As the demand for improved protections of human rights has increased over the past decade, several countries have developed, or announced plans to develop legislation to combat human rights abuses and hold business entities more accountable. Most recently in February 2022, the EU published its draft directive on Corporate Sustainability Due Diligence, which was promised by lawmakers in 2020.
However, both individuals and human rights-focused groups are voicing that significant improvements remain necessary to prevent and address human rights abuses and environmental harm. As this proposal develops, how will the landscape of human rights due diligence be affected? What will these priorities mean for the future of due diligence and impact on compliance teams?
We’ll focus on highlighting current human rights due diligence trends in Europe and offer insights into how these trends and potential legislation will not only shape how due diligence is enforced by governing agencies, but also how it is conducted by organizations operating and engaging in EU business.
The Human Rights Due Diligence Landscape in Europe
In recent years, human rights due diligence regulations have taken shape in Europe. France passed its mandatory human rights legislation in 2017. Germany and Norway both adopted mandatory human rights due diligence laws in 2021. The UN Guiding Principles on Business and Human Rights (UNGPs) were endorsed by the United Nations in 2011, and groups continuously meet and work to improve the guidelines and use them to help others create similar legislation.
Despite developments in human rights due diligence attention, 46.2 percent of the biggest companies in the world failed to show any evidence of identifying or mitigating human rights issues in their supply chains as of 2020, according to the Business and Human Rights Resource Centre.
With this in mind, the EU has officially published its first draft of its Corporate Sustainability Reporting Directive (CSRD), which aims to address these failings, as well as criticism from lawmakers and advocates. Instigated by the French Presidency, the primary purpose of the directive is to revise the non-financial reporting requirements, which proved to be insufficient in comparison to financial reporting. It extends the scope of the reporting, provides clearer standards and categories by which to report, and allows greater access by providing specific publication requirements. However, the initial draft has received criticism from lawmakers and advocates saying that it needs to cover more small and medium-sized companies and should extend to all tiers of the supply chain.
While reporting is a major starting point to assess where companies currently stand, critics are calling for future legislation to focus less on reporting and more on implementing proactive, meaningful processes that require businesses to prevent human rights violations in the first place and facilitate effective recourse for abuses.
How Regulations Are Shaping Due Diligence in Europe
With regulatory changes and new sanctions and enforcement policies, the future of human rights due diligence in Europe is looking different. Organizations need to prepare to take a hard look at their relationships in their supply chains and how to minimize negative impacts, as well as understand varying enforcement protocols in every applicable jurisdiction.
Regulatory changes
With the release of the new EU directive, there will be specific regulatory developments that applicable organizations need to be aware of.
- Policies: It’s no longer enough to insert a generic paragraph about human rights into your overarching corporate policies. Companies need to integrate human rights and environmental due diligence into their corporate policies and adopt a designated due diligence policy. The purpose of these policies is not only to maintain compliance, but also to foster a culture of sound human rights ethics that starts from the top down.
- Assessment: Organizations need to be able to identify actual and potential adverse human rights and environmental impacts arising from both their own operations and those of their subsidiaries. A dedicated human rights due diligence solution is integral to performing accurate and efficient ongoing assessment that integrates with internal and supply chain operations.
- Prevention and Mitigation: To maintain compliance under the EU directive, companies need to develop and implement a prevention action plan for human rights due diligence, seek contractual assurances from business partners and companies with which they have indirect relationships, and refrain as much as possible from entering new business with problematic partners.
- End and Minimize Impacts: The new directive not only addresses relationships with controversial supply chain partners, but it also speaks to minimizing global human rights impacts. Companies are instructed to end adverse impacts, and where this is impossible, implement a corrective action plan, potentially pay damages to those affected, and provide financial compensation to affected communities.
- Complaints: Complaints are a primary method by which regulators will investigate human rights violations. Organizations need to establish an easy-to-use system that allows interested parties to submit complaints and for those complaints to be managed.
- Monitoring: While previously, companies may have completed one-time or annual human rights due diligence monitoring, they will now need to conduct more frequent assessments of operations and human rights measures, including that of subsidiaries and supply chain partners.
- Transparency: Applicable businesses that are not already required to report to specific governing agencies under existing legislation will need to publicly report due diligence initiatives on their websites.
Sanctions and enforcement
The new EU human rights due diligence directive describes methods by which it will be enforced and the way consequences for non-compliance will be handled. Specifically, a European Network of Supervisory Authorities will be established, which will be the primary agency that determines when an organization is out of compliance.
Sanctions will be determined by individual member states, which means companies will need to stay on top of potential consequences not only at the EU level but at the level of each relevant country, as well. For example, if an Austrian company works with supply chain partners in Poland and Belgium, they will need to understand the consequences of non-compliance in all three countries. Specific sanctions are somewhat vague in the current draft of the directive but will include proportionate damages to affected communities and effective judicial remedies. With these varying yet non-specific sanctions, it’s essential for companies to implement solutions and work with compliance experts to help stay on top of location-specific compliance requirements.
Application and the future
After the official adoption of the EU directive, relevant companies will have two years to align their human rights due diligence practices — and those who have been through this process will tell you that these two years will go fast. To get started, now is the time for organizations to review their own compliance gaps and address them, and then tackle the larger initiative of complete supply chain due diligence.
As the directive is receiving significant criticism on its scope and thresholds, it will likely undergo continuous discussion for the implementation of possible harsher regulations. Applicable organizations will want to anticipate exponentially increasing regulatory requirements and aim to not only meet but exceed current compliance standards. This will empower companies to future-proof their compliance protocols and have all the right due diligence systems in place if more aggressive requirements are inevitably adopted.
Embrace the Future of Human Rights Due Diligence with IntegrityRisk
The landscape of EU human rights due diligence is constantly evolving, with inconsistent regulatory requirements in effect around the globe. Organizations in or with supply chain partners in Europe will need to be particularly aware of the new directive and ongoing changes to it that will impact their compliance protocols. IntegrityRisk offers extensive due diligence solutions that help companies monitor and maintain human rights and other regulatory compliance protocols.
To learn more about how IntegrityRisk can advance your human rights due diligence initiatives, contact us today.