Towards an EU mandatory human rights due diligence?

EIRIS Foundation submits its response to the European Union Commission’s consultation on sustainable corporate governance

The EIRIS Foundation submitted its response to the European Union Commission’s consultation on sustainable corporate governance, which is commonly referred to as the EU mandatory human rights due diligence.

Our unique insights, developed from over 35 years of work in sustainable finance and our ongoing efforts to support the Corporate Human Rights Benchmark (CHRB) and promote human rights in areas affected by conflict, placed our Foundation in a unique position to offer its perspective. Below are some of the most salient points raised for the EU to consider:

General comments:

– We commend the Commission for advancing a mandatory human rights due diligence and for being the trail blazers in the international arena. We are especially support the widening the definition of human rights to include climate change and other environmental standards.

– We also strongly support the holistic vision that businesses have obligations to not only their shareholders but also to the societies in which they operate and to the environment.”

– We firmly believe that to ensure a wider uptake, there must be a legal framework. The time to depend solely on voluntary actions is over as can be seen by CHRB and other benchmarks. In the CHRB 2020 benchmark, only a minority of companies demonstrate the willingness and commitment to take human rights seriously when it is not legally binding.

– It is worth comparing HRDD to the development of Health and Safety policies in the EU. According to an academic article published in Industrial Health in 2012, health and safety was ‘sometimes considered too demanding and over detailed’ when the first Directives were passed in 1989. The authors clearly state that ‘Their implementation in 27 Member States and the enlargement process have created a beneficial “common acquis” on a modern and advanced policy framework’.1 It has become a good habit with other business benefits.

– We also support that this legal requirement must be applied to companies which are not established in the EU. This will ensure EU consumers can be reassured that all those selling to them face similar requirements.

– We commented on the legal argument – in human rights litigation cases – that international companies do not have to be held responsible for what their subsidiaries do – whether it is because they were not consulted on actions taken by the subsidiary or because they sold their stake in the subsidiary company after the incident and are no longer linked to the subsidiary . We suggest that neither reasons should be valid and that company should remain responsible (under this due diligence framework) for all its direct and indirect subsidiaries regardless of what business model or management arrangements are in place.

HRDD Definition:

– Though the Commission’s definition is thorough (and as mentioned above it includes climate change and environmental degradation in addition to human rights), we identified a few areas which are missing:

  • It defines the action that a company needs to take depending on how the company is connected to the adverse impact but it only mentions causing and contributing. We are concerned that it omits the option that a company is directly linked to an impact. This is a crucial point because in many cases especially down the supply chain, companies are linked to abuses and it is relatively rare to find “causing” or “contributing” by a parent company. The obligation on large companies to use their leverage when they are linked to an adverse impact is a powerful tool. Without ‘linked to’, larger companies could claim innocence and shift the blame towards suppliers.
  • The definition incorporates supply chain but the terminology?] is vague. We suggest to follow Professor John Ruggie’s approach (articulated in a recent webinar),in which each company should focus on salient human rights risks throughout the entire supply chain, regardless of tiers or whether the risks concern its own operations or that or a supplier. . In addition, it should include the full spectrum of the value chain (i.e. use of products, customers)
  • In the same discussion Professor Ruggie also mentioned that a due diligence process must consider the harm caused by business practice such as delayed payment, change of orders etc.

Content of the due diligence:

– The Commission juxtapose process-based regulation vs. minimum setting standards. We would caution against setting some of these approaches against each other:

  • We suggest taking elements from all options and merging them into an alternative: some aspects of due diligence are by nature principles-based, and others would benefit from clear requirements (and it’s always helpful to know the principles behind a requirement, rather than just following a rule)
  • In addition, just as companies can better address conflict, conflict minerals, and modern slavery by adopting a “thematic approach,” some sectors could also benefit from such an approach by focusing on the specific issues affecting their sector (for example, big tech addressing digital rights & their impact on democracy). This is particularly important if the principles or the requirements approach result in insufficient attention to a particular matter.
  • We believe that elements of both principle-based and rules-based approaches need to apply in different stages of due diligence (risk identification; risk assessment; action plan; tracking). For example, in risk identification there could be rules covering stakeholder engagement . Undertaking risk assessment on the basis of saliency and making action plans proportionate to the harms they seek to avoid are important principles requiring judgement rather than rules, while the publication of the outcomes is more a clear rules-based requirement

What is missing from the proposal:

  • We think that the Commission should look at some stakeholders who for obvious reasons tend to be ignored:
  • Migrant and undocumented workers in Europe and in the supply chain.
  • Workers in informal economy – according to the ILO ‘More than 6 workers among 10 and 4 enterprises among 5 in the world operate in the informal economy’.
  • The people working in those settings tend to be vulnerable to human rights abuses. Though it is not clear to us how a HRDD might impact the informal workers, it is worth raising a concern about the consequences for them.
  • Future generations: much of the impact of climate change and the environmental degradation will be felt by future generations.
  • A gender analysis should be included too

– In addition to human rights, labour, and environmental standards, we believe that the EU should also examine operation in conflict-affected areas . As the UNGPs Working Group recently suggested, this requires a “heightened” due diligence. The risk of major human rights violations is considerably higher in conflict situations, and there are the specific risks of International Humanitarian Law violations, including War Crimes.

Though we have only summarised a few of our main points, there is more to read in our full submission. But we would like to reiterate that we really welcome this initiative, the ambition of the Commission and the Commissioner, and the engagement with civil society, businesses, and investors. We are now waiting to see the final proposal which we hope will be fair, realistic, and radical.