This year marks the 10th anniversary of the UN Guiding Principles on Business and Human Rights (UNGPs), the internationally recognised standard in preventing and addressing adverse human rights risks due to business activities.

The UNGPs outline a human rights due diligence (HRDD) framework for businesses to follow. This framework asks businesses to identify, prevent, mitigate, and account for how adverse human rights risks and violations are addressed.

There has been an increasing amount of regulation and a movement towards the potential adoption of cross-sectional mandatory due diligence regulation over the last decade. The EU MHRDD sets a new European due diligence standard that could “help foster the emergence of a global standard for responsible business conduct.”

The next ten years of the UNGPs will look towards an increase in mandatory human rights due diligence regulation and the possible emergence a new global standard of mandatory due diligence.

What is Human Rights Due Diligence?

There are four elements to the human rights due diligence process:

1. Identifying and assessing actual and potential human rights risks. (UN Guiding Principle 18)

2. Preventing and mitigating adverse human rights risks by integrating their findings and establishing policies to prevent these adverse risks. (UN Guiding Principle 19)

3. Tracking the effectiveness of the company’s response to addressing adverse human rights risks by drawing on feedback from stakeholders and use qualitative and quantitative indicators. (UN Guiding Principle 20 )

4. Communicating/reporting on how the company is addressing adverse human rights risks, i.e. transparency with stakeholders as well as with society. (UN Guiding Principle 21 )

Why the move towards MHRDD?

The need for an EU-wide MHRDD legislation is a result of the lack of conceptual and legal clarity of current regulations on human rights due diligence (HRDD) and associated disclosure, which inadvertently affect businesses and the implementation of HRDD into business frameworks. This lack of clarity leads to companies applying varying and divergent approaches to HRDD, resulting in some cases to competitive disadvantage among companies that are correctly implementing HRDD and companies that are lagging. It is an expansive and time-consuming endeavor for companies to properly implement HRDD into their company framework and their supply chains. Many companies’ welcome the movement towards MHRDD with many making public statements and endorsements in support. In a statement signed by 26 companies, the companies argue that “legislation introducing an obligation to conduct due diligence as defined by the UNGPs and covering all business actors is critical to bring all companies to the same standard and build on and scale progress to date.”

The EU MHRDD legislation will, in theory, and hopefully in practice:

1. create a level playing field for companies by legally complying companies to adopt HRDD

2. bring legal clarity to how companies can implement HRDD

3. establish effective enforcement and sanction mechanism to incentivise companies and ensure compliance to the law

4. improve the ability for those affected by adverse human rights risks and violations to be remedied through civil and legal action.

The 2019 Corporate Human Rights Benchmark indicates that nearly half (49%) of the 200 companies assessed have scored 0 across all indicators on human rights due diligence. It can be argued that companies lack the motivation to improve their scores, as a majority of companies are positioned in the lowest scoring band. Among the four sectors assessed - ICT manufacturing, apparel, agricultural product, and extractive – apparel companies are leading on human rights due diligence with an overall average score of 25.0%, with Adidas and Marks & Spencer Group in the highest band (80-90% and 70-80%).

Adidas and Marks & Spencer Group have the opportunity to become leaders in the apparel sector in regard to HRDD, assisting and showing other companies how they should go about in implementing HRDD into their business frameworks. ICT manufacturing companies have the worst score out of the four sectors assessed (17.8%), with no company scoring above 50% and more than two-thirds of the companies assessed scoring below 20%. From these results, it is evident that companies in ICT manufacturing and extractive will face the biggest challenges in implementing the EU MHRDD as they are already lagging in the voluntary implementation of HRDD.

What does the EU MHRDD Mean for Businesses?

On 10 March 2021, the European Parliament submitted its recommendations to the EU Commission on due diligence and corporate accountability outlining the MHRDD to be adopted by the EU. These are some key points to note regarding HRDD and its effects on businesses:

• All EU companies and non-EU companies of any size selling goods or providing services in the EU will have to adhere to this MHRDD legislation (operating in the internal market).

• Companies will be required to produce a document in which it publicly states their due diligence strategy at every stage of the due diligence process (identify, adopt policies and measures to prevent, mitigate, monitor, address, and remedy). This document will be reviewed annually by 1. Member State national authority whose job is to monitor the correct implementation of the MHRDD and 2. a European Due Diligence Network (EDN) set up by the Commission.

• Companies will be required to implement HRDD following the processes provided in the UNGPs to prevent adverse impacts on human rights, the environment and good governance both within the company and the supply chain.

• Sanctions will be imposed for non-compliance; national authorities may impose proportionate fines for non-compliance.

  • Member states are encouraged not to provide state support, including through state aid, public procurement, export credit agencies, or government-backed loans, to undertakings that do not comply with the objectives of the Directive (19).

  • This will act as an incentive for businesses to implement properly.

What should Companies do to ensure proper implementation of MHRDD?

1. Ensure you have a monitoring system and team that enables you to tackle the proper implementation of MHRDD. 

   • e.g. you will need to be able to identify the adverse risks and violations in both the company and its supply chain

2. Engage stakeholders to assist in the identification of risks and violations as well as how the company can prevent, address and remedy those risks and violations.

   • Stakeholders should have an active role in creating the company strategy to due diligence

3. Seek inspiration from companies that excel in their sector regarding HRDD and learn from their strategy and implementation.

   • Use resources like the Corporate Human Rights Benchmark and Know the Chain ranking to find those companies and find where the company itself is lagging (e.g. Companies in the apparel sector can look to Adidas’ strategy as it has the highest score)

Get in touch

If you have any questions or comments, please do get in touch with georgie@brodiepartners.com

BRODIE has a wealth of experience supporting clients to manage these issues and effectively communicate to meet multiple stakeholder needs.

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