A lot has been said about the importance of the UN Guiding Principles on Business and Human Rights (UNGPs) since they were published back in 2011. Putting them into practice has not been so easy.
Since 2015, KnowTheChain (KTC) has made it possible to see how well large companies in the highest risk sectors have implemented the due diligence recommendations of the UNGPs to prevent forced labour in their supply chains. Drum roll, please. Ten years since the guidelines were laid out, ten years since our task was defined, the average score achieved by the 129 companies in KTC’s benchmarks has soared – all the way to 29%. More than half scored 25% or less, while just two, Adidas and Lululemon, were judged to have taken “advanced steps”. KTC is not alone in its negativity either: 46.2% of the 229 companies assessed for due diligence in the 2020 Corporate Human Rights Benchmark failed to score any points at all.
Perhaps that shouldn’t be too much of a surprise: the UNGPs – like the similar OECD Guidelines for Multinational Enterprises – are not legally binding. As it stands, even companies that profess to align with them are under no obligation to actually do anything, even when dealing with their closest partners. Only a fifth of corporations benchmarked by KTC offer evidence that they have adopted responsible purchasing practices, which ease the strain placed on their first-tier suppliers and limit the risk of causing harm further down the chain.
After so long spent seeing so little change, EU lawmakers have grown frustrated with the voluntary paradigm. Over the past two years, the Parliament and Commission have been working on due diligence legislation that would ‘level the playing field’ and hold EU-based and EU-operating companies legally responsible for the actions of their global supply and value chains. Soon, as Cristian Ducu, president of the European Ethics and Compliance Association puts it, companies may have to “walk the talk”.
Walking the walk?
To quote the Commission, what Ducu calls “the talk” is about identifying, preventing, mitigating and accounting for “external harm resulting from adverse human rights and environmental impacts in a company’s own operations, its subsidiaries and in the value chain”. It’s a complex topic, but it fits in compliance documents. Walks, however, are harder to transcribe. “Many companies have drafted and approved ESG [environmental, social and governance] strategies,” says Ducu, “but they haven’t got to the point of really implementing them from the company itself to the last business partner on the supply chain. To be able to walk the talk you would have to know the entire chain. You have to go from your offices all the way to the door of the last company in the supply chain, or the last family that provides products to it.”
Ducu’s probably being a bit rhetorical. Even the Parliament’s 2021 recommendations to the Commission, which asked for far more than the draft directive the Commission has since issued, called for ‘undertakings’ to engage in value chain due diligence ‘proportionate and commensurate to the likelihood and severity of their potential or actual adverse impacts and their specific circumstances’. As Johannes Blankenbach, the EU and Western Europe researcher and representative at the Business and Human Rights Resource Centre explains, this refers to the risk-based approach outlined in the UNGPs. In almost the same breath, Blackbench is at pains to point out that it does not mean every business has to meticulously police every link in its supply chain – a misconception often used to argue due diligence is too difficult to implement. “Companies have to identify and assess risks along their value chains, prioritise them and focus on the most severe,” he says. “The UNGP concept is you go where the risks are, be it tier one or tier 12, and do something meaningful about them.”
Finding the risks isn’t something anyone has to do alone either. Broadly speaking, the UNGPs and the European Parliament’s recommendations agree that due diligence should be built through transparency and stakeholder engagement, making it possible for others to alert companies to potential problems in their value chains. “To find out where the most severe and salient risks are, and how to address them, you [should] have proactive engagement with rights holders – including human rights defenders, workers and unions – to get their feedback, not just as an add-on, but really as something that co-shapes and forms the whole due diligence strategy,” says Blankenbach. It’s not about surveilling eyes as much as open ears.
But businesses tend to think a little differently about exposing themselves to outside scrutiny and influence. Almost half (45%) of those assessed by KTC fail to disclose even their first-tier suppliers. Only 15% include workers – the people with the best knowledge of how operations impact lives – in their due diligence processes. Instead, companies prefer to rely on third-party social audits of their firsttier suppliers. Ducu’s a social and ethical auditor himself, but even he doesn’t believe that approach is sufficient. Too often, compliance audits devolve into box-ticking competitions. Particularly in sectors like textiles, agriculture and technology, Ducu feels a closer look at supply chains is almost guaranteed to reveal problems with where and how products are sourced. Once those problems are clearly visible, they’re a lot harder to ignore. Facing up to them is bound to add significant costs for the multinational corporations that have benefited most from cheap globalisation.
The Parliament’s recommendations called on the Commission to mandate just that sort of close look for the largest and most high risk of EU-based and operating companies. The Commission took a long time to respond. Inevitably, any cost increases would be passed on to European consumers. Even before war broke out on the bloc’s borders, they were feeling the pinch. In the delay-strewn year between the Parliament’s recommendations and the Commission’s proposed directive, Ducu wondered whether the two institutions were trying to understand quite what another inflationary move would mean.
“They’ve stopped at the top of the hill,” he said at the time, “and nobody wants to push the snowball down the slope. They’ve seen at the bottom there are houses, there are people”.
A compromise directive
Unsurprisingly, then, the EU Commission’s draft directive, which was eventually announced on 23 February 2022, is what Blankenbach calls a “compromise”. Ducu argues it represents a completely different philosophy. “The Parliament’s document is more like one written by NGOs, while the Commission’s is much more like what the business sector would write.”
“The UNGP concept is you go where the risks are, be it tier one or tier 12, and do something meaningful about them.”
Johannes Blankenbach
In practice, that approach may make some form of mandatory due diligence easier to implement. Rather than centring on transparency, traceability and stakeholder engagement, the Commission’s draft directive is structured around something businesses already know well: contracts. In essence, it proposes that EU-based and operating companies use them to ‘cascade’ their due diligence and human rights obligations all the way through the value chain. It’s not quite revolutionary – and is likely to increase the reliance on third-party audits – but it won’t cause an avalanche in the other direction. As Ducu puts it, “you can work with this document”.
The concern for NGOs is that tomorrow’s contractual cascades might not be too different from today’s UNGP virtue-signalling. “Right now, companies are already doing contractual requirements and audits,” says Rosie Monaghan, researcher and representative for KTC, “but that doesn’t help when they’re not doing anything about the fact that their own planning, pricing and forecasting practices end up creating bad working conditions in their supply chains.”
The Commission’s draft directive also has a much narrower focus than the Parliament’s recommendations, applying to a total of just 17,000 ‘large undertakings’ and high-risk SMEs. Moreover, it limits due diligence obligations to what it terms ‘established business relationships’ – a loophole that many NGOs fear could push companies to switch between cheap suppliers on high-pressure short-term contracts. The provision seems to be designed to make compliance easier, but it might not even achieve that. Blankenbach has spoken to numerous companies that think it makes things more confusing.
“They should raise their flag and say: ‘Let’s improve the proposal and make companies lead the way with ethical behaviours and good practices – not to scare them, but to incentivise them’.”
Cristian Ducu
Spurring innovation
Companies and trade associations often object to the UNGPs’ use of words like ‘adequate’ and ‘appropriate’ for the same reason. Oddly, though, nearly every company in existence has something to say about its ability to understand needs and craft solutions. It may seem like rote, easy to follow contract-and-audit due diligence processes give EU ‘undertakings’ the space to focus money and attention on improving products and services, but perhaps it’s better to think of due diligence legislation as a way of incentivising businesses to bring the same care and creativity to their supply chains and stakeholders. Looking back once more over the trends that have emerged since the UNGPs were published, it’s even possible to argue there’s scope to turn due diligence into a new type of competitive advantage.
“Recently, the EU has tried to reflect more on values than any other place in the world,” says Ducu. “And more and more people are inclined to buy goods that are produced in an ethical way than ten years ago. People from Canada, Australia, the US, China, Japan, Indonesia – all countries – really value not only their money, but also how the products that they buy with that money are made.” Already, there are thousands of EU companies ready to make the most of these trends. If only they were part of the legislation. While many SMEs do have severe human rights impacts, Blankenbach notes that “there’s a group that may almost intuitively do certain things right”. By way of example, he points to certain smaller family-owned businesses that focus on maintaining close relationships with a limited number of suppliers and emphasise creating a business model that doesn’t exploit or harm. Under the Commission’s draft directive, however, they’re more likely to get swept into the contractual cascades of less diligent corporations than be rewarded for their own thoroughgoing commitment to doing the right thing. While it’s unlikely that swathes of SMEs will be introduced into the Commission’s proposal when it’s reviewed by the Parliament, Blankenbach and Monaghan are hopeful that the process will align it more with the value focus of the UNGPs.
For one thing, Monaghan points out that stricter legislation can directly spur innovation. Many of the arguments she’s heard about product traceability being unworkable seem to have been disproved by the impact of recent US import bans – particularly on cotton. Speaking generally, she says, “we’ve started to see companies talking about new technology that made it possible to trace raw materials in their supply chains.” Monaghan also highlights how public and government attention on abuses of migrant workers in Malaysia have spurred companies to introduce risk-based measures in the region that, once piloted, are relatively simple to apply to the rest of their supply chains.
To paraphrase Ducu, it’s possible to work with ideas like that. It’s on companies committed to ecological and rights-respecting business models to take the next step. “Companies here taking their shot at diversity, at durable products, at products made by women who are victims of domestic violence, all these socially desirable actions, they should have their say now,” Ducu stresses. “They should raise their flag and say: ‘Let’s improve the proposal and make companies lead the way with ethical behaviours and good practices – not to scare them, but to incentivise them’.”