The S in Sustainability

How human rights due diligence is expanding the dialogue on social impact

Environmental, social, and corporate governance (ESG) has become another fixed feature of a company’s operating landscape. As such, it requires increasingly specific rules and requirements regarding ethical accountability, transparency, and disclosure, together with tough questions about where and how companies are generating revenue.

So far, the ESG agenda has primarily focused on the E, as companies tackle climate change, largely by reducing emissions and carbon footprints. However, the spotlight is also moving to the S, which includes the social impact of our value chains.

This task is more challenging compared with that of the E, in the sense that we are now being asked to take responsibility for practices and issues over which we may have little control, and for which we cannot offer sufficient transparency.

Increased Governmental Oversight

Meanwhile, social impact regulations are developing swiftly. The drive for human rights due diligence (HRDD) has gained pace since the United Nations issued its Guiding Principles on Business and Human Rights (UNGPs) in 2011. Known as the Ruggie framework, because it was developed under the leadership of then-Assistant Secretary-General for Strategic Planning John Ruggie, the UNGPs are based on three pillars:

• Protect
• Respect
• Remedy

Let’s look at these in more detail.

Duty to Protect against Human Rights Abuses
Government action, in the form of new legislation and regulation, is prompting companies to take human rights more seriously. Based on the UNGPs, national action plans (NAPs) have been developed by many countries. These include the United States and Japan, which published its NAP in October 2020.

In Europe, measures are moving toward enforcing human rights culpability. Germany’s Supply Chain Due Diligence Act will come into effect in January 2023 and require companies to conduct due diligence for human rights and related environmental risks throughout their supply chains. It also will require measures to prevent and mitigate human rights abuses, as well as the establishment of grievance and reporting processes.

In June this year, the US Customs and Border Protection law enforcement agency implemented provisions of the Uyghur Forced Labor Prevention Act, which prohibit imports into the United States of products related to forced labor in Xinjiang. And recently, the US Securities and Exchange Commission issued two regulatory drafts for publicly held corporations and investment funds, requiring mandatory disclosure of ESG aspects of their business operations.

“An organization’s policy is not sufficient should human rights issues be alleged or identified. Operational frameworks which activate these policies and make them meaningful and effective are necessary.”

In July, the Japan–US Economic Policy Consultative Committee Meeting pledged to coordinate efforts to foster an environment in which companies uphold human rights and, in September, Japan’s Ministry of Economy, Trade and Industry (METI) issued its HRDD guidelines, which include expectations regarding due diligence processes, remediation, and stakeholder engagement.

Corporate responsibility to protect human rights
Companies are being compelled to demonstrate a commitment to protecting human rights. An organization’s policy is not sufficient should human rights issues be alleged or identified. Operational frameworks which activate these policies and make them meaningful and effective are necessary, and identification of adverse impact on human rights requires that companies remedy such a situation.

Even if not involved directly, a company is still expected to act on the information and, ultimately, to consider whether to continue business with the party in question should no remedy be found.

Right of victims to access effective remedies
Similar to the structure of whistleblowing and ethics hotlines, there are likely to be mechanisms to enable claims from all tiers of supply against companies at the top of the chain.

This would inevitably require changes to the relationships companies have with suppliers, and implementation of specific onboarding policies, due diligence protocols, and corporate social responsibility measures. Monitoring and audit rights would need to be carefully built into contracts, as well as working and reporting processes.

So, for companies, HRDD can be summarized as:

• Assessment of actual and potential human rights issues and risk
• Mitigation and remedial action for such issues and risk
• Corporate commitment to, and responsibility for, human rights throughout the value chain
• A set of mechanisms for reporting and communicating human rights breaches, as well as for monitoring and contributing to human rights

Given the complexity of our value chains, when looking at the S in ESG, it is helpful to consider social impact in a similar way to how we scope emissions when addressing the E.

The METI HRDD guidelines also outline a similar categorization:

• Scope 1: Adverse human rights impact caused directly by our business activities
• Scope 2: Adverse human rights impact to which our business activities contribute
• Scope 3: Adverse human rights impact related to activities or entities with which we have a business relationship, and that are linked to our operations, products, or services

Increased Scrutiny

As legislation and public statements on ESG commitment have evolved, well-funded non-governmental and non-profit organizations have begun monitoring human rights issues ranging from wages, working hours, and conditions to child labor. These organizations are rightfully passionate about the causes to which they seek to give a voice.

Awareness of social concerns is rising among investors, shareholders, employees, and consumers, as are calls for related assurances. Perhaps most meaningfully, the influence of HRDD can hold negligent companies accountable through legal and civil liabilities.

Realizing Opportunities

All this brings new and sizeable burdens, including understanding risk exposure and expectations, as well as determining to what we must commit and how far we need to go. Companies must also determine how to put into operation and implement necessary actions, while considering reputation, profitability, growth, cost efficiency, as well as investor, employee, and consumer confidence.

Negative exposure can quickly damage profit-ability and status, as well as reputation with investors, customers, suppliers, workers, business partners, and other stakeholders on which we depend for business.

However, we will not make much headway in creating a more sustainable global economy if sustainability is viewed as being about risk mitigation, reporting duties, compliance, and regulatory burdens. The key to progress is not to lose sight of the overall objectives.

We must commit to change and realize the opportunities to pursue and maximize growth. We must seek competitive advantage rather than view this as a constraint to fulfill obligations. A significant dimension to consider is the company’s power to attract young talent and increase employee engagement. The business opportunities are many.

They can be realized through brand differentiation and innovation in supply management and manufacturing processes, product and service life cycles, new forms of cost efficiency, emerging channels for market access and diversification, novel applications of technology, and by building a more diverse workforce.

Hannah Perry contributed to this article. Perry works in the Corporate Communications Department at AIG Japan Holdings K.K. and is vice-chair of the ACCJ Sustainability Committee.

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