Human Rights: The Next Frontier

When preparing the first issue of the ECOFACT Quarterly this year, our team had a discussion about what we considered last year’s most important development in the environmental and social risk arena. It was a surprisingly short discussion: We all agreed that it was the traction that human rights norms had gained. There was a consensus that the time of observation had come to an end, and that private-sector companies would now have to actively address certain responsibilities in the context of human rights.

The UN Guiding Principles on Human Rights and Business (Guiding Principles) were endorsed by the UN Human Rights Council in 2011.1 Since then, there has been an ongoing discussion about their potential implications for private-sector companies. In 2013, three main developments altered the pace and importance of that discussion significantly:

• In several sectors, leading companies started dialogs which aim to tailor the key requirements of the Guiding Principles to their specific sectors and value chains. For the financial sector, a discussion paper2 was published by the Thun Group of Banks, an informal circle of seven international banks. In the tourism sector, a group of German and Swiss companies participated in a similar initiative that resulted in a commitment setting out the responsibilities of transnational companies in the tourism industry.3 Interestingly, both sectors have value chains with strong ties to emerging markets and other countries with socio-legal processes that tend to be less developed and reliable.
• In the UK, an amended law4 that requires the directors of listed companies to include information about human rights issues in their annual strategic report to shareholders came into force on October 1, 2013. The strategic report must also include information about the company’s corresponding policies, and their effectiveness. If the report does not cover all of these issues, it must state those that it does not contain.
• In a case related to the India-based operations of the Korean steel producer POSCO, the National Contact Points (NCPs)5 of the Netherlands and Norway ruled that the OECD Guidelines for Multinational Enterprises also apply to minority shareholders. The latest version of these OECD Guidelines (May 2011) contains a section on human rights that is derived from the Guiding Principles.

As the complaint targeted not only POSCO, but also two pension funds and their asset managers, these decisions set a precedent for what is expected from investors. More important, it is reasonable to assume that the NCPs would have ruled similarly had the investigation involved other business relationships with POSCO. In quoting the Guiding Principles, both NCPs underline in their final statements that enterprises should also “seek to prevent or mitigate an adverse impact where they have not contributed to that impact” if the impact is “directly linked to their operations, products or services by a business relationship.” The Norwegian NCP emphasizes that “enterprises are to carry out risk-based due diligence to prevent or mitigate” such an adverse impact. Again, there is no reason to believe that the requirements on which these rulings are based apply solely to pension funds or financial institutions. They apply to any business relationship in any company’s value chain.

In the words of Christoph Good, the Secretary-General of the Competence Center for Human Rights at the University of Zurich: “The Guiding Principles aimed at making the discussion about business and human rights more concrete. Even if many points remain open, the Guiding Principles do set out certain minimum expectations. In layman’s terms, companies are expected to go as far as possible, meaning that they should be able to demonstrate that they have done what is in their power to avoid harm. In cases where human rights abuses have been identified, they should try to better the situation. Companies should not simply step away from business partners that infringe human rights, they should at least try to take influence.”

This is one of the reasons that the Guiding Principles seem difficult to operationalize. They brought about a paradigm shift, in that companies must now aim higher than simply mitigating their own risks. They must now help to avoid the rights of others being infringed.6

You may or not agree, but what counts is that others do. Although the legal status of the Guiding Principles remains quite open, their interpretation by the Office of the High Commissioner on Human Rights7 reads as though they are a binding document. From a risk-management perspective, it does not matter what the legal status of the Guiding Principles is today. What matters is the traction they have gained and how they will shape regulation in the future.

The Guiding Principles have already influenced many standards and guidelines relevant to businesses. The most important of these include the OECD Guidelines briefly discussed above, the Renewed EU Strategy 2011-14 for Corporate Social Responsibility, including the related action plans of the EU member states, and — primarily relevant in the context of public or private infrastructure construction projects — the latest release of the Equator Principles.

Consequently, it may be wise to work on the assumption that the Guiding Principles already provide binding guidance. The Principles make it very clear that the duty of private-sector companies to respect human rights is an active responsibility.

According to the commentary included in the Guiding Principles, a company’s activities “are understood to include both actions and omissions” [emphasis added]. Ignoring these expectations might, in retrospect, be seen as a deliberate decision to flout them, which will eventually expose a company to risk. Every director or executive of a company that has the potential to affect human rights directly or through business partnerships in its value chain should make sure that their company conducts a strategic assessment of its human rights risks, and implements appropriate human rights due diligence processes where necessary.

Still, it is important to remain realistic about what a private-sector firm can achieve. Companies with large supply chains or customer bases can take a risk-based approach to prioritize which human rights risks to address first. Also, they do not need to prevent or mitigate adverse impacts alone. Promising strategies might involve partnering with other institutions, at the level either of certain challenging issues, or of individual client relationships.