Business and human rights – International steps towards mandatory due diligence in 2020

27 November 2020

Since 2011, the United Nations Guiding Principles on Business and Human Rights (UNGPs) have been the primary mechanism addressing the responsibility of private businesses to respect human rights. However, the non-binding nature of the Guiding Principles and other international 'soft law' instruments in this area, such as the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, has led to a push for binding 'hard law' obligations.

Some of this work is being undertaken at state level with examples such as the Netherlands' Child Labour Due Diligence Act 2019, the Swiss referendum on mandatory human rights due diligence on 29 November 2020, and the German government's planned Due Diligence Act.

However, in this article we focus on two initiatives at the international level from the UN and the European Union.



A new UN treaty?

In 2014 work commenced on what is intended to be a legally binding UN treaty on business and human rights. A 'zero draft' was published in July 2018 and a revised version in 2019. A second revised draft was published on 6 August, followed by negotiations in Geneva in October.

Scope

One of the main criticisms of the Zero Draft was that it applied only to transnational businesses. This was amended in the first revised draft to apply to business activities conducted by all business enterprises, including but not limited to transnational corporations. The definition of 'business activities' in the second revised draft now explicitly includes state-owned enterprises that do not operate internationally. This marks a shift from the first revision of the treaty, which maintained a 'particular' focus on transnational corporations.

Due diligence

Under the proposed treaty, states would be required to ensure that businesses domiciled within their territories undertake human rights due diligence to identify and assess any actual or potential human rights abuses that may arise from their own business activities, or from their business relationships (a widening out from the previous draft's reference to 'contractual relationships').

Businesses would be further required to respond appropriately to prevent and mitigate identified abuses (including potential abuses), monitor the effectiveness of their response and communicate these matters regularly with stakeholders.

Legal liability

States would be required to put in place 'effective, proportionate, and dissuasive' criminal and/or administrative sanctions where legal entities or individuals have caused or contributed to human rights abuses. Disapplying the doctrine of forum non conveniens, courts within the state where the business is domiciled would exercise jurisdiction regardless of where victims are from.

Next steps

Negotiations on the second revised draft took place between 26 and 30 October by the UN open-ended intergovernmental working group (IGWG). Numerous differences between state representatives were evident on points of detail, in addition to some more overarching criticism. The UK, for example, called the scope of the draft 'too vague to be workable' and the draft text 'inconsistent with principles of international law'. Whilst no specific amendments to the text were agreed, the working group plans to reconvene in 2021.

Before March 2021, the Secretariat will distribute 'concrete' suggestions, modifications, deletions and expressions of support for the second draft, as well as general comments and clarification requests.

Stakeholders will have until the end of February to table their submissions.

A final version of the proposed treaty is still some way off and it will then remain to be seen how many (and which) states sign up to it.

The proposed EU directive

The EU does not have a negotiating mandate in relation to the proposed UN Treaty. However, that has not stopped it taking its own steps this year following an announcement in April 2020 by the European Commissioner for Justice that voluntary measures on business and human rights were not working and that a mandatory solution is needed.

On 11 September, the European Parliament Committee on Legal Affairs published its recommendation for a proposed Directive which, although not the final version, gives some indication of the potential direction of travel.

Scope

The Parliament's proposed Directive would apply not only to all undertakings governed by the law of a Member State or established in EU territory, but also to non-EU limited liability undertakings selling goods and services into the EU. This means that it would potentially affect UK companies selling into the EU regardless of Brexit.

Member States would retain discretion to decide whether certain smaller companies would be exempted.

Due diligence

As with the draft UN Treaty, the Parliament's proposed Directive would require member states to impose mandatory due diligence obligations on relevant undertakings.

Initially, undertakings would be required to identify whether their operations or business relationships cause or contribute to human rights, environmental or governance risks. 'Risk' would include potential, as well as actual, adverse impacts on individuals, groups or organisations caused by the undertaking itself or its value chain, including those with which it has business relationships.

Undertakings would publish a due diligence strategy in relation to the identified risks, and ensure business relationships are in line with their strategy through contract clauses and codes of conduct.

Undertakings would also be required to establish a grievance mechanism to make anonymous complaints in relation to potential human rights, environmental or governance risks and provide remediation where it establishes that it has caused or contributed to any harm.

Liability

Member States would be required to provide 'effective, proportionate and dissuasive' penalties for infringements of national provisions transposing the Directive and take all necessary measures to enforce them. Repeated infringement would constitute a criminal offence.

Next steps

Although the European Parliament has published a draft Directive, only the Commission retains the power to propose and implement laws. The Commission must submit a formal legislative proposal to the European Parliament and the Council of the European Union, which subjects the proposal to debate before it can enter into force. This will likely occur in early 2021.

Once in force, Member States will have a period within which to implement the Directive in their domestic legal frameworks. The European Parliament's draft suggests a two-year implementation period.

The move towards mandatory due diligence in the EU also needs to be considered within the wider context of the EU's sustainable corporate governance initiative on which the European Commission is currently consulting and which includes mandatory due diligence as well as extending directors' duty of care to explicitly include adverse environmental, human rights and social impacts.

Conclusion

Following the inception of the UN Guiding Principles on Business and Human Rights in 2011 the first steps towards legal implementation mostly centred on states imposing reporting obligations under which companies had to disclose steps taken in relevant areas but which were not backed by any enforcement mechanism. The idea was that due diligence would be a necessary step in order to report, and that the risk of bad publicity impacting upon investment and sales would be a sufficient incentive.

The UK's Modern Slavery Act 2015 and section 414C of the Companies Act 2006 are good examples.

However, there is a growing sense that such reporting mechanisms are proving insufficient, hence the move to mandatory due diligence. Although a UN Treaty is a long way off (and may never happen) and the EU Directive will be implemented in different ways in different member states, both show a definite direction of travel, mirrored by domestic legislation being adopted by individual states.

As such, companies would do well to anticipate that mandatory human rights due diligence, in one form or another, is not far off.


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