Companies are increasingly exposed to the financial risks associated with abusing human rights. With mandatory due diligence on the rise, it is time for a robust approach to upholding human rights. Many global companies have faced allegations of abusing human rights, either directly or indirectly. But even in cases where their role appears obvious, holding companies legally responsible is challenging.


Moving from reactive to proactive

Modern approaches to regional legislation are taking a new perspective on corporate accountability for human rights, with a focus on mandatory due diligence and disclosures for human rights. If rigorously enforced, we believe these laws could be proactive steps in upholding human rights, rather than just focusing on backward-looking assessments of liability. Companies can avoid regulatory action, costs, and reputational damage by establishing a robust approach to human rights in advance of these regulations. They can also enjoy the benefits of more efficient operations (particularly amid increasingly complex environments), higher supply chain productivity and enhanced brand value.

Why do we need change?

Current international laws are largely ineffective in holding large multinational corporations liable for abusing human rights. Some of the main barriers to successful litigation can include:
• weak regulatory regimes where abuses occur
• jurisdictional ambiguity because of increasing globalisation
• the separation of legal liability between owners and companies (known as the ‘corporate veil’)
• victims lacking the resources to pursue lengthy legal processes.

As a result, victims of abuse can ultimately be left with no legal recourse.

In 2011, the United Nations’ (UN) Guiding Principles on Business and Human Rights (UNGPs) marked significant progress in clarifying the role of businesses and states in upholding human rights. The subsequent UN Guiding Principles Reporting Framework, which has been incorporated into prominent reporting and management standards, helped the model to work.

However, since the UNGPs and reporting standards are not legally binding, many continue to view them as discretionary. While corporate social responsibility and sustainability reporting have become relatively commonplace (93% of the largest 250 companies globally now publicly report on sustainability issues), the quality of human rights disclosures tends to be inconsistent and non-substantive. This makes it difficult for stakeholders to hold companies accountable. Companies leading the way in this space and demonstrating good reporting practices include H&M, Nestle and Anglo American plc.

Efforts to challenge these barriers and to encourage meaningful disclosures are ongoing. Regulators in the UK, the European Union (EU) and Australia are focusing on more proactive requirements for companies, aimed at stopping abuses from occurring in the first place. This includes mandatory due diligence and disclosure laws.

New legal requirements

The lack of consistent reporting has created demand for mandatory reporting requirements, with a strong focus on demonstrating sufficient due diligence processes. Laws already in place in the UK, US and EU – such as the UK Modern Slavery Act (2015), Section 1502 of the Dodd-Frank Act (2012), the EU Non-Financial Reporting Directive (2014), and the California Transparency in Supply Chains Act (2012) – have inspired some of the thinking in other countries. Some of the new laws and proposals are detailed overleaf.

  • Child Labour Due Diligence Law, 2017 (the Netherlands). This would require companies to determine whether child labour exists in their supply chain and to establish an action plan to address it. The law passed in the House of Representatives, but it is still to be approved by the Senate.
  • Corporate Duty of Vigilance Law, 2017 (France). From 2018, large companies with operations in France must establish and implement vigilance plans, and include this in their annual report. The plan must address the risks of environmental damage and human rights issues. Austria, Italy, Luxembourg and Germany are considering similar initiatives. And non-governmental organisations (NGOs) in Finland are calling on the government to do the same.
  • Responsible Business Initiative, 2018 (Switzerland). Large Swiss companies would be legally obliged to incorporate due diligence across all their business activities (including overseas) to ensure respect for internationally recognised human rights and environmental standards. The bill was adopted in June 2018, but the Council of States is still to vote on it.
  • Conflict Minerals Regulation, 2018 (European Union). Largely inspired by Dodd-Frank, EU regulation requires importers of tin, tantalum, tungsten and gold to comply with and report on supply chain due diligence obligations. This covers whether these minerals originate from conflict-affected and high-risk areas. The regulation takes effect on 1 January 2021.
  • Modern Slavery Act, 2018 (Australia). Similar to the UK, the Australian Modern Slavery Act requires companies to report annually on the risks of modern slavery in their operations and supply chains. It also includes the actions taken to assess and address those risks. The act took effect on 1 January 2019.

Costs and benefits for companies

For many companies, compliance with the new requirements will necessitate material operational and disclosure changes. This inevitably comes with costs, but the benefits should not be overlooked. A robust approach to ensuring respect for human rights will help companies to avoid potential legal penalties. But it will also offer competitive advantages by smoothing operations in complex environments, increasing supply chain productivity and protecting brand value. While the laws mentioned in this article are all within developed countries, many of the laws target large multinationals and they have a strong focus on supply chains.

As a result, the impact should ripple into other parts of the world – ideally raising standards across regions and facilitating the promotion and enjoyment of human rights globally.

However, the success of these efforts depends on how rigorously the laws are enforced, and it is still early days for many of them.

We are encouraged by the action taken thus far and we are optimistic about further progress.

We will be closely watching the response of regulators and the companies in which we invest.

Summary

Emerging corporate human rights laws demonstrate a new way of thinking. They are moving away from backward-looking assessments of liability towards demanding proactive approaches that prevent harm. This could result in meaningful change, improving standards globally, while offering competitive advantages to businesses. We are cautiously optimistic as the success of these initiatives depends on rigorous enforcement of the new laws.

Important Information

Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.

United Kingdom: Aberdeen Asset Managers Limited, registered in Scotland (SC108419) at 10 Queen’s Terrace, Aberdeen, AB10 1XL. Standard Life Investments Limited registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Both companies are authorised and regulated in the UK by the Financial Conduct Authority.



Elizabeth Meyer
ESG Investment Analyst – Aberdeen Standard Investments


Aberdeen-Standard

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