Conducting human rights impact assessments as part of ESG programs is crucial for companies to identify and mitigate potential adverse impacts on human rights and integrate human rights into their broader compliance efforts
Earlier this year, the Thomson Reuters Institute predicted that corporate environmental, social, and governance (ESG) strategies would evolve from fad to essential business, in part because environmental and social issues had themselves begun converging and growing in importance within companies’ supply chains.
Indeed, the European Union’s proposed Corporate Sustainability Due Diligence Directive pushed supply chains and human rights into the mainstream. Human rights in and of itself is a broad issue and includes such topics as a right to a living wage, rights of indigenous communities, favorable working conditions (including reasonable work hours and breaks), the right to clean water and sanitation, preventing child and forced labor, and the right to a clean and healthy environment.
Companies increasingly accountable for human rights
Although human rights were initially viewed as creating duties and obligations for the state to protect, in more recent years, there has been an increasing focus on the obligations of businesses to do their part in this area too, says Tara Giunta, human rights expert and partner in the litigation practice of law firm Paul Hastings. This was in part the result of some major multinational companies being seen as complicit with their several countries’ poor human rights records and corruption-related crises that started in the 1980s with the 1984 chemical gas leak at Union Carbide’s plant in Bhopal, India to the 1989 Exxon Valdez oil spill.
In the 1990s, many states increased their enforcement of anti-corruption laws, such as Foreign Corrupt Practices Act, which was passed in the United States and resulted in material impacts to companies’ reputations and financials. During this period, many people began having a greater appreciation for the needs for companies and governments to be held accountable for human rights as part of their broader commitment to operating ethically.
“Most companies, particularly multinationals, have well developed legal and compliance functions that address related risk areas — such as anti-bribery and anti-corruption, sanctions, cyber — that can be leveraged to incorporate human rights.”
— Tara Giunta, Paul Hastings
The last decade saw human rights emerge as a more central ethical issue in business as reports of human rights violations continued to surface. An analysis by Paul Hastings of cases brought under the human rights chapter of the Organisation for Economic Co-operation and Development (OECD) guidelines for business and governments revealed that more than 50% of all cases included allegations related to human rights violations. More specifically, two industrial sectors were most commonly implicated — manufacturing (44 of 206 instances), and mining and quarrying (40 of 206 instances). And more than 40% of the 206 complaints alleged insufficient human rights due diligence.
Guidance for companies
Human rights touches every area of a company’s functions, operations, and business and therefore can provide a more effective lens through which to view its ESG and human rights-related risks, according to Giunta. “Most companies, particularly multinationals, have well developed legal and compliance functions that address related risk areas — such as anti-bribery and anti-corruption, sanctions, cyber — that can be leveraged to incorporate human rights. They need to be adjusted to make sure that they are addressing actual and potential impacts and not just legal and financial risk to the business,” Giunta says, adding that no longer can companies make statements and take positions. “They must take credible, tangible action with documented impact,” she notes. And this means incorporating human rights into the broader risk management and compliance systems.
According to Giunta, more specific steps within the process should include:
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- Conducting a human rights impact assessment — A human rights impact assessment can help identify and then prioritize adverse consequences of human rights violations (actual and potential) and then identify ways to effectively address them. Typical components of such an impact assessment, according to Giunta, include reviewing applicable international human rights laws, consulting with internal and external stakeholders and outside experts as needed, identifying those human rights most relevant to the company and its supply chains well as to the different groups that may be affected. Based on this assessment, companies can then determine best steps to avoid, prevent, mitigate, or remedy those potential actual and adverse impacts.
- Integrating human rights into broader compliance — Businesses can leverage anti-corruption, bribery, and other compliance programs to address ESG and human rights risk areas. “Even the most laudable initiative to address a human rights need can implicate other risks such as fraud, corruption, and money laundering,” says Giunta. Creating systems and processes that focus on these areas of compliance and then integrating them into other areas of international regulatory compliance, including within due diligence exercises, is a best practice.
- Tracking emerging risks — It is also very important to have a methodology for tracking emerging risks. One approach is to have an annual or bi-annual meeting of leadership — including with internal and external experts as appropriate — to address emerging risk areas. These risks should include those that are realistic as well as those that may not be viewed as likely, but which, if they occurred, would be material to the company.
- Anticipating “black swan events” — So-called black swan events have evolved into grey swans, meaning that they are no longer considered so remote or unlikely to occur. Five years ago, for example, most companies would never have conceived of a global pandemic that could shut down entire countries and economies for months. Even though that may not be the crisis that erupts, the fact that organizations have establish a process and protocol for addressing such acute crises is key.
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In today’s business landscape, companies can no longer afford to ignore human rights issues within their operations and supply chains. Proactively assessing and mitigating human rights risks through measures like impact assessments, integrating human rights into compliance programs, and preparing for crises will be crucial for companies to maintain ethical practices, protect brand reputation, and ensure future long-term sustainability.
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