Landmark report on 1,000 European companies shows the need for human rights due diligence laws

21/2/20 - Filip Gregor, Head of Responsible Companies, and Joanne Houston, EU Policy Officer, at Frank Bold

Reporting requirements aren't enough - we need mandatory due diligence laws in order to eradicate abuse

This blog is part of a series 'Towards Mandatory Human Rights Due Diligence'.

On Monday 17 February, the Alliance for Corporate Transparency, a collaborative initiative led by Frank Bold, published the results of its assessment of the sustainability disclosures of 1,000 European companies.

The findings of the research point to widespread shortcomings in how companies report on their social and environmental impacts, suggesting that the European Non-Financial Reporting (NFR) Directive is not meeting its objective of ensuring business transparency around ESG (environmental, social and governance) challenges and risks. This is exactly what the Alliance aims to address, by providing the European Commission with evidence-based recommendations around the need to standardize corporate sustainability reporting.

Policy context

The results of the research arrive at the same time as the EU Commission initiates the process to reform the Directive and after Executive Vice President Valdis Dombrovskis’ announcement on the plans to create EU standards for corporate sustainability reporting. At the same time, EU Member States as well as the EU Commission are mulling over plans to introduce mandatory human rights due diligence (HRDD) laws.

Progress in both areas is needed to ensure respect for human rights. However, each has a different purpose, and thus requires a different approach, a fact that is often overlooked. The findings of the research provide some guidance in this regard, as we will explain below. But let’s first present those findings:

Results of the Research

The results of the assessment (available in an online database) show that while many companies report general information on sustainability-related matters, only a minority communicate information neeeded to understand corporate impacts on society and the environment as well as sustainability-related financial risks. This is the case across all topics assessed by the Alliance, from human rights and supply chain transparency, to climate change and biodiversity.

Human Rights Disclosure

A vast majority of companies address human rights in their reports (85.9%). A positive finding, at first glance. When it comes to the disclosure of more specific aspects, however, results paint a much more worrying image. 22.2% of companies describe HRDD processes, suggesting that only a small fraction is working towards effectively managing the impact of business activities on people, fulfilling their basic duty to respect human rights. The percentage of companies referring to their commitment to provide remedy for harmed people is even lower, 6.9%.

As stated in the research report, “the most important element of human rights disclosure is reporting on risks, or in business and human rights terminology, salient human rights issues” (p. 19).

Of the 1,000 companies assessed, almost 57% report on risks (25.5% of statements being specific), but only 26.7% describe policies designed to address salient risks and an even lower percentage report on actual human rights impacts (14.6%).Moreover, under 4% describe indicators or specific examples illustrating effective management of identified salient issues (3.6%). This is shocking compared to the percentage of businesses reporting on identified issues and risks, 56.6%.

Other interesting results are given by the assessment of how transparent companies are on supply chain matters. From a cross-sectoral perspective, most companies provide little to no information at all about the structure of their supply chains (77.1%), and very few communicate their lists of suppliers (2.3%). Findings are somewhat more positive for the Apparel & Textiles sector.

13.6% do disclose information on their suppliers in high-risk countries for human rights. This is of course still a relatively low percentage yet, considering that values would have most likely been much lower a few years ago, it suggests an emerging good practice, as well as the fact that there is no principle obstacle for companies to disclose such information. 

Given the industry’s impact in this area, this finding makes a strong case for standardising this disclosure by means of law.

The implications for the Mandatory Due Diligence Debate

The European Commission confirmed in the Green Deal that it will present a proposal for the revision of the NFR Directive by the end of 2020. Through the standardisation of reporting requirements, this is expected to enhance corporate transparency and comparability among companies on sustainability-related matters, including of course human rights.

As stated in the UN Guiding Principles on Business and Human Rights, companies should report formally on how they address risks to human rights posed by their operations and operating contexts. Reporting on HRDD is one of the steps businesses should take as part of their duty to respect human rights.

However, this is only one element of due diligence. Companies can only report on processes they have in place to address severe risks and impacts, if such processes exist. Whether adopting a corporate governance perspective or viewing things through the lens of corporate responsibility, HRDD processes and reporting on HRDD play different roles. The former is about minimizing negative impacts and providing remedy for affected people, while the latter is about being transparent.

Our research demonstrates that reporting requirements on their own don’t have the power to bridge this gap. Avoiding profitable abuses and ensuring access to remedy for impacted people cannot be ensured by reporting alone. As envisaged in the UN Guiding Principles on Business and Human Rights, reporting plays a supportive role to corporate accountability, but first there needs to be effective legal disincentives in the form of mandatory human rights due diligence.

The example of the French vigilance law makes this distinction clear, and, as shown by the poor quality of the disclosures of French companies, highlights that due diligence is misunderstood by many companies as a mere reporting obligation. The success of this law - as well as any human rights due diligence legislation - will depend on the enforcement of the corporate liability which is linked to it.

The diagram below hopefully illustrates the different roles of reporting, due diligence and liability. While reporting plays a critical role in the corporate governance framework, it is not directly connected in legal terms to a company’s duty of care owed to affected people.

Our research, however, also suggests how reporting can play a strategic role in supporting corporate accountability, in addition to documenting business decisions linked to due diligence obligations.

An example is reporting on factories in high-risk industries such as the Apparel & Textiles sector, which is absolutely essential to enable affected people to engage with these companies. This information can also positively reassure responsible investors that investee companies are taking their responsibility seriously, as it reflects their openness to public scrutiny.

Our research has also documented that if companies are required by national law to disclose specific information, they do so. This is for example the case of gender pay gap, which has been reported on by over 70% of Spanish companies compared to the European average of 7.4%.

Defining such precise and universally applicable indicators (and underlying methodologies) remains a challenge, but it is certainly not impossible at least for core labour rights, including living wages.