Looking Past the E: Mandatory Human Rights Due Diligence in Finance

Updated: May 1, 2021


The coronavirus crisis has had a profoundly disturbing effect on global value chains. This creates renewed urgency but also new opportunities for strengthening human rights and environmental due diligence by multinational companies.

The crisis has revealed the fragility of global supply chains, which have been seriously disrupted due to travel restrictions, lockdowns forcing factories to stop their activities and other restrictive measures related to the crisis. Reliance on geographically distant supply chains has also proved to be a major vulnerability in the light of the medical equipment crisis. Seeing this global challenge, the accountability and responsibility of multinational companies is questioned but not only. Human rights are also considered a key topic linked to financial institutions’ fiduciary duty, risk mitigation and creation of opportunities for financial performance, which request a clearer understanding of expectations towards financial institutions.

Human rights provide the essential social foundation for all people to lead lives of dignity and opportunity. From a societal perspective, it is important for businesses to respect these social foundations and to ban underpayment, child labor, and human right violations. Ending poverty and hunger are the primary goals of moving towards social equality. Ensuring healthy lives and inclusive education promote the well-being and lifelong opportunities for all. Overall, effective due diligence is good for business in general. It enables enhanced supply chain visibility and intelligence; promotes supply protection with reduced risk of disruption due to labor unrest; supplier performance management systems; increased efficiency, reduced employee turnover, improved recruiting and training; improved reputation and credibility.

Photography: Philippe Lanciers

As Human rights due diligence becomes increasingly more important in the corporate sector, it is more important than ever for companies to have good reputation and have already set forth ESG goals of which they closely follow. Human rights norms assert the fundamental moral claim each person has to life’s essentials, such as food, water, health care but also mental care, education, freedom of expression, political participation, and personal security. Mass production in a competitive economic system has led to long working hours, underpayment, and child labor.

When it comes to human rights due diligence, comprehensiveness, connectivity, equity, prudence, and security are extremely important aspects to keep in mind.

Human rights due diligence is a key tool to assess companies negative impact in their operations and supply chain. It should cover the steps taken by an organization to recognize and resolve real and future human rights threats for employees in its practices, supply chains and the facilities it uses. However, most of the programs of due diligence we see today are directed at risk recognition and comprehension, but do not include intervention and prevention. With the current crisis, the duty of care and the pressure from investors for more transparency, we see that human rights have been climbing up the responsible investment agenda over the past 18 months.

During a webinar organized by Arendt on the 24th of February in collaboration with Human Rights & Responsible Business Finance & Human Rights (FaHR), we discussed the approach of companies to due diligence. Businesses function in a world which is increasingly complex and see due diligence as a complex tool to establish. But human rights due diligence as a concept which first requires the proactive identification by businesses of their actual or potential human rights impacts (before these impacts can be prioritized for mitigation based on their severity) draws on fundamental concepts underpinning key international frameworks.

The UN Guiding Principles on Business and Human Rights are driving these processes and can definitely guide businesses through this complex question. Corporate due diligence require new policies and procedures to be integrated in companies’ operation and supply chains. This process should also take into consideration an often forgotten “multi-stakeholder participation and engagement” in order to avoid tremendous fee in term of remediation.

Some businesses definitely see an opportunity to get ahead and secure a potential long-term competitive advantage moving towards every company taking action to prevent human rights abuses and environmental damage in their global operations and supply chain. However most of the time, human rights due diligence and the assessment of their negative impacts remain a voluntary approach adopted by a small minority of companies.

New national regulations on human trafficking and modern slavery have pushed this question into the agenda but there is a need to further. The European Union is working on a mandatory due diligence legislation that will integrate these aspects of human rights along with the aspects of governance and of environment. Such an initiative would be intrinsically linked to the Green Deal as a central component of sustainability. This legislation would have important advantages, such as creating a level playing field among all companies operating on the EU market, bringing legal clarity, and establishing effective enforcement and sanction mechanisms, while possibly improving access to remedy for those affected, by establishing civil and legal liability for companies.

Alongside the sustainable finance agenda, we also see the notion of adverse impacts introduced with the Sustainable Finance Disclosure Regulation (SFDR) and whose now consider not only the environmental impacts we have on our environments but also the social impact and ethical impacts.

It is important to note the differentiation between sustainable finance and human rights within business. Sustainable finance is the hard law that incorporates business and human rights within. Companies should be aware of the different roles that human rights take on depending on the employee’s level within the company. Employers and owners/ operators must focus on human rights statement policies and management systems, robust risk identification, and take action when it comes to reporting how impacts are addressed. Directors and upper-level management should be able to communicate results and be transparent with the rest of the company while enabling remediation and paying compensation. Investors should leverage their influence to investee companies.

Different roles have different due diligence duties, but overall, the goal is to reduce employee turnover and guarantee and safe and healthy working environment. In terms of the director’s duty of care, there should be a highlight on shareholders vs other stake-holders, and their personal due diligence duty including implementing human rights agenda. Now that motions have been made within legislation in many countries and at the European level, affecting not only companies but also financial market participants and investors, the world as a whole is moving in the right direction in regard to human rights due diligence. The path towards more accountability and transparency is opened.

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