Recent years have seen a significant effort to encourage companies to take greater responsibility for the actions of their subsidiaries and suppliers in developing countries, where labour protection and corporate accountability may be weak. In-House Perspective assesses the developments and the resulting requirements for companies and their legal teams.

Through a mixture of legislation, ‘soft law’ and best practice, companies are now at least minded to pay attention to – and report on – how their operations may affect employees, sub-contracted labour and the communities in which they operate, and to put in place measures to protect them and to take steps to remedy any abuse or harm.

Yet despite obligations to report and conduct greater due diligence, some commentators believe that many companies aren’t living up to the expectations such duties place upon them, and that workers in developing countries are no more protected than they were before these requirements on corporates came into effect.

One of the problems, says Maria Lancri, a partner at French law firm Squair, is that ‘there is still not enough executive buy-in to deal with the challenges properly’. She adds that ‘a lack of direct boardroom leadership in this area impacts the necessary resources to deal with the issues’. Another issue is that too many companies rely on suppliers to self-certify their compliance with the buyers’ codes of business conduct because of the difficulties – and expense – of trying to get independent verification themselves. As a result, the practice is ‘almost useless’ in terms of providing adequate assurance or oversight, says Lancri. ‘Asking suppliers to self-assess against your terms and conditions means you rely almost 100 per cent on their responses, which makes it look like your job is effectively done once the questionnaire comes back. This is not enough,’ she adds.

Edie Hofmeister, Co-Chair of the IBA Business Human Rights Committee and an independent company director, says ‘it is significantly more challenging for complainants in developing companies to seek and achieve meaningful redress for harms using traditional government channels’. Barriers to justice, she says, include lack of legal representation, government corruption, weak rule of law and even a lack of understanding as to what rights an individual might have.

Enter the UNGPs

As such, the onus to protect workers and citizens’ rights – as well as health – in many developing countries is dependent on the companies operating there ‘doing the right thing’. The key international mechanisms established to ensure this situation, says Hofmeister, are the UN Guiding Principles on Business and Human Rights (UNGPs) published in 2011, which direct companies to measure and monitor human rights impacts and implement meaningful grievance mechanisms for individuals potentially affected by business operations under its framework of ‘protect, respect and remedy’.  

However, many companies haven’t signed up to these 31 principles or implemented them effectively. Hofmeister says this is more common in small and medium enterprises (SMEs) that may not have the capacity, expertise, resources or corporate will to measure, mitigate and address human rights issues. ‘Large publicly-listed multinational companies widely acknowledge the UNGPs as setting important and achievable standards in business,’ she says. ‘The key for these companies is effective implementation – that means conducting early and rigorous due diligence on human rights impacts and continuing that effort throughout the life of the operation. To the extent there are impacts, a corporate is obligated to mitigate [the] risk of violating human rights and then providing a remedy if an abuse or perceived abuse does occur. Simple concept, complicated in practice.’

Hofmeister says that good business lawyers will help their clients understand and implement the UNGPs regardless of size or a company’s ability to ‘stay under the radar’, adding that in-house lawyers are typically ‘the leaders’ in implementing the UNGPs. To implement a meaningful UNGP framework, companies should begin by creating a human rights policy that ‘goes all the way up to the board for approval’ and is made part of the organisation’s corporate culture through training and capacity building. Next, they should engage with counsel and consultants to set up toolkits that can get the company on track in conducting its human rights due diligence throughout its operations and supply chain. ‘Once a company has identified the material risks and opportunities in its business and secured a comprehensive human rights due diligence report, it can start to understand their impacts and map out a strategy to eliminate or mitigate them,’ she says. 

Companies should then implement a meaningful grievance mechanism appropriate to the specific operation and community as outlined under Principle 29 of the UNGPs, which can address human rights grievances from their subsidiaries and supply chains globally. The key elements for success include engagement with interested stakeholders, capacity building on human rights issues both within the company and with outside stakeholders, and ongoing monitoring to take account of any changing circumstances. ‘Situations change on the ground all the time – political regimes, economic stresses, climate events, migration, and vendor relationships, to name but a few – which means companies need to maintain constant vigilance regarding their impacts on human rights and adjust their strategy and conduct accordingly,’ says Hofmeister.

A culturally-sensitive grievance mechanism system can go a long way, if done properly, to address community concerns, says Hofmeister. ‘In Latin America I’ve implemented programmes called “Tu Cuentas” – You Tell/You Count – which had a complaint mechanism and a more positive stakeholder engagement side. Next comes regular training for relevant stakeholders on how to use the mechanism, ideally involving trusted community leaders familiar with local custom and culture,’ she says.

Mechanisms and initiatives

Daisuke Takahashi, also a Co-Chair of the IBA Business Human Rights Committee and a partner at law firm Shinwa Law in Tokyo, agrees that only a limited number of companies have been carrying out human rights due diligence and operating grievance mechanisms by being committed to the UNGPs. To counter this, he believes governments need to develop policies – as well as regulations and incentives – to encourage companies to adopt the UNGPs, as well as provide support for SMEs that don’t have the resources to properly do so.

In September 2022 the Japanese government published its Guidelines on Respecting Human Rights in Responsible Supply Chains. This guidance came about in no small part due to the fact that most Japanese companies have a significant business presence – as well as supply chains – elsewhere in Asia, where there still exist serious concerns about human rights abuses. In April, the Japanese government announced that it’ll incorporate human rights due diligence into public procurement.

Takahashi believes companies can also come together to find ways to best ensure they meet their legal and/or stakeholder expectations regarding respect for human rights in the supply chain. For example, in Japan, legal and business groups have joined forces to embrace better human rights conduct in corporate activities. In 2019, The Business and Human Rights Lawyers Network Japan and the Global Compact Network Japan published their Engagement and Remedy Guidelines, a guide for Japanese businesses on operating corporate environmental, social and governance (ESG) grievance mechanisms. This has resulted in the creation of an annual Engagement and Remedy Forum to explore how to improve the effectiveness of grievance mechanisms, as well as the founding in 2022 of the Japan Centre for Engagement and Remedy on Business and Human Rights (JaCER). The latter was set up with the support of the Japan Electronics and Information Technology Industries Association (JEITA), one of the country’s largest industrial organisations.

JaCER doesn’t operate a grievance mechanism, but it aims to improve the effectiveness of those run by its members. The organisation has established a common grievance contact point on its website where it can receive claims/reports from stakeholders on any ESG-related issues, including human rights abuses, which have occurred in a member company’s operations and/or supply chains. JaCER then contacts the company and recommends it addresses the reported grievances in line with the UNGPs.

As of April, more than 20 Japanese major companies from a range of industry sectors have decided to participate in JaCER to improve their grievance mechanisms for addressing human rights abuses through their operation and supply chains. Among them are Furukawa Electric, Mitsubishi Electric, Panasonic Group, Sharp, Sumitomo Metal Mining, Toshiba, Yamaha and Yokohama Rubber.

Takahashi says many Japanese companies want to improve their grievance mechanisms and that there’s many drivers to do so. Business, human rights and ESG issues continue to rise up the corporate agenda, he says, due – in part – to mandatory human rights due diligence legislation and human rights-based trade regulations introduced in North America and Europe, which also have extraterritorial effects on Japanese companies. Meanwhile investors have also been asking whether their investee Japanese companies operate effective grievance mechanisms addressing ESG issues, says Takahashi.

Ethical questions

But depending on companies to uphold human rights and ensure worker protections relies heavily on them acting both legally and ethically in the first place – and this hasn’t always been a given. In fact, there’s been mounting concern that many companies have tried to circumvent such duties or have quashed complaints and investigations through intimidation and legal threats – sometimes with the help of in-house and external counsel.

In June 2022 the IBA began a project to examine the professional role of lawyers as ‘ethical gatekeepers’ within wider society and to help clarify the ethical responsibilities and obligations of lawyers when providing legal services. Its appropriately-named ‘Gatekeepers Project’ is designed to respond to the ethical challenges and criticisms that lawyers face in relation to the profession’s core principles and the provision of legal services. These include accusations that lawyers hide behind and abuse some of the key principles of the profession – notably the protection provided by lawyer-client confidentiality – to shield and protect the ethically questionable behaviour of their clients.

In some cases, says the IBA, this criticism has metastasised into a deeper questioning as to whether lawyers should continue to be afforded the benefit of not being associated with the interests of their clients – a benefit inherent in the professional work of a lawyer in providing independent legal advice to a client. Part of the IBA’s consultation as part of the project will examine how lawyers can respond effectively to a changing shift in priority towards broader social concerns and considerations, noting the extensive work undertaken over the last decade to build on the UNGPs.

Announcing the launch of the scheme, Mark Ellis, the IBA’s Executive Director, said that ‘the Gatekeepers Project has the potential to be one of the most important undertakings of the IBA since it first issued an international code of ethics in 1956. We need to recognise that the world has changed a lot in the last 70 years, as have the ethical dilemmas facing the profession’.

The IBA has also been working to update and simplify the 2016 IBA Guidance on Business and Human Rights for Business lawyers, which aims to ensure companies operate in-line with the UNGPs. The revised version can be found here.

While principles and guidance are helpful, some companies have complained that it’s not always easy to understand what’s expected of them in terms of ESG and human rights due diligence, or how they can satisfactorily report progress. Geert Vermeulen, Chief Executive Officer at compliance consultancy The Integrity Coordinator, explains that companies often say it’s most difficult for them to get assurance of ESG compliance on issues such as child labour and slavery. And because they’re anxious about any potential penalties or regulatory sanctions they may face for failing to report or remedy such incidents properly, there’s an increased risk that companies will resort to ‘tick-box’ or ‘boilerplate’ disclosures to avoid blame.

The ‘squeeze’ of regulation

Vermeulen also believes many companies have still not prepared adequately for key upcoming legislation, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which entered into force in January 2023 and which will apply for the 2024 financial year for reports published in 2025. The Directive will apply to nearly 12,000 EU listed companies, including banks and insurers, which have more than 500 employees. These companies will need to publish information related to the environment; societal risks and the treatment of employees; human rights; anti-corruption and bribery; and boardroom diversity.

Part of the problem, says Vermeulen, is that the first set of sustainability reporting standards for companies to comply with CSRD were only adopted by the European Commission in July, ‘which has prompted many companies to adopt a “wait and see” approach before looking at how they should comply’.

Vermeulen adds that the EU’s planned Corporate Sustainability Due Diligence Directive (CSDDD) will place further pressure on companies to prioritise ESG and human rights reporting, especially since the planned legislation looks set to include fines of up to five per cent of global turnover. This is unlike the CSRD, which has no provision for fines.

Efforts to improve supply chain due diligence are also complicated by differences between EU law and national legislation in some EU Member States. For example, France’s Duty of Vigilance law is not very prescriptive about how companies should comply and check for possible abuses in their supply chains, while the UK’s Modern Slavery Act simply requires companies to make a statement about what they have done to detect and remedy any cases of forced labour within their supply chains, where relevant. However, there are no sanctions attached where companies fail to report or act.

Germany’s Supply Chain Act, which came into force in January, has more teeth. The legislation allows prosecutors to impose fines of up to two per cent of companies’ global turnover if they fail to identify and prevent human rights and environmental impacts in their supply chains. It applies to companies with a registered office or principal place of business in Germany, as well as foreign companies with a branch office in the country. From 2024 it’ll apply to companies with just 1,000 workers – down from the threshold of 3,000 employees established when it originally became law.

The legislation has already generated two major complaints, although none of the companies mentioned in either complaint believe they’ve broken the law. Simon Geale, Executive Vice President Procurement at Proxima, a supply chain and logistics consultancy, says some companies are unsure whether they could be culpable under the legislation due to a lack of guidance, as well as case law. He says the legislation ‘establishes a duty of effort, but not a duty to succeed, and so many companies, whose aims are to comply rather than drive, will be anxiously watching to see exactly what standards they will be held accountable for and what the consequences will be if they don’t meet them’.

But Geale adds that ‘the goal of a piece of legislation like this is not to dish out fines – rather it is to provide guidance and hopefully spark change’. He believes that ‘regulatory standards are beginning to squeeze, and greater transparency is the answer’.

There can be no doubt that stakeholder expectations regarding the ethical duties of companies extends to the treatment of workers in their supply chains, as well as to the welfare of the communities in which these suppliers are based and operate. And while there may be some tolerance by regulators and enforcement agencies to provide a degree of leeway for companies to properly understand and embed the legal duties enshrined in revised principles and recently enacted legislation, such patience is hardly likely to be shared by non-governmental organisations or labour groups representing those affected. The message is clear: the responsibility for preserving workers’ human rights and safety is down to business.