Now that Canada has banned the importation of goods made with forced labour, potential supply chain risks have increased for many Canadian businesses in terms of both probability and severity. As we've seen so often during the COVID-19 pandemic, global supply chains can be extremely challenging to map, to monitor and to manage.
Yesterday is not soon enough for Canadian companies to start mapping their supply chains and to enhance their assessment of the risks that there may be forced labour, child labour and human- trafficked labour (collectively, "modern slavery") in their supply chains. Boards of directors, as part of their risk oversight responsibilities, should (but may not yet) be well aware of the financial, operational, legal, regulatory, customer, investor, and brand-erosion risks relating to the presence of modern slavery in Canadian businesses and their supply chains, especially risks that may lurk beyond first-tier suppliers.
Once supply chains are mapped, businesses must then carry out due diligence to effectively identify, prioritize, prevent, mitigate and account for adverse impacts associated with the businesses' operations, products and services.
Modern Slavery Disclosure Legislation
Last month, Senator Julie Miville-Dechêne introduced Bill S-216 into the Senate, which if passed would enact the proposed Modern Slavery Act. The Bill proposes mandatory annual disclosure by businesses in Canada of the steps that the business has taken to prevent and reduce the risk that forced labour or child labour is used in any step in the production of its goods in Canada or abroad or in the goods that the business imports into Canada. Bill S-216 also includes an amendment to the Canada Customs Tariff to prohibit the importation of forced labour- and child labour-made goods.
Even though Canada has still not yet enacted modern slavery disclosure or supply chain transparency laws (as has been done, for example, in California, the United Kingdom and Australia), many Canadian businesses are already carrying out supply chain due diligence to accurately inform the company of what is going on in its businesses and supply chains. This critical information is essential in order to respond to increasingly detailed and comprehensive reporting requirements of asset managers, investors and other stakeholders, as well as to enhance and to support their brands and corporate purpose. Due diligence results are also used to meet statutory reporting obligations under modern slavery disclosure laws in jurisdictions outside of Canada.
U.S. Import Restrictions
Exporting to the U.S.? In the United States, there is a ban on the importation of goods made with forced labour, indentured or prison labour. While there is no statutorily mandated due diligence, the U.S. Customs and Border Protection Service Commercial Enforcement Division has published a forced labor Supply Chain Due Diligence Fact Sheet recommending that businesses should carry out supply chain due diligence. The CPB Fact Sheet states "to combat the risks of child and forced labor in your operations and global supply chains, you should have a comprehensive and transparent social compliance system in place". Lack of insight and knowledge of supply chains creates risk of detention at the U.S. border of goods suspected of being made with forced labour.
Mandatory Due Diligence Legislation
Outside of Canada, several of Canada's trading partners have enacted mandatory human rights due diligence legislation, and more legislation is on the way. For example, France, with its "duty of vigilance" law and the Netherlands with its child labour law, require companies to carry out mandatory due diligence on their supply chains. Under the French duty of vigilance law, companies to which the law applies must establish a vigilance plan that includes not only due diligence measures designed to identify risks and prevent harm to human rights and fundamental freedoms, human health and safety and the environment, but also to disclose actions to mitigate risks or prevent serious harm. The vigilance plan and a report on its implementation must be made public.
And, in my view, two recent initiatives - the Swiss Responsible Business Initiative and the proposed EU legislation requiring mandatory human rights and environmental due diligence – merit detailed consideration and discussion. Both of these illustrate an approach that could have the potential to dramatically shift the liability paradigm for businesses (especially Canadian businesses as seen through the eyes of a Canadian court) through both the undertaking of mandatory due diligence reviews and the introduction of a presumptive and legally enforceable duty of care. In my opinion, although referred to by many as "due diligence" legislation, both expressed an intention to create new legal duties and, consequently, responsibilities and legal risks for businesses. Taken as a whole, these proposed laws transcend how the term "due diligence" might be understood by many Canadian businesses.
EU Mandatory Human Rights and Environmental Due Diligence Legislation
While proposed legislation has not been drafted or made available for reference and comment, it appears that the favoured option (that which was expected to deliver the most significant human rights impacts) would be "mandatory due diligence as a legal duty of care".
According to the report making the recommendation, it would entail a new mandatory due diligence requirement at the EU level which would require companies to carry out due diligence in order to identify, prevent, mitigate and account for actual or potential human rights and environmental impacts in their own operations and supply or value chains, as a legal duty or standard of care.
This recommendation is very much aligned with the United Nations Guiding Principles (UNGP) on Business and Human Rights, especially Principle 17. Among the issues for businesses to consider are those suggested by the commentary on UNGP Principle 17 as to the scope of liability and the duty of care:
"Conducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse. However, business enterprises conducting such due diligence should not assume that, by itself, this will automatically and fully absolve them from liability for causing or contributing to human rights abuses".
On the radar for businesses will be the scope, granularity and standards of the required due diligence review, as well as the implications of the proposed legal duty and standard of care.
Swiss Responsible Business Initiative
The Responsible Business Initiative was voted on by Swiss voters on November 29, 2020 and failed to achieve the double majority required for approval. While it garnered 50.7% of the popular vote, it failed to receive approval from a majority of Switzerland's cantons. The proposed law would have required Swiss businesses to carry out an appropriate due diligence process to identify actual and potential impacts on internationally recognized human rights (e.g., UN Guiding Principles on Business and Human Rights) and the environment, to take measures to prevent violations, to cease existing violations and to account for the actions taken.
Under the proposal, Swiss businesses would be liable for their own adverse human rights impacts and environmental misconduct and those of controlled companies unless they can prove that (i) they have taken all due care to prevent such adverse impacts or (ii) the adverse impacts would have occurred even if the requisite care had been taken. This would have imposed a reverse onus on businesses subject to the proposal – essentially a reversal of the customary burden of proof, and resulting in the creation of new legal obligations on businesses.
Although it failed to achieve approval, the Swiss Responsible Business Initiative illustrates the direction in which mandatory modern slavery/human rights due diligence legislation is headed.
Right now, Canadian businesses need to "do" diligence on their supply chains to be able to report accurately to shareholders, investors and other stakeholders and to effectively manage supply chain risks that are increasing every day.
More in this series
For further information, please read the other parts of our Guide to addressing modern slavery in your business and supply chain for Canadian directors:
How we can help
To find out more about how Gowling WLG can help your business expertly organize and manage due diligence and other governance, risk, compliance and supply chain issues, please contact the author Stephen Pike.