Human Rights, Ethical Risks, and Due Diligence
The legal and ethical risks are growing for organizations to investigate and address the human rights impacts of their activities and relationships, which have far-reaching implications for companies operating in the global economy. This post explores why identifying human rights impacts that occur in a global business operations chain is not just the right thing to do for humanitarian reasons, but it is also important to address increasing risk management issues.
A recent study conducted by Norton Rose Fulbright and the British Institute of International and Comparative Law (BIICL) found that approximately three quarters of the respondents that conducted human rights due diligence identified human rights impacts on their operations or linked to third-party business relationships (77% and 74%, respectively).
The United Nations Guiding Principles provide, among other things, that respecting human rights is a global standard of conduct that exists beyond compliance with domestic laws and regulations, and that businesses are in a unique position to impact human rights across the globe through their business activities and relationships by developing and implementing:
- A human rights policy
- A due diligence process to address their impact on human rights
- Remedial processes for adverse human rights impacts.
BIICL’s study shows that building an effective compliance and prevention program starts with comprehensive due diligence focused on human rights impacts.
Human Rights Due Diligence
The BIICL study looked at legal, principle, and practice issues in order to “provide practical recommendations for businesses in relation to their approach to human rights due diligence.” The study defined these primary goals of conducting human rights due diligence:
- Identify actual or potential human rights impacts
- Take action to address these impacts
- Track or monitor the effectiveness of these actions
Most of the 152 respondents who completed the BIICL survey self-identified as “multinational” organizations. Two-thirds of respondents were publicly held companies, or were listed on a stock exchange. After completion of the survey, 14 senior level managers were interviewed about human rights due diligence practices within their company and industry sector. In addition, a roundtable was held with a number of companies that differed in their implementation of human rights due diligence.
Because health, safety, and labor are highly regulated, those areas of human rights impacts draw the most attention, but identifying only regulated impacts means other human rights are not identified. Therefore, unlike the typical due diligence associated with mergers and acquisitions, the BIICL found “the most prominent components” of conducting comprehensive human rights due diligence are to:
- Conduct impact assessment through research and stakeholder interviews
- Assess risks and prioritize issues
- Develop action plans with board level strategic direction
- Create steering and working groups that include the relevant functions
- Integrate human rights into compliance mechanisms, scoring, and tools
- Apply human rights to each function
- Include human rights in contractual provisions
- Develop codes of conduct and operational policies
- Provide training
- Develop effective grievance procedures
Grievance mechanisms used by survey respondents were mostly limited to whistleblowing channels, workplace complaints systems and anti-corruption and money-laundering mechanisms. While studies show that whistleblowing deters wrongdoing, the BIICL study suggests that external methods to collect information about human rights abuses is overlooked by companies as another tool to identify their human rights impacts.
The BIICL study also found that of those respondents that conducted comprehensive due diligence expressly targeting human rights impact, 81% referred to the United Nations’ Guiding Principles, which provide that human rights due diligence:
- Should cover adverse human rights impacts that the business enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships;
- Will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations;
- Should be ongoing, recognizing that the human rights risks may change over time as the business enterprise’s operations and operating context evolve.
Additionally, being proactive in tackling issues can itself become a risk management strategy, such as ethical culture evidence in a lawsuit. In its report BIICL observed that formulating private industry standards for human rights due diligence could turn “soft law into hard law” by proactively setting expectations for a reasonable company in the same sector and similar circumstances.
Taking Steps Beyond Due Diligence
Other key findings of the BIICL study were that creating contractual obligations was ranked as the primary method to prevent and address human rights impacts by 77% of BIICL survey respondents across all sectors (100% in the mining and technology sectors, and 83% in the energy sector).
Having a code of ethics ranked as the second most important tool, especially when dealing with supply chains. Compliance with these codes was often made a separate contractual obligation with termination rights and other severe penalties for breach. Training was also ranked as an important implementation mechanism by 58% of respondents.
Using leverage over third-party business partners (e.g., suppliers, retailers, or distributors), incentivizing human rights compliance through negotiation, and stakeholder engagement were other methods employed to prevent risks. In circumstances where issues require a collective approach, companies have engaged NGOs, governments, and international organizations though reaching consensus takes time, resources, and often compromises.
Benchmarking Human Rights Performance
The BIICL findings also coincided with the first results of the Corporate Human Rights Benchmark, which seeks to increase transparency of actual human rights impacts of major companies in high risk industries and the effectiveness of policies and procedures implemented by companies to address them.
According to the Chief Executive of the Institute for Human Rights and Business, “The ‘social license’ of business and its activities is becoming increasingly material to investors, governments and consumers themselves.” Thus, the Corporate Human Rights Benchmark was born and its first results are, let’s say, disappointing. Of the largest 98 companies in high human rights risk industries (agricultural products, apparel, and extractives), only six companies scored over 50%, with an average score of 28.7% on performance in human rights terms, including implementation of the UN Guiding Principles on Business and Human Rights.
The purpose of this benchmark is to use these results to put pressure on companies to show that they are taking effective measures to address the risks of human rights abuses. Scoring high on performance in human rights terms — much like creating an ethical culture — is good for business. Also, the process to get there aligns with creating an ethical culture: identify, assess, and address salient issues (watch the video).
Corporate Tort Liability for Human Rights Abuses?
Whereas benchmarking addresses human rights abuses primarily from an ethics perspective, the risk management perspective involves legal liability, including tort damages. The U.S. Supreme Court recently agreed to hear a case that may decide once and for all whether the Alien Tort Statute (the “ATS” enacted in 1789) authorizes American courts to hold corporations liable for tort damages caused by human rights abuses abroad.
The ATS was originally enacted to prohibit piracy and regulate diplomatic relations between States. For most ATS violations lawsuits are filed against government officials, the military, or police. However, in an earlier case the U.S. Supreme Court left open the question of whether corporations may ever be sued for human rights abuses committed abroad. The case now before the Court involves claims that Arab Bank, based in Jordan, facilitated payments through its New York branch to groups linked to terrorist attacks in Israel, the West Bank, and the Gaza Strip [In re Arab Bank, PLC Alien Tort Statute Litig., 808 F.3d 144 (2d Cir. 2015); cert. granted, Jesner v. Arab Bank, PLC, No. 16-499 (USSCt. Apr. 3, 2017].
We’ll follow this case and report back on the Court’s decision.
Human rights is extremely complex, involving ethics, legal compliance, risk management, and basic humanitarian issues. Due diligence alone does not eliminate the risk of legal liability and the effectiveness of prevention efforts can only be judged by whether actual or potential human rights impacts were detected and avoided.
However, in determining whether an organization has met its legal and human rights duty of care, many factors will likely be considered, including the extent of an organization’s good faith human rights due diligence to identify human rights impacts, and whether the necessary systems and processes to address these impacts were in place. While seemingly a daunting task, the rewards for these efforts will be realized in ways that go far beyond the balance sheet.
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