Investors demand greater human rights due diligence: How can companies adapt?

By Elodie Grant Goodey, with International Conflict and Security Consulting Ltd (INCAS)

Ten years ago, companies and investors viewed due diligence through a prism of risks to their assets and businesses. The introduction of the UN Guiding Principles on Business and Human Rights (UNGPs) gradually but permanently shifted the culture of risk management to consider the risks to the people associated with business activities. Today, international investors expect companies they work with to perform human rights due diligence and uphold relevant normative standards. It is crucial for companies to adapt to these new trends in corporate due diligence and to keep pace with shifting investor requirements.

The UN Guiding Principles on Business and Human Rights, adopted in 2011, set out guidelines for states and companies for preventing, addressing and remedying human rights abuses committed in business operations. The Guiding Principles rest on three main pillars: (i) states' obligation to protect human rights (ii) businesses' obligation to comply with applicable laws and respect human rights and (iii) the need to provide appropriate remedies when human rights obligations are not met.

Within the UNGPs framework, the concept of human rights due diligence (HRDD) was defined as a risk management process that a company must follow in order to "identify, prevent, mitigate and account for how it addresses its adverse human rights impacts." Human rights due diligence consists of four key steps: assessing actual or potential human rights impacts, integrating and acting on the findings, tracking responses, and communicating how impacts are addressed.

In 2021, the Guiding Principles, although they are not legally binding, are widely seen as the standard that international companies should achieve. Thus, the UNGPs have acquired the informal status of 'soft' or normative law, inspiring a host of similar international standards.

?·????????The OECD Guidelines for Multinational Enterprises, for example, contain recommendations endorsed by participating governments for responsible business conduct. They also introduce a unique feature, an international grievance mechanism to address complaints between companies and individuals who feel negatively impacted by irresponsible corporate practices.

?·????????The International Finance Corporation (IFC) Sustainability Frameworks, updated in 2012, offer strategies to mitigate adverse business impacts, signal that human rights due diligence may be appropriate in high-risk projects, and extend to all investment and advisory clients who go through IFC's credit review process.

?·????????Similarly, the Equator Principles are a risk framework adopted by more than 100 IFIs in 37 countries to assess and manage environmental and social risks and provide a minimum standard of due diligence. The Equator Principles Financial Institutions also commit not to provide project financing or corporate loans to clients who do not, or are unable to, comply with the Principles.

Institutional investors, too, have become more sophisticated in their understanding of human rights risks in business. In 2013, a multi-stakeholder investors' initiative, the Corporate Benchmark on Business and Human Rights (CHRB), established an open and public external mechanism for assessing companies' human rights performance. Its 2020 report highlights that companies who demonstrate willingness and commitment to take human rights seriously remain a minority, and there is a disconnect between human rights commitments companies make and the performance they deliver.

It is clear that more and more investors expect companies to conduct visible due diligence in their operations. In fact, investors in Europe and North America lobby for and support new legislation imposing mandatory human rights due diligence standards. For example, in April 2020, the Investor Alliance for Human Rights (IAHR) published a report calling on governments to develop regulatory measures that would require companies within their jurisdictions to perform human rights due diligence. The report stressed that a voluntary approach to HRDD was not enough and argued that risks to human rights created greater reputational and financial risks to businesses. This call for stronger regulation was endorsed by 105 international investors, worth over $5 trillion in combined assets, including Legal & General Investment Management, BMO Global Asset Management, and Aviva Investors.

When the European Commission committed to introducing EU-wide legislation mandating businesses to respect human rights and the environment, the IAHR expressed support for these efforts. Portfolios with companies that show greater responsibility in human rights due diligence outperform others, according to the IAHR, and binding legislation would enable investors to complement their own influence with companies in order to drive change.

Investors have also shown enthusiasm for national legislation that aims to impose mandatory minimum HRDD standards. For example, five major Swiss business associations and 27 investors backed the 2019 bill introducing an HRDD regime in Switzerland. In Australia, investors filed statements in support of the 2018 Modern Slavery Act, and in the U.S., investors called on the U.S. Securities and Exchange Commission to mandate corporate disclosure of human rights information and ESG practices.

This commitment to human rights among international investors means that they will expect companies to demonstrate approaches to HRDD that are as thorough and systematic as health and safety regulations. External reporting on human rights performance, through mechanisms such as CHRB, will soon become the norm. In fact, HRDD is well on its way to evolving beyond an industry-wide expectation to a regulatory requirement in some countries.

?In order to satisfy investor demand for greater HRDD commitments, companies should consider adopting the following strategies:

?·????????Defining and regularly updating what the UNGPs and relevant regulations means for HRDD in practice for their key functions,

·????????Supplementing internal considerations of risks to the company with considerations of risks to and impacts on rights-holders across their business activities and relationships,

·????????Recording and monitoring progress on human rights risks for the company as a whole, and ensuring that due diligence requirements are effective for the supply chain,

·????????Considering what the trend toward mandatory HRDD means for the company as a supplier to customers who wish to strengthen their own supply chain due diligence and may therefore ask the company about its HRRD practices.

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