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Thursday, August 15, 2013

Business and Human Rights: The State of Play

Ruth Cowley, Jon Hari and Stuart Neely discuss the "state of play" of business and human rights.
The Guiding Principles, formulated by John Ruggie (the former Special Representative of the UN Secretary General for Business and Human Rights), implement Professor Ruggie’s “Protect, Respect and Remedy” framework. The framework promotes the principles that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) effective mechanisms are needed to enable victims of human rights abuses to seek redress.

The Guiding Principles set out the steps businesses should take to ensure that they are functioning in a way which respects human rights – an obligation incumbent on all businesses. They do not, however, offer a toolkit for operating a business in a human rights compliant manner. This article aims to clarify the application and effect of each of the primary soft law BHR initiatives, and summarises current BHR trends more generally, before offering a brief synopsis of how businesses should be responding to these developments.

The Guiding Principles

The broad acceptance of the Guiding Principles – including from the business community – has led to a rapid consolidation of the expectations on businesses in relation to their human rights impact. Businesses are responding to this, and to signs that regulatory requirements and investor / shareholder expectations are on the increase. The Financial Times recently reported on a study carried out by Novethic, a French research group, which showed that Europe’s largest institutional investors are filtering their investments to avoid becoming associated with businesses which are perceived to have infringed on the rights of others, denying those businesses access to around €2.3 trillion in assets.

As we see a growing trend towards compliance and transparency, more and more businesses are willing to show the public what they are doing in respect of human rights. Principle 11 of the Guiding Principles states that businesses should “avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved.” To meet this responsibility, businesses should have in place policies and processes appropriate to their size and circumstances. In effect, businesses need to “know and show” that they respect human rights (Commentary to Principle 15).

What does this mean in practice and how should businesses address human rights risks?

Developing policies

Principle 16 states that businesses should embed their responsibility to respect human rights by expressing their commitment in a statement of policy.

This can be a stand-alone human rights policy or a statement integrated into existing policies. Such policy should be aligned with other policies across different functions and countries. Compliance officers, in-house lawyers and CSR managers will have noticed the increased publicity surrounding the issue of business and human rights (BHR) since the UN Guiding Principles on Business and Human Rights (the Guiding Principles) were unanimously endorsed by the UN Human Rights Council in June 2011.

Since then, many businesses have been developing detailed, bespoke human rights policies which draw upon the guiding principles.

As businesses find themselves being questioned by investors and other external stakeholders about their commitment to corporate responsibility, there is increasing pressure on businesses to develop and publish a human rights policy. A growing number of businesses are showing their commitment to meet this responsibility by publicising these policies on their websites, as required by Principle 16(d).

Assessing impacts / risks

Principle 17 goes on to state that businesses should carry out periodic human rights due diligence “to identify, prevent, mitigate and account for how they address their adverse human rights impacts.” This should include an assessment of actual, as well as potential, human rights impacts with which businesses may be involved either through their own activities or as a result of business relationships (Principle 18).

Human rights due diligence should be initiated as early as possible when developing a new business activity or relationship, as human rights risks may be inherited through mergers or acquisitions and can be increased or mitigated when drafting contracts or agreements. When carrying out human rights due diligence, the initial step is to identify and assess the nature of the actual and potential adverse human rights impacts with which a business may be involved. This process should draw on internal and/or independent external human rights expertise, and involve meaningful engagement with potentially affected groups and other relevant stakeholders.

Wherever in the world businesses operate, they should comply with all applicable laws and respect internationally recognised human rights (Principle 23(a)), meaning legal compliance should be considered when conducting human rights due diligence. Principle 23(b) recognises that conflicts may exist between national laws and international human rights principles, and calls on businesses to respond creatively in such circumstances in a way which seeks to honour the latter.

Businesses are therefore well advised to draw on not only human rights expertise, but also to consult with their in-house and external lawyers where necessary, and particularly when faced with such a conflict. For instance, Unilever collaborated with Oxfam to carry out a study of labour issues in its operations and supply chain in Vietnam, allowing Oxfam access to its factory in Cu Chi. With Unilever’s approval, a report was published earlier this year which revealed evidence of poor labour standards. In response, Unilever promised to change the way it operates in Vietnam and has invited Oxfam to return to the factory in two years’ time to review progress. Unilever opened its doors to demonstrate transparency and agreed to Oxfam publishing the report to stimulate a wider debate and encourage other businesses to do the same.

Another example is that of the tourism company Kuoni’s pilot project in Kenya. A report was published following a human rights impact assessment of Kuoni’s operations and business relationships in Kenya which explains the assessment process Kuoni adopted, the outcomes of the pilot project and Kuoni’s commitment to mitigation measures. The above examples demonstrate that businesses would do well to act now and carry out a human rights impact assessment while they still have time to take reasonable steps to avoid and mitigate risks, and show progress, rather than in the future when they could face legal claims and substantial fines.

Integrating, tracking and communicating performance

As a next step, businesses should integrate the findings from their human rights impact assessments across relevant internal functions and processes, and take appropriate followup actions (Principle 19). Businesses should also track the effectiveness of their response to such findings and be prepared to communicate this to external stakeholders where necessary (Principles 20-21). Remediation and grievance mechanisms Finally, Principle 22 states that where a business has caused or contributed to adverse human rights impacts, active engagement in remediation is required.

To ensure that grievances are addressed early and remediated directly, businesses should establish effective operational-level grievance mechanisms for those potentially impacted by their business’ activities.

Other soft law initiatives incorporating human rights principles

Many other key sustainable investment initiatives have been amended to reflect the Guiding Principles or otherwise reflect human rights compliance more generally.

A few important examples are set out below.

Equator Principles and IFC performance standards

The Equator Principles (EPs) are a risk management framework for signatory financial institutions to determine, assess and manage environmental and social risk. The revised EPs create new requirements for businesses to conduct human rights due diligence in order to qualify for financing from EP members, which include 79 of the largest financial institutions. The EPs apply to all project financing with a value of over US$10 million and to certain types of corporate loans, bridge loans and project finance advisory services. The third version of the EPs, which took effect on 4 June 2013, requires signatory financial institutions to ensure their clients comply with the detailed requirements of the International Finance Corporation Performance Standards on Environmental & Social Sustainability (IFC Performance Standards), which are intended to “fill the gaps” of host country laws and regulations on environmental and social issues.

The 2012 version of the IFC Performance Standards specifically requires that human rights due diligence of the type endorsed by the Guiding Principles should be conducted in “limited high risk circumstances”.

OECD Guidelines for Multinational Enterprises

All OECD States are obliged to sign up to the OECD Guidelines for Multinational Enterprises, which set out principles and standards for multinational companies operating in or from OECD States. The OECD Guidelines were updated in 2011 with a new human rights chapter which is consistent with the Guiding Principles.

Significantly, OECD States are required to set up national contact points (NCPs) to hear complaints against businesses alleged to have contravened the OECD Guidelines. Following the promulgation of the Guiding Principles, a finding of non-compliance by an NCP is likely to have a greater reputational impact on the business concerned, and organisations should therefore take a great deal of care when responding to NCP complaints.

To date, 161 complaints have been filed with NCPs, with human rights based complaints involving issues such as child labour, labour rights, indigenous rights and the environmental impact of business operations on communities. The UN Global Compact The Global Compact is a United Nations initiative whereby businesses voluntarily sign up to adhere to ten principles of sustainable business, including respecting human rights. To date, the Global Compact has around 10,000 signatories based in over 140 countries. The Global Compact has confirmed that the need to “respect” human rights in Principle 1 reflects the second pillar of John Ruggie’s framework.

This is a significant development, particularly as signatory organisations need to report annually on their implementation of the Global Compact and therefore, indirectly, the Guiding Principles.

ISO 26000

ISO 26000, which also draws upon the Guiding Principles, was published by the International Organization for Standardization in order to provide guidance for businesses to operate in a socially responsible way.

Towards hard law

Beyond this consolidation of international soft law standards, the real impact of the Guiding Principles is likely to be the stimulation of state regulation.

The first foundational principle of the Guiding Principles recognises that States need to “protect against human rights abuse within their territory and / or jurisdiction by third parties” and, as reflected in the commentary, a State’s failure to do so may be a breach of its international human rights obligations.

The second foundational principle requires that States “set out clearly the expectation that all business enterprises domiciled in their territory and/or jurisdiction respect human rights throughout their operations”. There are already signs that States around the world are considering the Guiding Principles when formulating policy. For example, the European Commission has called on all EU Member States to publish “action plans” on how to implement the Guiding Principles by the end of 2013.

The UK action plan is due imminently, whilst a Dutch inter-departmental working group is expected to report to the Dutch parliament with an action plan in early 2014. In June 2013 the European Commission also published a guide to implementing the Guiding Principles for businesses in three sectors: (i) oil & gas; (ii) employment; and (iii) ICT. In terms of human rights reporting, the UK government has published the final version of the draft Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which will require directors of UK incorporated, quoted companies to prepare an annual strategic report covering a number of issues including human rights.

This is a clear step towards requiring companies to “know and show that they respect human rights” (as envisaged by the commentary to Guiding Principle 15). In the context of conflict minerals, the European Union is in the consultation phase in relation to a potential directive which will create similar reporting requirements to Section 1502 of the Dodd Frank Act in the USA, and will apply to large companies. The Guiding Principles are also likely to impact on tort litigation, particularly in common law States, as certain obligations within the Guiding Principles may in the future be interpreted by judges as crea ting an objective “standard of care” owed by businesses to external stakeholders affected by their operations. The commentary to Guiding Principle 23 specifically acknowledges that conflict-affected areas pose an inflated risk of complicity in gross human rights abuses, and businesses should treat this risk as “a legal compliance issue”, as extraterritorial civil claims are increasingly being brought against businesses in their “home” state courts.

This is particularly relevant to common law States with a long tradition of negligence claims against companies for their overseas activities, such as the US and UK – although the US Supreme Court in Kiobel (2013) recently restricted claims under the US Alien Tort Statute to instances where there is sufficient “closeness” (which has yet to be defined) between the event and the jurisdiction of the US.


The examples set by Unilever and Kuoni above demonstrate that businesses are responding to pressure from external stakeholders and the expectations of increasingly ethically minded investors and shareholders by actively assessing their human rights impacts and mitigating associated risks as envisaged by the Guiding Principles and other BHR standards. This trend is likely to continue as a growing number of businesses see the benefit of understanding and addressing risks rather than waiting for adverse human rights impacts to be identified by external stakeholders. Businesses that take such steps now will be best placed to respond to future hard law requirements as they develop.

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