expected to take a full value chain approach to human rights due diligence under the UNGPs and the OECD Guidelines. (This full value chain approach is coupled with a specified method for prioritising impacts within the value chain, as further described below). The scope of due diligence extends to impacts that may be directly linked to their operations, products or services through their business relationships. For environmental due diligence, a similar full value chain approach is expected under the OECD Guidelines. Companies should incorporate both direct and indirect environmental impacts connected to their operations into their due diligence. There is also a growing consensus that individual methodologies used for specific environmental areas (such as water, greenhouse gas emissions and biodiversity) should cover impacts beyond a company’s direct operations and tier one suppliers. Taking a full value chain approach to sustainability due diligence is becoming the expectation.

Not only looking at risks to business – but also risks to people and planet

The risks companies will identify through their due diligence will look different – depending on whether they are viewed from the perspective of people, the planet, or the business.

In the human rights space, companies are expected to look at risks to people from the perspective of those who are or may be affected, using international human rights standards. Similarly, in the environmental space, companies are expected to look at risks to the environment from the planet’s perspective – meaning that they need to consider environmental impacts whether or not they also pose risks to the business. This is where new legislation can provide greater clarity for companies, in defining what would constitute an adverse environmental impact.

Beyond this, by bringing these areas together under one ‘sustainability due diligence’ umbrella, we have the opportunity of more clearly understanding the inter-connections between these impacts.

Beyond this, by bringing these areas together under one ‘sustainability due diligence’ umbrella, we have the opportunity of more clearly understanding the inter-connections between these impacts. For example: impacts on the environment and the climate that, over a longer timeframe, will manifest as impacts on human rights; or impacts on human rights that can be mitigated but in a way that harms the environment in the immediate term. This being said, we also need to ensure that bringing these areas together under one umbrella does not result in the dilution of environmental risks which do not have immediate human rights impacts.

Potential to take a longer term view of risk

One point to consider when looking at environmental and human rights risks together is that companies commonly use different timeframes and geographic locations for assessing them.

Looking at risks to people and planet today will yield a different result than looking at impacts that could occur in a year, in ten years or in a generation’s time.

Looking at risks to people and planet today will yield a different result than looking at impacts that could occur in a year, in ten years or in a generation’s time. The timeframe for assessment of human rights impacts tends to be more immediate, with a focus on human rights impacts that could occur in the short- or medium-term. Due diligence can also include longer-term impacts (e.g. from the future decommissioning of a project or transitions to automation), however, capturing long-term human rights impacts can be a challenge because of limitations in predicting future activities and behaviours. When it comes to environmental impacts, the time horizon for assessing impacts tends to be longer and commonly relies on scientific projection data.

Furthermore, human rights due diligence will typically capture impacts on people close to the company’s site, or those impacted by its suppliers’ operations. Some environmental impacts also have localized impacts on a specific habitat or water source, while others have both cumulative impacts and ripple effects on the environment elsewhere, and/or are global in nature. Where environmental impacts are local, this could more visibly result in local human rights impacts (e.g. impacts on a community’s access to water or sanitation). In contrast, where the environmental impacts manifest elsewhere or are global, this could connect to human rights impacts elsewhere (e.g. communities’ livelihoods impacted by greenhouse gas emissions) – but it is more challenging to identify the specific groups of people affected.

In practice, we are seeing that companies are finding it easier to bring environmental and human rights considerations together under one broader umbrella when both sets of impacts are more localized in nature. New legislation can reflect the differing timelines and locations of where risks may manifest, and help ensure that due diligence enables capturing change over time, both to the risk and to the expected mitigation/action.

Whose views determine which risks to prioritize?

The human rights risks that companies are expected to prioritize for attention are those that pose the greatest potential harm to people. Since human rights risks should be understood from the perspective of those who are or may be affected, the most effective way to conduct due diligence is to conduct stakeholder engagement – with those who could be impacted or their legitimate representatives, or with credible proxies where direct engagement is not possible, as well as with human rights experts. In the environmental space, we are seeing a growing number of companies including elements of human rights-based stakeholder engagement as part of their environmental work – and this is also expected for environmental impacts that result in impacts on people (as evidenced for instance by the European Parliament’s 2020 proposal for an EU legal framework to halt and reverse deforestation).

The opportunity here is to support companies in conducting stakeholder engagement that can inform both their environmental and human rights due diligence, while recognizing where the objectives of, and audiences for, engagement may differ.

The opportunity here is to support companies in conducting stakeholder engagement that can inform both their environmental and human rights due diligence, while recognizing where the objectives of, and audiences for, engagement may differ. Further, engaging on both human rights and environmental risks together can help companies see the interlinkages, develop more nuanced prioritization criteria and methodologies, and inform and explain their prioritization decisions.

What actions is a company expected to take?

The actions that a company is expected to take in response to a human rights impact differs depending on how the company is, or could be, involved with an impact. There are different expectations for action depending on whether a company has caused the impact, contributed to the impact, or whether the impact is directly linked to the company’s operations, products or services by a business relationship. Actions range from ceasing the impact, preventing the impact, building and using leverage (alone or with others) to prevent and/or mitigate the impact (or seeking to do so), and remedying the impact.

Cause and contribution as modes of involvement are also well-known in environmental due diligence. In particular, we often see companies talk about cumulative environmental impacts: how their actions alongside those of other parties can combine to create environmental impacts. This is akin to contribution in parallel, an accepted mode of involvement in the human rights space. The actions expected for instances of cause or contribution are similar to the human rights space: cease, prevent, and/or mitigate the impacts and remedy the contribution.

Although not necessarily framed as such, a number of environmental methodologies expect companies to build and exercise leverage. But there may be some areas of distinction to consider when it comes to remedy. A company’s responsibility to remedy a human rights impact seeks to restore the person to the situation they would have been in, had that impact not occurred, or as close to it as possible. Companies may also be expected to remediate their environmental impacts – with the appropriate remedy being defined by regulation or the applicable international framework. At the same time, when it comes to environmental harm, there may be broader repercussions where environmental degradation has had ripple effects and led to other forms of environmental harm. Where environmental harm results in impacts on people, the remedy expectations of companies are clear. When they have not (or have not yet), the remedy expectations are less clear.

Where environmental harm results in impacts on people, the remedy expectations of companies are clear. When they have not (or have not yet), the remedy expectations are less clear.

A new corporate duty could reinforce the importance of companies using leverage to tackle risks, and articulate what can be reasonably expected of companies in terms of action depending on their mode of involvement with an impact, including what remedy can look like (and to whom it can be delivered) in the environmental space.

Conclusion: Embedding due diligence in governance

As the connections between the ‘E’ and the ‘HR’ of ‘HREDD’ grow, so too will the need for cross-functional structures and discussions that enable companies to take a holistic approach to due diligence. This extends to when companies are setting overarching targets, as well as how they set up their internal accountability and responsibility structures. Synergies should start to happen between functions, budget lines, programming and expertise on these areas within companies. And this in turn will start to inform business models that are viewed as sustainable for the long term – as well as those that are not. New EU regulation can play a pivotal role here in supporting companies to take a holistic approach to sustainability risks, which builds on and amplifies existing methodologies and standards, in a way that is embedded in appropriate governance structures. 

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).