Regulatory developments – indirect drivers
In addition to the voluntary initiatives described above, regimes like the EU's Sustainable Finance Disclosure Regulation ("SFDR") and the Taxonomy Regulation are likely to drive adoption and implementation of human rights policies and procedures, albeit via a less direct route. This is for a number of reasons, including the fact that, under the SFDR, investors and asset managers reporting on principal adverse impacts across their investments will be required to disclose those investments that have failed to incorporate the principles within the OECD Guidelines and UNGPs into their policies and procedures. In addition, under the Taxonomy Regulation, an economic activity may only be considered "sustainable" if it meets all relevant, stringent requirements set out in the legislation, including that the entity carrying out the relevant activity has implemented procedures to ensure alignment with the OECD Guidelines and UNGPs (the so-called "minimum safeguards"). The question of alignment with OECD Guidelines and UNGPs is also engaged in respect of those Article 8 plus (so-called 'mid-green') and Article 9 funds that commit to make 'sustainable investments' (as defined in Article 2(17) SFDR).
As discussed in our recent briefing on the Platform for Sustainable Finance's ("PSF") report on "minimum safeguards" under the Taxonomy Regulation, recent guidance from the PSF is that to measure alignment with the "minimum safeguards", investors should consider four areas of compliance:
(i) human rights and employee rights;
(ii) bribery and corruption;
(iii) fair competition; and
(iv) tax compliance.
A company that is able to provide evidence of appropriate policies and procedures, including a human rights policy, and demonstrate effective implementation of it, will give confidence to its investors that it aligns with the OECD Guidelines and UNGPs. Indeed, these are the companies that are more likely to be able to provide evidence of compliance with "minimum safeguards" requirements, advancing the likelihood of Taxonomy alignment and providing data needed for the detailed report of "principal adverse impacts" (or lack thereof) under the SFDR. As a result, companies proactively embracing these voluntary initiatives are positioning themselves well to be seen valuable investments for more ambitious asset managers and other investors.
Upcoming regulatory developments – direct drivers
In tandem, two key EU proposals are getting closer to implementation – namely the Corporate Sustainability Reporting Directive ("CSRD"), coming into force in January 2023 and applying in Member States beginning in 2024, and the Corporate Sustainability Due Diligence Directive ("CS3D"), still currently in proposal form. Notably, both extend to companies based outside the EU but which have significant operations in the EU, and the CS3D in particular is expected to capture not just corporate entities in the strict legal sense but a number of other legal forms, including asset managers, and in respect of the latter, may also impose significant obligations with regard to their portfolios.
- CSRD: The CSRD sets detailed mandatory sustainability reporting requirements for in-scope companies in respect of "environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters" in-line with mandatory European sustainability reporting standards ("ESRS"). While the ESRS have yet to be formally adopted, they have been approved by the EFRAG advisory body and EFRAG does not expect them to be altered materially before adoption. The ESRS are made up of twelve reporting templates, four of which address the "S" elements of ESG and include a requirement for the undertaking to describe its human rights policy commitments and explain how such policies are aligned with internationally recognised standards, including the UNGPs (see our briefing for further details on the scope and implementation of the CSRD).
The ESRS will require companies to describe their "human rights policy commitments" in relation to its own workers, its value chain, "affected communities", and consumers/end-users where relevant; these data points are explicitly intended to address the requirement under the SFDR for financial market participants to disclose what proportion of their investments do not have a human rights policy.
- CS3D: The CS3D (as explained in our earlier briefing when it was originally proposed back in 2022) is aimed at tackling human rights and environmental impacts across a company's value chain by imposing a corporate duty of due diligence on in-scope large companies operating in the EU. These due diligence measures include a requirement to identify, prevent and mitigate human rights and environmental impacts connected with companies' own operations, as well as those of their subsidiaries and in their value chain.
The CS3D draft text expressly refers to the human rights due diligence as proposed under the UNGPs and OECD Guidelines and requires (as set out under these instruments) that companies integrate such due diligence into their policies and risk management systems, have in place a due diligence policy, and publicly communicate the same. The draft CS3D would also require companies (and their subsidiaries) to have in place a code of conduct describing rules and principles to be followed by the company's employees and subsidiaries and where relevant, its direct or indirect business partners.
It is envisaged that companies in the scope of both the CS3D and the CSRD will report their due diligence behaviours and other information required by CS3D under the CSRD mandatory reporting standards. For those companies who are not captured by CSRD, companies will be required to publish a statement on their website on their compliance with CS3D.
In addition to the above, other legislative drivers highlight a trend towards greater regulatory focus on human-rights and responsible business conduct by companies. For example, the UK has seen proposals to strengthen the UK's Modern Slavery Act 2015 reporting requirements to require more detailed reporting on steps taken by a company to combat modern slavery in its operations and supply chains and including considering further enforcement options for non-compliance (see our briefing for more details). The use of trade controls and sanctions targeting specific products and parties have also been used to influence corporate behaviour and are likely warrant a review of corporate risk and compliance management processes for many businesses. For example, following ongoing calls for action in respect of allegations of the use of forced labour and other human rights abuses in China, the US has implemented, and the EU has proposed similar legislation, designed to end the sale of products made by forced labour in the US/ EU (see our briefing for further details).
These drivers, then, are not only pushing companies towards the creation and implementation of a human rights policy but, more significantly, making such a policy publicly available. This development brings with it clear litigation and wider reputational risks for businesses (see our previous articles on this point highlighted in respect of corporate due diligence, corporate reporting and wider value chain litigation trends).