Change Agents: Standard Setters

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.

Also Read

March 2022 |

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

Read

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.

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.

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.

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.