This article originally appeared in this compendium by the Business and Human Rights Resource Centre
As the debate on mandatory human rights due diligence (mHRDD) at the EU-level starts to move from the if to the what and the how, a key concern that policymakers must grapple with is the size of businesses covered by any incoming legislation.
While our work with some forward-thinking small and medium-sized businesses suggests that they boast some significant advantages over their larger counterparts when it comes to realizing their responsibility to respect human rights, legislators will need to act with care not to disadvantage them. The first step would be to anchor mHRDD in the UN Guiding Principles’ understanding that while the responsibility to respect human rights applies to all businesses, the means through which a company meets that standard will vary according to its size.
Here are five key considerations to support such an approach being reflected in new legislative developments:
Half of the world’s population works for a small or medium business
First, let’s look at the numbers: SMEs account for about 90% of all businesses and contribute up to 50% of total employment in the world. That is why, if legislation aims to drive positive outcomes for people in the context of business activity, it must reach the businesses people work for and interact with. What’s more, we see that the support amongst larger businesses for mHRDD increasingly hinges on the inclusion of SMEs in any such regimes, given the interest of multi-nationals in the level-playing field and the increased leverage with resistant suppliers that mHRDD promises.
Prioritization of salient issues
Most stakeholders recognize that companies – regardless of size – need to prioritize their salient human rights issues. For small businesses with limited resources, prioritizing action on the most severe risks to people is even more crucial to get traction. For instance, we’ve spoken to businesses in the apparel, food, retail and cleaning sectors that have made progress by focusing on addressing the problem of low wages, believing this will have knock-on effects on a host of other rights. The expectations hardwired into legislation ought to reflect the need to enable businesses to prioritize action on human rights impacts based on their severity and that the complexity of company processes for identifying and taking action on impacts will be affected by the size of the company in question.
A focus on the quality of relationships with business partners
In comparison to larger businesses, SMEs tend to have fewer suppliers and customers, which can enable deeper and better-quality relationships. In work that we’ve done with forward thinking SMEs, we’ve seen how they often spend a lot more time selecting business partners that are the right fit and putting more up-front investment into finding those who share their values and tend to perform well on human rights. For small businesses that aim to respect people, partnership with suppliers is a necessity not a choice.
However, there is a risk that legislation on mHRDD incentivizes an approach where a buyer ‘polices’ its supply chain through a process of monitoring and social audits. This approach would fail to encourage the right behaviors for any business, but would particularly impact SMEs. As policymakers consider how best to articulate the standard of human rights due diligence, they should encourage practices that focus on relationship-building, not policing, to work towards better outcomes for people.
Expectations on action need to move beyond commercial and legal leverage
SMEs often lack the cold, hard commercial leverage of larger multi-nationals, and must think more creatively. For instance, we’ve seen how one medium-sized business has rolled out programs on freedom of association and worker voice in the most challenging contexts, despite having less than 5% of the product buy from suppliers. This business achieved buy-in through explaining the benefits of the program, and drawing on the trusted relationship it had developed, rather than requiring suppliers to participate.
Under any form of mHRDD, the nature of a company’s involvement with a human rights impact, and the strength of the action it has taken to prevent it from occurring, is likely to determine the assessment of the consequences the company faces. Such assessments must consider the wide spectrum of avenues to effectively influence business partners, rather than honing in narrowly on the extent to which a company has deployed legal or commercial leverage, which SMEs are unlikely to possess.
Respect for human rights is more than a mechanical due diligence process
One of the advantages that committed SMEs have over their larger counterparts when it comes to human rights is a greater facility to nurture a culture that supports people and their ability to speak up for themselves. For SMEs, people truly are their most important asset. The very lack of resources and stretch that skeptics cite as reasons why SMEs may find it difficult to respect human rights means that smaller businesses have to respect, trust, motivate and empower their employees to succeed. From talking to executives in SMEs, it is clear to us that committed leaders are able to instill values of empathy and empowerment through face-to-face interaction with employees, listening to them and modelling desirable behaviors.
Experience shows that even the most sophisticated human rights risk management processes will bear little fruit if they are not fully embedded in company culture, lived by the business’ leaders, and supported by effective governance structures. Here, values-driven SMEs have an advantage and legislation should support that relative strength, setting the expectation not just for a mechanical due diligence process, but one that lives and breathes, informing company behavior and decision-making.
Structuring legislation to encourage and compel companies to adopt and scale rights-respecting business practices and behaviors is no small task. But the legislation will have limited impact for the people that need it the most if it does not consider how best to incorporate SMEs within its scope. Doing so means ensuring an adaptable framework that sets a clear standard of conduct, but allows businesses of all sizes to reach that standard drawing on their unique strengths and expertise.
We are proud to share that Shift’s Senior Advisor, David Vermijs, is among the 40 selected members of the multi-stakeholder task force appointed by the European Reporting lab to produce recommendations on the potential development of EU non-financial reporting standards. This forms part of the preparatory work for a revised version of the EU Non-Financial Reporting Directive, due in 2021.
During the first phase of the project, David is co-leading a workstream that will analyze and assess the conceptual framework for potential reporting standards, including approaches to materiality, linkages to the SDGs, and the structure and types of relevant information.
A revised Non-Financial Reporting Directive and robust reporting standards can create coherence for companies between what they are expected to do and to report when it comes to managing their impacts on both people and the planet. Effective reporting is in particular critical for markets to be able to recognize and reward those companies that are consistently progressing in their efforts to identify and address the most critical risks to people in their operations and value chains.
The EU initiative is therefore both critical and timely. It should also support a move towards more coherent and consistent standards at the global level.
The European debate on mandatory human rights due diligence (HRDD) has gained significant momentum in the last year. A number of national initiatives are coming to a head in late 2020, and the European Commission is launching a formal consultation on a potential EU-wide regime on mandatory human rights and environmental due diligence. We have seen growing business support for mandatory HRDD, from both individual companies and business associations, as well as an increase in joint calls by business and civil society for such measures.
Also Read
October 2020 |
Opening Remarks by John Ruggie at the Conference “Human Rights and Decent Work in Global Supply Chains”
As we approach this critical moment, we have been working hard at Shift to support constructive discussions among government, business and civil society allies about the role and content of new regulation. In particular, we have been engaging with businesses that are supportive of new measures, but have concerns about what shape it might take and what the consequences might be.
In this briefing note, we explore what well-designed mandatory HRDD measures could look like, with a focus on the role of accountability – or consequences – for meeting a new legal standard of conduct. We set out three key considerations that we believe businesses that are committed to meeting their responsibility to respect human rights should keep in mind:
The legitimate role of liability in implementing the UN Guiding Principles
Incentivizing robust HRDD through accountability measures that go beyond liability
Assessing the quality of a company’s due diligence
The UN Guiding Principles on Business & Human Rights are approaching the tenth year since their unanimous endorsement by the Human Rights Council. It is encouraging that their uptake continues apace, not only by businesses but beyond. For example, human rights factors make up the bulk of the S elements in ESG investing, with investors clamoring for more robust metrics. Also, global sports bodies, including the International Olympic Committee and FIFA, have made human rights a mandatory part of their host city agreements.
The UNGPs were conceived to generate an ongoing interactive dynamic of a smart mix of measures – voluntary and mandatory, national and international – that would strengthen the business and human rights regime over time.
But I confess that governments, with exceptions, have been a weak link in this dynamic. So, I am pleased to see action picking up on two significant fronts in the EU context.
The first is human rights due diligence. This is the foundational construct for businesses to identify, prevent, mitigate and account for their adverse human rights impacts – throughout their operations and business relationships.
The experience of the past decade has demonstrated that many multinationals understand the importance and utility of human rights due diligence. But the record also shows shortcomings and weaknesses in implementation.
In response, Germany, like several other governments, is giving serious consideration to making human rights due diligence mandatory, as foreshadowed in its 2016 National Action Plan. Similarly, mandatory human rights and environmental due diligence is on the legislative agenda of the European Commission.
I appreciate that many details still need to be worked out. Perhaps none is more important than the question of liability. It may be helpful for me to recall that the UNGPs foresaw the possibility of liability, and how it might play out in practice. The Commentary to UNGP 17 state that:
Conducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse.
Of course, case-specific facts would also be considered in any such assessment.
A second area that shows progress is the strengthening of non-financial disclosure requirements, including on human rights. Indeed, there is a rush into this space by private international standard setting bodies, large asset managers, alliances of consulting firms and the like, all wanting a piece of the ESG standards market.
Here the EU, as the world’s largest trading bloc, has a golden opportunity to provide authoritative standards, which inevitably would have international spillover effects.
Perhaps there is still time for the Germany Presidency in collaboration with the Commission to establish a measure of policy coherence across the related EU initiatives, so as not to contribute to overwhelming businesses with potentially overlapping or, worse, inconsistent requirements.
Progress on these two fronts would contribute significantly to the overarching concern of this conference with promoting decent work in supply chains.
Indeed, I believe it would go even further and help inform the grand debate taking place on both sides of the Atlantic on the social purpose of the corporation, on the need for it to better serve a broad array of stakeholders in addition to shareholders.
So in conclusion, thanks again, and I wish you every success on the journey ahead.
John G. Ruggie, the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard’s Kennedy School of Government, has served as UN Assistant Secretary-General for Strategic Planning, and as the Secretary-General’s Special Representative for Business & Human Rights. He chairs the Board of Shift.
The Working Group’s project is forward-looking. So are the UNGPs. They embody two core strategic concepts that are as relevant today as they were in 2011 when the Human Rights Council endorsed them unanimously.
The first is leveraging opportunities to drive human rights considerations into everyday decisions by businesses and governments.
The second is the need for a smart mix of measures, national and international, voluntary and mandatory, in order to achieve that aim.
In big picture terms, what guidance do they provide as we look ahead? Let’s look first at leveraging human rights into the mainstream.
Today, there is near-universal consensus on the need to build back better from the worst pandemic in a century, and for many countries possibly the worst recession since the Great Depression. Building back better must not become a slogan for some technical fix. It should serve as a call for a fundamental rethink of how things are done, one which puts people at the center rather than treating them as a factor of production.
In addition, for the first time in a half-century, a serious debate is taking place within the business community itself regarding the social purpose of the corporation. Is it merely an instrument to serve the interests of securities holders? Or is it a social entity that should also serve a broader range of stakeholders, including workers and communities – whether they are next door, at the other end of global value chains, or virtual?
Or take yet a third opportunity, the remarkable rise in ESG investing – incorporating environmental, social, and corporate governance criteria into investment decisions. ESG investing, modest in scale until the 2008 financial sector meltdown, now accounts for close to one-third of all assets under management globally. Virtually every theme under the S in ESG addresses human rights: workplace standards, diversity and inclusion, community relations, and so on. But ESG analysts, data providers and asset managers don’t yet seem to be aware of this. As a result, the widely different metrics they use to measure the S factors make it hard to compare performance across firms and sectors.
In short, we are surrounded by opportunities to drive human rights considerations into every-day decisions by business and governments: building back better, the corporate purpose debate, and ESG investing. Let’s seize them.
Also Read
December 2019 | Video
Keynote Address by John Ruggie at the Conference ‘Business & Human Rights: Towards a Common Agenda for Action’
A smart mix of measures is required to support these transformative opportunities. What would that look like in the context I have sketched out? To make it concrete, let me focus on the EU as an illustration.
A smart mix of measures would begin with consideration of the kind of mandatory human rights due diligence Commissioner Reynders has just described.
It would link the due diligence provisions to the revision of the non-financial disclosure requirements the EU is also undertaking – it makes good sense for the two to reinforce one another. In turn, this means that the materiality construct in the reporting requirement recognizes potentially high impact risks that are emergent but not yet imminent, which is the case for climate change and certain human rights harms.
Furthermore, a smart mix would include drawing on these initiatives to promote greater consistency among ESG standards, for which everyone is clamoring but no authoritative entity is providing.
Finally, this level of policy coherence would provide the EU External Action Service with a robust position for engaging in the ongoing business and human rights debate in Geneva.
Our fragile world is in desperate need of systemic change. Unconnected fragments here and there will not achieve the outcomes we need. Thank you again, and bon voyage to the Working Group as it heads towards a decade of global implementation.
This document contains reflections offered by Shift to the World Economic Forum on its white paper ’Towards Common Metrics and Consistent Reporting on Sustainable Value Creation’. The document is based on Shift’s expertise and experience working directly with companies, standard setters and financial institutions. It focuses on indicators and metrics most relevant to the assessment of impacts on people, and draws on Shift’s work leading the improvement of human rights reporting by companies and Valuing Respect, our current initiative to advance better ways to evaluate business respect for human rights.
Shift, IHRB, The Business & Human Rights Resource Centre and the European Coalition for Corporate Justice have written to Sergio Mujica, Secretary General of the International Organization for Standardization (ISO). In the letter, we make the case for why ISO should not proceed with proposals to revise the ISO 26000 social responsibility standard, nor to establish a technical committee charged with introducing further private standards on responsible business conduct.
The ISO 26000 standard was adopted in 2010 in careful alignment with key international standards on business and human rights, and we are concerned that its reopening will become a major distraction from the development of international and national laws in relation to environmental and human rights due diligence.
Please read the full letter below and share it with your networks.
In February, the European Commission began seeking stakeholder feedback to inform the revision of the EU Non-financial reporting directive (NFRD) as part of its strategy to strengthen the foundations for sustainable investment.
Shift made this submission as part of the consultation, drawing on our work over several years to strengthen human rights reporting standards in line with the UN Guiding Principles on Business and Human Rights.
In December 2019, Shift and the Finnish Presidency to the EU Council co-organized the conference ‘Business & Human Rights: Towards a Common Agenda for Action’, a space where businesses, government representatives and civil society organizations engaged in a multi-stakeholder dialogue to discuss business and human rights and, in particular, a collaborative and constructive way forward on this critical agenda.
In his initial remarks, Professor John Ruggie emphasized that while we often hear the term ‘smart mix’ being employed to mean voluntary measures, the concept is broader and should be understood to include mandatory measures. (Watch the full video)
During the conference, participants discussed the role of state financing in promoting human rights due diligence; the role of regulation in a smart mix to foster business respect for human rights; and the use of collective leverage and cooperation to improve human rights outcomes. The conference concluded with the launch of Agenda for Action -the outcome paper of the conference.
These remarks were originally delivered by Professor John Ruggie at the Conference ‘Business & Human Rights: Towards a Common Agenda for Action’, on December 2, 2019. The Conference was co-organized by Shift and the Finnish Presidency of the Council of the EU.
Many thanks to the government of Finland for convening this timely and important conference.
It is timely because a new European
Parliament has been elected and a new Commission selected. It is
important because we live in a turbulent world that challenges
foundational premises we had been able to take for granted. The European
Union is one of the most significant governance innovations in modern
times. It all began modestly, with six countries coordinating their coal
and steel sectors in the wake of World War II. Today, the EU – whether
it is 27 or 28 – constitutes an economic and social superpower. Now more
than ever, the EU needs to think of itself in those terms.
I am pleased that Finland chose business
and human rights as the focus of its EU Presidency and of this
conference. It leads us to address the people part of the people and
planet challenges faced by all humanity. The conference agenda asks the
question: How do we most effectively advance action on the EU level? My
job this morning is to sketch out the backstory to our discussions and
suggest some strategic directions.
Let me begin with the most basic question:
What is business and human rights all
about? The answer varies depending on the vantage point. In big-picture
terms, it is about the social sustainability of globalization. Some
years ago, my favorite boss, Kofi Annan, said: “if we cannot make globalization work for all, in the end it will work for none.”
Today, people around the world are telling us that we have fallen
short, that the benefits and burdens of globalization have been
unequally distributed within and among nations. The result is public
resentment and loss of trust in institutions of all kinds.
When seen from the perspective of
enterprises, business and human rights is about ways they can recover
trust and manage the risk of harmful impacts. Undeniable progress has
been achieved by individual firms, business associations, and even
sports organizations. But not enough, and not by enough of them.
For governments, business and human
rights is at the core of new social contracts they need to construct for
and with their populations. This includes decent work and living wages,
equal pay for work of equal value, social and economic inclusion,
education suitable to the needs and opportunities of the 21st century, and effective social safety nets to buffer unexpected shocks to the economy or the person.
For the individual person whose rights
are impacted by enterprises, business and human rights is about nothing
more – but also nothing less – than being treated with respect, no
matter who they are and whatever their station in life may be, and to
obtain remedy where harm is done.
My second point is to remind us that
formal international recognition of business and human rights as a
distinct policy domain is relatively recent. At the UN level, the first
and thus far only formal recognition dates to 2011, when the Human
Rights Council unanimously endorsed the Guiding Principles on Business
and Human Rights.
The state duty to protect against human rights harm by third parties, including business; the responsibility of enterprises to respect human rights, regardless of whether states meet their own obligations; and the need for greater access to remedy
by people whose human rights have been abused by business conduct. The
OECD Guidelines on Multinational Enterprises quickly incorporated Pillar
II virtually verbatim.
The UNGPs comprise 31 Principles and
Commentary on what each means and implies for all actors: states,
enterprises, as well as affected individuals and communities. They are
not merely a text. They were intended to help generate a new regulatory
dynamic, one in which public and private governance systems, corporate
as well as civil, each come to add distinct value, compensate for one
another’s weaknesses, and play mutually reinforcing roles—out of which a
more comprehensive and effective global regime might evolve.
That brings me to the key issue of
strategy – how to reinforce and add to this transformative dynamic. The
Guiding Principles embody two core strategic concepts: advocating a
“smart mix of measures,” and using “leverage.” I’ll take them up in
turn.
We often hear the term “smart mix of measures” being employed to mean voluntary measures alone. But that gets it wrong. Guiding Principle 1 says that states must have effective legislation and regulation in place
to protect against human rights harm by businesses. Guiding Principle 3
adds that states should periodically review the adequacy of such
measures and update them if necessary. They should also ensure that
related areas of law, for example corporate law and securities
regulation, do not constrain but enable business respect for human
rights. So, a smart mix means exactly what it says: a combination of
voluntary and mandatory, as well as national and international measures.
A number of EU member states and the EU
as a whole have begun to put in place mandatory measures that reinforce
what previously was voluntary guidance to firms on corporate
responsibility. These include reporting requirements regarding modern
slavery, conflict minerals, and non-financial performance more broadly,
as well as human rights and environmental due diligence. Such
initiatives are aligned with the spirit of the UNGPs, and they are
important steps in adding “mandatory measures” into the mix. Still, many
leave a lot to the imagination – of company staff, consulting firms,
and civil society actors among others. More should be done to specify
what meaningful implementation looks like, in order to avoid
contributing to the proliferation of self-defined standards and
storytelling by firms. Also, with limited exceptions currently no direct
consequences follow from non-compliance. Nevertheless, the ascent of
Pillar I is underway.
Using leverage
A second key strategic concept embedded in the UNGPs is “leverage.”
Here are three examples of how leverage can play into the core question
of how most effectively to advance implementation at the EU level.
First, individual member states and the EU as a whole are economic actors: they procure goods and services, provide export credit and investment insurance, issue official loans and grants, and so on. Each agency involved has particular objectives of its own, to be sure. But in all cases, they should consider the actual and potential human rights impacts of beneficiary enterprises with which they engage.
Second, the UNGPs state that the responsibility of enterprises to respect human rights requires that they avoid causing, contributing to, or otherwise being linked to adverse impacts, and to address them when they occur. This extends throughout their value chains. Of course, all firms, including the suppliers of goods and services within global value chains, have the same responsibility to respect. But parent companies and companies at the apex of producer- or buyer-led value chains should also use whatever leverage they have in relation to their subsidiaries, contractors, and other actors in their network of business relationships. They should establish clear policies and operational procedures that embed respecting rights throughout their entire value chain system. Where leverage is limited it may be possible to increase it, for example by providing incentives or collaborating with other actors.
In turn, home, as well as host states of multinational enterprises, have significant roles to play through laws and regulations that enable and support private international ordering of this sort. Global value chains are exceedingly complex. If parent or lead companies fear that they may be held legally liable for any human rights harm anywhere within their value chains, irrespective of the circumstances of their involvement, it would create the perverse incentive to distance themselves from such entities. It is important that regulation gets the balance right.
A third way in which leverage can play into effective implementation at the EU level is by reinforcing positive trends already underway in the business community, but which need strengthening. Perhaps the most important instance today is ESG investing – investment decisions that combine environmental, social, and governance criteria with financial analytics. ESG investing now accounts for $31 trillion of all assets under management worldwide, or one-quarter of the global total. And while it may not be known to many investors themselves, the S in ESG is all about human rights. It seeks to assess how firms conduct themselves in relation to the broad spectrum of internal and external stakeholders – workers, end-users, and communities. It typically includes such categories as health and safety, workplace relations, diversity and social inclusion, human capital development, responsible marketing and R&D, community relations, and company involvement in projects that may affect vulnerable populations in particular.
But here is the problem: it is now
generally agreed that a major impediment to the further rapid growth in
ESG investing is the poor quality of ESG data provided by raters. Common
taxonomies and templates are still in their infancy and evolving
haphazardly even as demand for ESG products is increasing. This poses
problems for investors who seek ESG opportunities and may be paying a
high price for flawed data, as well as for companies striving to improve
their practices that go unrecognized. The problem is especially severe
in the S category – addressing human rights-related issues.
The EU has developed a comprehensive
taxonomy for investment on climate-related standards, indices, and
disclosure. That should have a significant impact for strengthening the E
in ESG. Also issuing official guidance to the S in ESG investing,
making clear its human rights bases, could have a transformative effect
on global capital markets.
In short, a great variety of
opportunities exists for exercising leverage in order to generate
further positive developments in business and human rights.
Allow me briefly to add two thoughts in closing.
The first is that business and human
rights, by definition, is a domain that requires horizontal vision and
cross-functional collaboration – whether within companies, governments,
or the EU. Within the European Commission the task has been largely left
to the External Action Service, with the support of other
directorates-general. That is too narrow a lens to do justice to the
broad array of challenges, and to have the impact that could be
achieved. One of the singular contributions of National Action Plans for
implementing the Guiding Principles is that they have required the
whole of governments, for the first time ever, to consider business and
human rights as a single policy space. The same holds true at the EU
level.
My other concluding thought concerns the
ongoing negotiations on a binding business and human rights treaty in
Geneva. International legalization is both inevitable and desirable to
help level the playing field in a world of global business. In fact, at
the conclusion of my mandate in 2011, I proposed that governments
negotiate a targeted legal instrument addressing business involvement in
gross human rights violations, coupled with the need for greater
cooperation between states to provide remedy. Some parties objected on
the grounds that this did not go far enough, others that it went too
far. It became the only one of my recommendations that did not get
adopted.
The current treaty process began in
2014. From the outset, I expressed my doubts about attempting to
shoehorn the entire business and human rights domain into a single,
overarching treaty. In my judgment, this is far too complex and too
contested a domain for such an endeavor to produce meaningful results.
Indeed, the risk is that if it were to “succeed” in the sense of being
adopted by some minimum required number of states, it would be by
locking in lower expectations and fewer incentives for innovative
practical approaches than exist today. Nothing I have seen in the five
years of negotiations suggest otherwise.
Having said all that, I do find it
puzzling that the EU has taken no substantive position in these treaty
negotiations. It is puzzling because the EU was an early supporter of
the “smart mix of measures” idea. This leads me once again to thank the
government of Finland for bringing business and human rights to the
forefront of its EU Presidency, with the aim of contributing to a common
agenda for action. I very much hope that Finland’s successors – as well
as the Commission and Parliament – will continue on this path.
Thank you for your attention, and I look forward to our discussions.
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