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13 May 2021

John G. Ruggie, Caroline Rees, and Rachel Davis (Harvard Kennedy School)

Ten Years After: From the UN Guiding Principles to Multi-Fiduciary Obligations

While American commentators continue to debate whether the “repurposing” of the corporation is virtue signaling or more fundamental, and whether ESG investing is real, a bubble, or an artifact of bad measurement, Europe is launching a regulatory revolution that, if seen through successfully, will fundamentally reshape the social construct of the large corporation.

The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is now being phased in. It imposes two requirements on all “financial market participants,” including advisors. First, they must identify and publish how they account for “sustainability risks” in their investment advising and decision-making. Second, financial market participants are required to publish on their websites how they do their ESG due diligence to identify those risks. Additional requirements apply where financial products are marketed as “ESG” or “sustainable.” Specific enforcement mechanisms are still to be determined but will include administrative measures and fines. The assumption is that the SFDR in some manner will apply to any financial market participant that operates within the single market – which includes U.S.-based firms and their subsidiaries. Details on how this will be implemented are still being worked out. The Commission has also just published a revised Corporate Sustainability Reporting Directive that confirms the expectation that covered companies will report on their ‘principal adverse impacts’ on people and planet, informed by international human rights standards.

The European Commission is drafting another directive or regulation, expected to be published in July. This is likely to require companies to conduct human rights, environmental and governance due diligence across their global value chains. The European Parliament has already recommended a draft law to this effect, which is not binding on the Commission. But as it was adopted by the overwhelming majority of 504-79 it sends a strong signal. It covers companies’ entire value chains; includes a liability provision; and requires companies to establish grievance mechanisms accessible by stakeholders.

The EU links these regulatory initiatives to the European Green Deal or closely related EU sustainable finance commitments. Both initiatives invoke not only the concept but also the specific steps first outlined in the human rights due diligence provisions of the UN Guiding Principles for Business and Human Rights, adopted unanimously by the UN Human Rights Council in 2011. The UN Guiding Principles have served as the global “soft law” law standard for the past decade. By the mid-2010s several countries began incorporating these provisions into reporting legislation combatting modern slavery (UK, Australia). In 2017 France adopted a more comprehensive Loi de Vigilance inspired by the Guiding Principles; in 2019, the Netherlands adopted a law requiring due diligence on child labor risks and in 2020, the government committed to expand it to a comprehensive due diligence obligation. The German cabinet in February 2021 adopted a draft mandatory human rights and environmental due diligence law that was sent to parliament for its consideration before the end of June. While the EU requirements will cover the entire single market, national governments will need to contribute to their enforcement.

U.S.-based corporate law firms have begun to pay attention to these development on behalf of their clients. But neither the EU initiatives nor, even less so, their origin in the human rights due diligence construct introduced in the UN Guiding Principles, are widely known in the United States. Our paper aims to fill the gap...

The complete paper is available for download here.