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Five trends to watch in business and human rights in 2017

Five trends to watch in business and human rights in 2017

Once an issue for the CSR team, human rights risk response falls increasingly under the purview of the general counsel. For many companies, it is becoming a core part of adopting sound risk management strategies alongside ABC considerations. What does taking a compliance view of human rights mean in practice? How does one get respect for human rights right? With the Corporate Human Rights Benchmark pilot results soon due for release, we discuss the emerging standards applicable to corporates in this area and outline notable trends in the evolving business and human rights landscape.

The UN Guiding Principles on Business and Human Rights 

Over the past few years there has been significant intergovernmental action to address a perceived governance gap in relation to corporate human rights conduct. None is so significant as the UN Guiding Principles on Business and Human Rights (UNGP). Developed by UN Special Representative John Ruggie and endorsed by the UN Human Rights Council in 2011, it is the first global, governmentally agreed standard that concerns the role of business with respect to human rights. The UNGP provide a global framework around which international practices and policies are converging.

Companies and countries worldwide are at different points on their journey towards addressing the issues underpinning the UNGP, commonly called their “Ruggie journeys,” which is exactly what the UNGP authors pragmatically envisioned. For companies, the UNGP represent the touchstone for human rights compliance, supported by the authority of global consensus, and furnish both a vision statement and roadmap for action.

At a fundamental level, the UNGP promote the expectation that companies should respect human rights, implement due diligence to avoid infringement, and address any adverse impacts that are identified. Central to the UNGP is the concept of leverage, which refers to how companies should seek to influence business partners’ behavior, when possible, and respond when business partners’ practices lead to human rights harms. As such, human rights issues are increasingly being raised in the context of commercial relationships between companies operating across different markets.

Companies are also expected to “know and show” that they respect human rights – that is, do what they say and say what they do – particularly where concerns have been raised by or on behalf of affected external stakeholders.

As with any standard, what constitutes compliant, and certainly best, practices will likely continue to evolve as concept becomes reality and companies compare their work-in-progress to others that are further along on their journeys. Indeed, that change is already palpable: for reasons articulated below, multinationals are increasingly expected not simply to respect human rights, but to seriously and substantively engage with and manage their human rights risks.

Helpfully, many companies – whether they know it or not – already do much of what Ruggie expects via existing policies and procedures (e.g., those concerning environmental protection, workplace equality, and recognition of organized labor). They are better prepared than they might think to fulfill the standards that new national laws and regulations implementing the UNGP, which we discuss below, espouse.

We now explore five, key trends in business and human rights for 2017.

Major Trends in the Business and Human Rights Landscape

Continued expansion of mandated disclosure regimes and enhanced corporate disclosures

This year, companies covered by Section 54 of the UK Modern Slavery Act of 2015 (MSA) will, for the second year in a row, release reports on steps taken to consider the risks associated with, and end, suspected human trafficking or coerced labor by suppliers. The extent to which statements will differ from last year remains to be seen, and while we expect a certain degree of repetition, we also anticipate a small but influential minority to go farther – providing insights on what systems they have in place or are developing to address modern slavery risks.

This will have an obvious cascading effect as information flows to company contractors and suppliers. In support of mutual success and continuing business relationships, suppliers and contractors (and their suppliers and subcontractors) will be expected to exhibit acceptable, conforming behavior. While no lawsuits have yet been filed as a result of Section 54 disclosures, criminal prosecutions brought under other parts of the Act may increasingly “interact” with Section 54 disclosures. As an example, last year’s conviction of a UK business owner who supplied leading British high street retailers for conspiracy to traffic individuals within the UK illustrated the possible limits of a contractual and audit approach to scoping and addressing human rights impacts in supply chains, and the potential benefits of implementing more holistic, UNGP-style risk monitoring and management programs.

In California, where disclosure requirements have been on the books for several years, statements produced pursuant to the California Transparency in Supply Chains Act 2010 (CATSCA) have been, on the whole, comparatively more limited than MSA disclosures. Recently, however, some statements have been used as a hook on which to hang putative, consumer class actions. At the heart of the claims, brought for unlawful business practices, misleading and deceptive advertising, and unfair and deceptive practices, are companies’ attempts to comply with CATSCA, and the scope of their disclosure statements. All cases have been dismissed and appealed, with companies successfully defending the disclosure-based actions via different approaches. It is too early to tell what effect, if any, the lawsuits, or the results of a compliance review undertaken by the California Attorney General, will have on the quantity and quality of CATSCA disclosures.

There is still no federal analogue to CATSCA in the US, although proposals have been put forward.  Meanwhile, the expanded anti-human trafficking provisions of the US Federal Acquisition Regulations (FAR), introduced in 2015, are beginning to impact some companies’ compliance undertakings. Under the new provisions, which apply to all federal contracts and subcontracts awarded after March 2, 2015, contractors and subcontractors and their employees and agents are prohibited from certain activities, including engaging in severe forms of trafficking, using forced labor, and charging employee recruitment fees. Additional requirements (involving the production of compliance plans and conducting annual certifications) apply if contracts involve goods or services sourced abroad where the estimated contract value exceeds $500,000. On a related note, we observe that US Customs and Border Protection has – empowered by the 2015 Trade Facilitation and Enforcement Act, which repealed the “consumptive demand” exception to the US Tariff Act – seized various shipments entering the US that possibly involved the use of forced labor.

A final and noteworthy development is France’s “Duty of Vigilance” bill. If the bill is passed in its current form, it would require certain large French companies to set out and effectively implement an annual “vigilance plan.” The bill was recently passed by France’s National Assembly and has been referred to the French Constitutional Council. The bill will only pass into law if approved by the Constitutional Council, which may make changes to its provisions. As it currently stands, companies would fall within scope if they are registered in France and there are either (i) more than 5,000 employees, in total, working in the company and in its direct or indirect French-registered subsidiaries; or (ii) more than 10,000 employees, in total, working in the company and in its direct or indirect subsidiaries worldwide. Some estimates suggest about 100 companies would be caught by these provisions.

Under the current proposals, such vigilance plans would have to establish the measures the company will take to prevent the violation of human rights and fundamental freedoms, significant personal injury or damage to the environment, hazard to health, and active or passive corruption. As well as internal measures within the company and any subsidiaries it controls (directly or otherwise), the plan should also set out the steps the company plans to take to address these risks in its established supply chain worldwide. Failure to publish such vigilance plans may, under the current proposals, result in fines of up to EUR10m, with fines increasing to up to EUR30m if the company’s failure to put in place an effective plan results in damage to third parties. Companies could also have to compensate victims who may have suffered as a result of such failure.

If the bill is passed by the Constitutional Court, without much amendment, it will represent a significant shift in focus from legislation elsewhere seen. Both the MSA and CATSCA are fundamentally reporting requirements, focused on transparency rather than conduct, but the French bill would require the relevant companies to take an additional, affirmative step – and be subject to large enforcement fines for failing to do so. 

Modern slavery developments indicate the direction of travel 

Modern slavery has framed the discourse thus far but constitutes only one of several, severe human rights issues. And we predict the “rest of Ruggie,” already on its way, to follow a similar path. The trend is evident in the rise of new requirements on non-financial/narrative reporting pertaining to issues commonly referred to as environmental, social, and governance (ESG) concerns. This includes Directive 2014/95/EU, which is now in effect in the EU, and new guidance issued for companies listed on the Hong Kong and London Stock Exchanges.

The trend is also apparent in newly released National Action Plans (NAPs) implementing the UNGP in Germany and the United States, an enhanced UK NAP, reports of NAPs being drafted in countries like Thailand, and otherwise redoubled efforts to operationalize the state duty to protect against human rights abuses from third parties through policies, regulation and adjudication.

The trend is apparent in increased conflict minerals reporting requirements in some jurisdictions. Responsible sourcing is often framed as a human rights issue due to the impacts that mining and trading of certain natural resources can have on individuals living in conflict-affected states. An intensifying focus on responsible sourcing has led to approval of the text of a conflict minerals regulation in the EU by the European Parliament’s Committee on International Trade, which is expected to be formally adopted by the European Parliament. The EU regulation goes farther than the US’s current conflict minerals rule, applying as it does to all conflict-affected and high-risk areas around the world where conflict minerals are mined, not simply to those sourced from the Democratic Republic of Congo and adjoining countries. In the US, questions have been raised over the enforcement of the conflict minerals rule promulgated by the US Securities and Exchange Commission (SEC) under the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2012. The public has been invited to submit comments on the rule and the SEC’s 2014 guidance on same through mid-March.

We also note the steps taken to crack down on human rights abusers by freezing their assets and cutting off access to the financial system. The recent passage of the US Global Magnitsky Human Rights Accountability Act empowers the US government to apply visa bans and asset freezes against gross human rights abusers in any country (e.g., those engaged in the torture or attack of human rights defenders or whistleblowers anywhere in the world). Further, proposed legislation in the UK would pave the way for civil recovery orders and related asset freezes against anyone who has gained from either carrying out such gross human rights abuses or from providing material support in their commission –which may include financial or technological assistance. The UK proposals are included in the Criminal Finances Bill, which has cleared the House of Commons and will now proceed to the House of Lords.

Corporate rankings mechanisms will continue to gauge and create competitive tension in corporate human rights performance 

The UNGP ask companies to report on how they respect human rights and furnish a reporting platform to that end, one of several that is available. And now corporate benchmarking pressures add competition to the equation. We highlight the Corporate Human Rights Benchmark (CHRB) in particular, a collaborative effort by thinktanks and investor groups to assess corporate human rights performance in three high-risk sectors, while noting the presence of sector- and issue-specific ratings mechanisms (e.g., from the UN Global Compact, the Global Reporting Initiative, BankTrack, KnowTheChain and other stakeholders).

The initial CHRB rankings are expected to be low and the reactions mixed. Questions have been raised about the methodology developed to rank the pilot class of companies selected on the basis of market capitalization and geographic reach. Regardless, the CHRB represents a global first, providing as it does a rare, comparative glimpse into how some commercial enterprises are (or aren’t) integrating the UNGP into their strategies. The benchmark considers how companies are developing commitments to observe and protect human rights norms, governing and implementing those commitments, remediating adverse human rights impacts, and responding to serious allegations – and how transparently. Whatever the quality of these initial findings, in our view, the CHRB signals the beginning of a new chapter whereby competitive behavior will drive performance, and cross-sector comparisons will be used not just in the media but perhaps also in the courtroom to judge the appropriateness of corporate conduct.

The legal risks for businesses will increase

Plaintiffs’ lawyers have long explored ways to hold multinationals accountable for direct and indirect involvement in alleged abuses associated with the full range of human rights, with often damaging commercial, operational, and reputational consequences. We are seeing the development of an active claimant human rights bar, particularly in Canada and the UK, that is bringing cases against global businesses alleged to have links with human rights violations.  These claims use national tort law as their vehicle, based on the concept of an operator or a parent company’s duty of care, and seek remedy against parent companies for failure to safeguard stakeholders from adverse human rights impacts. In addition, recent case law in Canada and the UK suggests that a company’s human rights reporting and public statements can be one of the many factors affecting the shape and extent of the duty of care – not only between a parent company and the employees of a subsidiary but also other people who are affected by the actions of the subsidiary (or those operating under its control).

It is important to note, however, that no court has yet offered guidance on what might constitute a breach of duty in the human rights context, and it may be difficult for claimants to establish such a breach given the current lack of an established standard against which a company may be judged, and in an area of law that is itself evolving.  Nevertheless, as human rights norms and principles become increasingly embedded in industry practice, courts may feel emboldened to adjudicate on corporate liability, referencing standards including the UNGP and the Voluntary Principles on Security and Human Rights.

In addition to ordinary litigation risk, we expect the continued use of non-judicial Organization for Economic Cooperation and Development (OECD) National Contact Points by individuals and NGOs seeking redress for alleged human rights abuses. The OECD has issued guidelines for multinationals covering human rights compliance aligned to the UN Guiding Principles, and OECD countries are expected to establish National Contact Points that can hear complaints brought by individuals or NGOs against private enterprises regarding alleged human rights violations. Although the OECD guidelines are voluntary and NCP findings are non-binding, they are published – and we anticipate that claimant law firms and NGOs will continue employing this mechanism as a means to develop information about particular cases and opening points for litigation or mediation.

Human rights issues will become more prominent in bilateral investment treaty arbitrations 

We finally note the use of human rights arguments in state responses in bilateral investment treaty (BIT) arbitration to justify measures taken against investors. As a result, arbitral tribunals are increasingly being asked to weigh human rights considerations, encompassing social and environmental aspects of cases, against the application of substantive treaty protections. Going forward, we expect states to continue to raise human rights issues as a “shield” or defense to BIT claims by investors, invoking soft law human rights norms in jurisdictional defenses and as a substantive defense to allegations that state conduct breached BIT-guaranteed standards of protection such as “fair and equitable treatment.” And we expect respondent states to continue wielding human rights standards as a “sword” in the context of counterclaims against BIT claimants.

For example, in a recent BIT award relating to the termination of a water concession, a counterclaim for damages advanced by Argentina alleging that the claimants had violated contractual and international law obligations to guarantee the human right to water was dismissed by the ICSID tribunal in Urbaser S.A. v Argentine Republic. This outcome notwithstanding, an obvious takeaway for clients is the need to evaluate and take steps to mitigate actual and potential environmental and social risks at the time an investment is made.

How Freshfields Can Help 

Freshfields is one of the few major international law firms with a dedicated Global Business and Human Rights practice, and the first international law firm to sign the United Nations Global Compact. Our Global Business and Human Rights practice brings together partners and associates from around the world to advise clients on safeguarding their companies from risk while helping them exhibit a commitment to responsible business conduct that is aligned with current legal requirements and emerging global expectations. We would be pleased to assist you with your needs. For further information on our practice, or if you would like to learn more about the subjects in this Alert or to sign-up for our Global Business and Human Rights blog, please contact us or your usual Freshfields contact.