In House Perspectives on Human Rights and Environmental Due Diligence and Reporting in Global Supply Chains and Implications for External Counsel

Looking back at the last 10 years, it is apparent that many companies have been getting on and doing value chain due diligence in line with their business models. In parallel, the legal environment has shifted from voluntary ‘soft’ law approaches to include more ‘hard’ law requirements involving harder-edged enforcement mechanisms. This shift has in some ways encouraged companies to take a less creative and more compliance-based approach to ESG issues and opportunities. At the same time, there is still need and opportunity to engage with sustainability in positive ways as a business, and to learn from how this has played out in practice.

Internal stakeholder engagement remains a key pillar to undertaking human rights due diligence and reporting in companies.

No one size fits all in terms of approach, but internal engagement generally starts with a saliency assessment of the human rights risks particular to the company in question. The assessment can then drive who you should engage with internally. Working groups play a key role in this, by bringing stakeholders together and driving forward actions. Legal, procurement, risk, public and government affairs, sustainability and corporate communications teams would usually be in the room, alongside any relevant specialist teams that are specific to your particular business, such as technology or product development teams. Being clear and concise about human rights impacts can help manage effective engagement with the broader stakeholders. For example, by finding the top 10 risks everyone recognizes, articulating them in language which resonates with their business areas and starting to prioritize the issues from the saliency assessment.

Business have had to get to grips with new ways of seeing risk.

The EU’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D) represent a huge shift because, traditionally, risk was addressed through the lens of risk to the business - not risk to wider stakeholders. This shift towards double materiality has meant finding new ways of looking at risks and challenges in evaluating them. For example, financial risk can be more easily quantified and bounded, but finding clear and precise language to describe impacts on society and the environment can be much harder to do and to assure. The key is to include sustainability considerations early when the strategic decisions are being made, rather than after the fact, to avoid these considerations devolving into box ticking.

Understanding of impacts may be partial, but this is not a blocker to action.

In asking “how much due diligence is enough?” as part of the process of addressing human rights concerns, it’s necessary to recognize that understanding may be partial and incomplete. One example is a jurisdiction where homosexuality has been recently criminalized, which creates a risk for hotels and airlines operating there that isn't on risk registers yet but soon will be. The right processes involving forward-looking and proactive due diligence can help address these gaps. AI can also be used to provide inputs on salience and potential mitigants, to help inform human assessment. However, many of these are questions of judgment, where human assessment is also required. Realistically however, companies won't always get it right, or an unexpected external factor will come in (like sanctions), meaning that having sufficient remedies available is important.

Altering your approach can help you get better results.

Legislative value chain due diligence demands have prompted many businesses to send out supplier questionnaires which can be over-long and poorly worded. Is there a way to encourage suppliers to be more honest and forthcoming in their disclosures? Some companies are taking an innovative approach with behavioural science techniques guiding a fresh look at the communications that go out to suppliers, and re-writing them to be more personalized, clearer on the request, provide explanatory context and offer further assistance if there are questions. This has yielded some positive result, and overall underlined the need to build relationships in order to improve disclosures, as there will be sensitivities about sharing issues with large customers.

Multi-stakeholder initiatives are vital to driving change.

Companies generally default to wanting a clear rule that can be applied consistently - but some ambiguity can create space for more creative approaches. Having a wider stakeholder group can encourage more of this kind of thinking and the development of pragmatic solutions. Sharing experiences (subject to competition law requirements) between companies can also help find solutions without reinventing the wheel every time. Some degree of soul-searching will likely be need in response to the deregulatory moves coming from some jurisdictions, and there can be a real issue with mandates being hoovered up by others where a company has turned down work due to human rights concerns.

Embracing uncertainty can help navigate the risks.

Risks should be seen increasingly as interconnected - climate, human rights, water, nature etc. – and this emphasizes the need to talk more about uncertainty and partial data. Focus should be on making decisions in the right way at the right time, and engaging in stakeholder initiatives, as we can't predict everything. It is also important not to criticize people for making decisions where they have been made in the right way (even if the course of action ultimately turns out to be wrong) and allowing them to make further decisions to make things better, as there may not ever be a single right answer. An example of a radical change in direction includes Qatar’s response to allegations of forced labour as part of their World Cup preparations. A whole new team was brought in following the indentured labour allegations, including John Ruggie (architect of the UN Guiding Principles), to set up a framework to address the issue head on and develop an approach that provided a remedy for workers.

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