European Human Rights Due Diligence (HRDD) Legislation – Preparing for the Future

Introduction

Sustainable social development is increasingly viewed as critical to ensure the future stability of the global economy and planet. This often-overlooked element of the ESG (Environmental, Social, and Governance) agenda is becoming more important to global corporates amid growing stakeholder awareness of the issues and the strengthening of legislation in this area worldwide. In Europe, planned changes in region-wide legislation on Human Rights Due Diligence (HRDD) and the January 2023 German HRDD Act will require companies to identify and address human rights in their operations, supply chains, and downstream value chains.

This paper will explain the basic components of HRDD, describe the new legislation, and review what these developments mean for companies with business interests in Europe.

Defining Human Rights Due Diligence (HRDD)

The concept of Human Rights Due Diligence has been gaining global acceptance since the United Nations (UN) issued its Guiding Principles (UNGP) on Business and Human Rights in 2011. The framework, known as the Ruggie Framework, is based on three pillars:

1. The state’s duty to protect against human rights abuses – conducted primarily through new legislation and regulations.
2. Corporate responsibility to protect human rights – going beyond company policies by requiring operational frameworks which activate these policies and make them meaningful and effective.
3. The right of victims to access effective remedies to human rights violations.

Rationale for Advancing HRDD Legislation in Europe

There are a range of reasons behind the current drive for mandatory HRDD laws in Europe.

• Compliance with international standards: There is already guidance from the United Nations[1] and the Organization for Economic Co-operation and Development (OECD)[2] on human rights and responsible conduct, including HRDD recommendations. But this is not formally required in many European Union (EU) countries. Similarly, there exist several related initiatives in the EU, such as the European Green Deal[3] and Global Gateway,[4] which are both focused on sustainable development, but neither mandate HRDD for companies in the region.
• Clarity of expected business behaviour: While many companies are working to ensure their business practices align with global guidance through voluntary initiatives, an HRDD law would provide both clarity on what is required for firms doing business in the EU and level the playing field, i.e., create consistency and legal certainty for companies operating there.
• Provision of incentives to comply: Existing voluntary standards and mechanisms on HRDD do not provide sufficient incentive for corporate behaviour in this regard. So, they are relatively ineffective. In November 2022, one global survey reported that around a third of the largest companies had yet to take any public action to address human rights issues within their supply chains.[5] Formal HRDD legislation would provide the impetus for corporations active in the EU to implement measures and recognise their importance, while also increasing corporate accountability for adverse impacts.
• Supporting broader long-term sustainable goals: Underpinning HRDD are the concepts of openness and fairness, through the protection of human rights. Normalising and standardising the approach and considerations implicit in HRDD measures across the EU should encourage sustainable development around the world and help establish a more just and equitable global business environment.

Details of New European HRDD Legislation

EU countries are leading the way in demands for effective human rights and environmental due diligence. While France introduced legislation in 2017[6] and due diligence reporting regimes recently came into force in Norway[7] and the Netherlands,[8] other European countries are either debating such laws or awaiting regional HRDD legislation.

European Directive on Corporate Sustainability Due Diligence

In February 2022, the European Commission published its proposal for a Directive on Corporate Sustainability Due Diligence,[9] the key aspects of which are as follows:

• Qualifying companies: The proposed Directive will initially apply to all companies domiciled in the EU with more than 500 employees and more than EUR150 million net global turnover; and non-EU domiciled companies active in the EU with a net turnover of more than EUR150 million generated in the EU.
• Additional qualifying sectors: This provides for other companies mainly operating in specified high impact sectors (including textiles, agriculture, forestry, fisheries, food, and mineral resources), including EU companies with more than 250 employees and more than EUR40 million net global turnover; and non-EU domiciled companies with a net turnover of more than EUR40 million generated in the EU.
• HRDD Requirements: Qualifying companies must conduct due diligence on human rights in their operations, subsidiaries, and value chains to examine the impact on workers, communities, and society. The scope of such due diligence extends to both ‘upstream’ impacts, i.e., those which arise in a company’s operations or supply chains, and ‘downstream’ impacts, i.e., those associated with the use and disposal of a product or service by a third party.
• Corporate Measures: Companies are obliged to prevent, cease, or minimise actual and potential adverse human rights impacts by integrating HRDD into their internal policies. They should establish and maintain a complaints procedure, develop, and implement a prevention / corrective action plan and seek contractual assurances from direct business partners, among other measures.
• Enforcement: The Directive requires that EU countries ensure effective enforcement of administrative sanctions for non-compliance. It specifies that pecuniary sanctions will be proportionate to a company’s turnover. The Directive also provides for a civil liability regime, enabling victims of adverse human rights impacts to obtain compensation for damages.

The extraterritorial scope of the Directive means that multinational groups could fall within the scope even if they do not have a physical presence in the EU. This would mean they need to appoint an EU-based representative to function as a liaison with EU supervisory authorities.

German Supply Chain Due Diligence Act

In June 2021, the German Bundestag adopted legislation on corporate due diligence in supply chains, including respect for human rights.[10] It will come into force in 2023, with the key aspects as follows:

• Qualifying companies: The Act applies to companies that have their principal place of business, administrative headquarters, or branch office in Germany based on headcount. It initially covers firms with at least 3,000 employees, and, from 2024, firms with at least 1,000 employees in Germany.
• HRDD Requirements: Qualifying companies are responsible to introduce HRDD along their entire supply chain, including their own operations, contracted partners, and other suppliers.
• Protected Rights: The Act contains 11 internationally recognised human rights conventions that cover the prohibition of child labour, slavery and forced labour, the disregard of occupational safety and health obligations, the disregard of the right to form trade unions, the denial of access to food and water, and the unlawful taking of land and livelihoods, among others.
• Corporate Measures: Requirement to establish a risk management system to identify, prevent or minimise the risks of human rights violations. Complaint procedures are mandatory and there are regular reporting obligations.
• Enforcement: If enterprises fail to comply, administrative fines up to EUR 8 million or up to 2% of annual global turnover can be imposed, in addition to potential exclusion from public contracts.

Corporate Response to HRDD Legislation

Indicators on HRDD Implementation

According to the 2022 Corporate Human Rights Benchmark (CHRB),[11] which examined key human rights indicators related to 127 leading companies in food and agricultural products, information and communications technology (ICT), as well as manufacturing and automotive manufacturing, over half of the companies in all three sectors have improved their scores. This indicates growing momentum around corporate respect for human rights spurred by regulatory action.

However, there remains a significant gap in implementation of HRDD. The survey revealed that while many of these companies have enhanced the first steps of a due diligence process (namely identifying, assessing, integrating, and taking action on human rights risks and impacts), most companies lag behind on tracking and communicating these actions. Meanwhile, half of the companies surveyed by the CHRB still do not meet requirements for initial HRDD processes, as shown in their 2022 data:[12]

General Corporate Response

There have been some concerns by European companies about the advancing legislation, notably on their competitiveness given the cost of introducing these measures. But while there is likely increased short-term burden for these firms, especially those that have not already established voluntary standards, the fair practices that arise from sustainable reforms in the long-term should create savings while promoting their social license to operate.

Most alleged human rights impacts by global companies take place in developing countries. As a result, companies covered by the new HRDD legislation in Europe must engage in responsible and ethical practices along their entire supply chain. For those companies that are already committed to HRDD and making appropriate investments, the following measures are being introduced:

• Developing a Structured HRDD Process: Companies that are seen as best performers of HRDD, scoring full marks in the 2022 CHRB Survey, have a clearly structured framework for their due diligence. For example, Tesco has a five-stage HRDD process: risk assessment, prioritising and identifying leverage, mitigating risks, remediating and grievance mechanisms, and monitoring and communication.[13] This broad due diligence process enables the company to identify and then focus resources in the areas of highest risk, wherever in the supply chain they arise.
• Empowering Suppliers to Conduct HRDD
• Introduce contractual clauses: To reach abuses that may occur further down their supply chain, qualifying companies are introducing supplier codes of conduct and contractual agreements requiring partners with which they have established business relationships to carry out their own HRDD. The CHRB survey revealed that around 33% of the companies surveyed place expectations on their suppliers through such clauses, covering topics such as child and forced labour, land rights, women’s rights, and living wages. One example is General Motors, which requires all suppliers and business partners it contracts with to comply with its zero-tolerance policy on forced labour and apply similar expectations throughout their own supply chains.[14] Ford also requires suppliers to comply with its Supplier Code of Conduct, which outlines obligations for supplier relationships in areas related to human rights, and requests that suppliers enforce a similar code of practice and that subcontractors do the same.[15]
• Develop self-assessment checklists: Some global corporates have developed self-assessment checklists to assist with awareness and early issue identification in their supply chain. For example, Hitachi has created supplier questionnaires[16] and Coca-Cola has established seven specific lists that it circulates as part of its HRDD including plant siting, migrant workers, and child labour.[17] These assessments are conducted at the outset of any relationship, with periodic follow-ups, so that human rights risks can be identified and mitigated.
• Training: To further enable suppliers to conduct sufficiently comprehensive HRDD, companies are improving their processes through providing continued training and engagement. For example, Ford offers a training module covering ‘Due Diligence on Recruitment Fees’ to suppliers located in countries at higher risk for forced labour, with nearly 150 suppliers completing the course.[18]
• Using Third-Party Support: Companies will need to look to third parties experienced in human rights to enhance their HRDD framework and to operationalise the necessary processes. There are many examples of such initiatives in the EU, with Tesco stating that it developed its due diligence process in consultation with external stakeholders, including non-governmental organisations (NGOs) such as the Ethical Trading Initiative, Unseen, and Oxfam.[19] Once established, external support continues to be utilised. Unilever conducted gap analysis of its HRDD framework against external guidance,[20] and Ford uses online assessment tools and due diligence training materials from the Responsible Business Alliance.[21] The EU legislation also permits qualifying companies to rely on third-party auditors to verify business partners’ compliance with the HRDD requirements.

Sectoral Emphasis

There are variations across sectors in terms of how companies deal with supply chain requirements that are part of HRDD legislation, as shown below (based on data from the 2022 CHRB Survey):[22]

While companies may take distinct approaches to HRDD regardless of their sector, there are broad differences between industries.

The food and agriculture sector is performing relatively well in terms of HRDD. The main human rights issue affecting this industry is the vulnerability of the workforce, which often includes women and migrants, with forced labour a concern. As a result, two-thirds of the companies surveyed by CHRB in this sector include a supplier requirement that prohibits restrictions to workers’ freedom of movement. In addition, possibly related to increased consumer awareness about ethical food choices, almost half the food and agriculture companies surveyed have a senior management role responsible for decision-making regarding human rights issues, which is strongly correlated with due diligence performance.

The automotive sector, in contrast, does not have a good HRDD record to date. The issues of concern that persist with this industry and its supply chain include forced labour, a lack of living wages, and restrictions on freedom of association. The reason HRDD practices are lacking in the automotive sector could be due to both the complexity of supply chains and the related difficulty of monitoring human rights and holding companies accountable.

The ICT industry also faces issues of exploitative conditions among its workforce, including forced labour, long overtime hours, and unsafe working environments. While commitment to HRDD varies between ICT companies, overall, it has stronger supply chain requirements regarding relevant human rights issues than companies in the other two sectors. For example, these ICT companies prohibit child labour and maintain good practices on living wages.

Guidance for Global Businesses

The advancing HRDD legislation in Europe will have a significant impact beyond the region’s borders, including on companies active in that geographic area. Based on the experience of global companies already taking action, we recommend that multinational corporations position themselves for the legislative momentum regarding HRDD as follows:

1. Engage leadership: Ensure that there are senior management officials with designated responsibility for human rights and develop a public policy commitment.
2. Map existing policies: Check what processes and systems are already in place to examine and manage adverse human rights impacts to avoid duplication and build on existing frameworks.
3. Social Risk Mapping: Understand where risk exposure is throughout the entire value chain to ensure prioritization of key risks and an informed approach to policy creation and the mitigation and remediation measures in the HRDD process. This includes supplier profiling to ensure high risk supply chain issues are addressed.
4. Develop and implement HRDD policy: An HRDD policy, whether it comprises additional or entirely new systems, will include a human rights impact assessment to identify issues in a company’s operations, supply chains and downstream value chains, prioritization, and mitigation.
5. HRDD Due Diligence: A policy itself is not enough. It will be necessary to implement an active HRDD framework and process to demonstrate to all stakeholders the mechanisms to identify, mitigate and respond to any risks prevalent across their value chains. This will include the conduct of actual due diligence investigations on an overt or discreet basis.
6. Remediation: Develop a remediation policy and process to ensure any issues are addressed and managed appropriately so as to avoid adverse impact and to demonstrate commitment to human rights objectives. Identify relevant stakeholders to engage with during this process.
7. Cascade HRDD down the supply chain: Draft human rights compliant provisions to incorporate in supplier codes of conduct and contractual agreements. Ensure that all stakeholders understand the benefit to engaging in this activity and support as and where needed.
8. Monitoring progress: Appropriate measures must be in place to ensure both the effectiveness of the overarching HRDD policy and adherence to the relevant legislation at all levels. This could include introduction of an internal complaints procedure and a whistleblower mechanism to enable relevant stakeholders to raise concerns in regard to both human rights issues and measures taken in response, and checks to verify suppliers’ compliance. External organisations may assist with this ongoing review.

Conclusion

Companies and other organisations are facing new challenges as HRDD legislation in Europe is formally enacted and implemented. Now is the time for companies with significant European business dealings to identify and examine any human rights problems they may have, including any issues that occur throughout their supply chain. A global investigations expert can provide advisory services to support companies globally to assess, develop, and implement HRDD requirements and enable a practical, comprehensive, and yet efficient approach to social and human rights risks, their identification, mitigation, and response.