Three Reasons Why Human Rights Due Diligence Is Beneficial For Companies

By Theresa

When was the last time you – voluntarily – tried something new which looked complex to your mind and unpredictable in its consequences?  Usually, we overcome our doubts and fears once it is established that trying a new action will have benefits. This post presents three reasons why human rights due diligence is beneficial for companies.

Just as companies had major reservations against environmental standards, gender diversity programs and measures to combat corruptions, there are still many companies which do not like the idea of integrating human rights in their processes. Some argue that it is not necessary. For a brief introduction to that, read my post on corporate human rights responsibility in Germany. Other corporate representatives do not think it would be beneficial to their company; an attitude which speaks volumes about how they understand their business and their customers.

In my advocacy work for a strong National Action Plan on Business and Human Rights (NAP) I have gained the impression that the biggest impediment for changing companies’ conduct towards paying proper regard to human rights and environmental concerns is fear: the corporate fear of human rights. This fear is tangible in rooms, and you can sometimes see it in people’s faces. I do not know all reasons for this fear, but with this post I tackle one aspect: the fear that companies could not benefit from taking on human rights responsibility.

Wondering what human rights due diligence is?

The UN Guiding Principles on Business and Human Rights (UNGPs) suggest that companies should fulfil their responsibility by establishing and maintaining human rights due diligence. If you wonder what this form of due diligence is, you will find this blog post on blue trousers interesting.

If you wonder what advantages human rights due diligence offers companies, here are three examples:

# 1 Legal Clarity for Investments….

Uncertainty always causes costs to companies because they cannot ascertain the best possible usage for available funds and, in the worst case, do not invest available funds. When speaking about costs we talk about the absence of earnings because the uncertainty led companies to prefer forgoing potential business. A good example is the investment withheld by companies following the Brexit referendum.

There is a high degree of uncertainty what exactly customers and members of societies in home and host state expect of companies regarding their social and environmental conduct. The framework of the UNGPs presents itself as an international minimum standard of expectations on companies’ human rights conduct. Properly studied and applied to the company in question, human rights due diligence offers legal clarity. This clarity translates into legal certainty and, thus enables companies to shed light on the true, but hidden costs an investment may imply.

…. and clarity on Responsibilities

Establishing an ongoing procedure with constant screening and monitoring potential business impacts on workers, neighbouring villagers on factory sites and similar external stakeholders is currently a novel idea. Many corporate actors fear that human rights due diligence would imply that the company takes on the responsibility for all human rights of all stakeholders. This is not the case as explained in the first post on human rights due diligence. How to prioritise different human rights issues in order to take the correct action depends on scale, scope and remediability as explained by the organisation Shift:

By publicly recognising the UNGPs and their framework as a basis of its corporate human rights responsibility, a company clarifies its understanding of human rights and resulting responsibilities. This is a good basis for developing legally sound social compliance.

# 2 Better Risk-Management

Yes, the huge difference between human rights due diligence and other forms of due diligence already undertaken by the company is: human rights due diligence places individuals and groups – not the risk for the company – in the limelight. It monitors the risk with which the company negatively impacts a specific kind of individual and/or group and to which degree. This renders it so difficult to grasp for companies. Simultaneously, this is also the reason why human rights due diligence can serve as an effective early warning system. With human rights due diligence you can detect risks that are not recognised by other due diligence mechanisms.

Companies currently only consider a limited number of factors in their risk-management. This leads to risks developing into dangers which catch companies by surprise as John Komlos shows in his analysis of the impact of deregulation on US-American politics. He states:

“This is a generalizable rule: elites are endangered by excessive greed. And being out of touch to the last minute is not uncommon at all.” (John Komlos)

If you factor in this human tendency to ignore crucial developments, adding a new angle to a company’s risk management system is well-worth the investment.  Yes, human rights risks may look non-financial for the moment, but the development of the last decades shows that non-financial issues can quickly evolve into financial ones with very painful effects to the ignorant company.  There are many cases in which companies failed in their social compliance and are still paying for it, for instance:

  • Unilever– usually praised for its implementation of human rights due diligence – continues to be confronted for its failure to pay for cleaning up the mercury poisoning in Kodaikanal
  • The increasing pressure on BASF to use its leverage over Lonmin for the benefit of the survivors of the Marikana massacre
  • German clothing company KiK, the main customer of Ali Enterprises, is currently standing trial

# 3 Level Playing Field

Everyone who grows up to become an adult knows: sometimes one correctly follows all procedures. And things still go wrong. Sometimes they go terribly wrong. Human rights due diligence is the diligence towards human rights which is due in a specific context. Once a company has exercised this diligence and can present evidence to doubting third parties such as non-governmental or victims’ rights organisations, it can escape the black-and-white images which ‘blaming & shaming’ campaigns create. If human rights due diligence were clearly defined by law, companies had clear guidance on how to effectively discharge their human rights responsibility. Currently, companies fear competitive disadvantages if only some companies in some states or regions of the world were burdened with this kind of new obligation.

This reasoning ignores three aspects:

1) The playing field is already uneven.

Companies doing good, like alternative trading companies, are de facto disadvantaged in competition with conventional companies. Some point to the consumers as those responsible for changing this. Consider the complexity of today’s supply-chains and companies unwillingness to be transparent in their and their suppliers’ conduct. Consider how industry associations claim they have no control over their supplier and subcontractors. How can we shift the burden to the consumer who is not at a liberty to dedicate his/her* productive time to researching sustainable business practices? The bottom line remains: the current field punishes those who are unwilling to give up ethical standards in business.

2) Absent transparency and weak trust already cause unpredictable and spontaneous costs.

The current state of absent transparency and distrust towards companies translates into costs arising from building consumer trust, and this is worsened with every ‘name and shame’ campaign. This particularly applies to all companies directly dealing with consumers, but the legal setting is changing for other companies such as investors, too.

3) The shift towards an internationally level playing field is already taking place.

With an increasing frequency corporate failures have enabled campaigners to successfully motivate political leaders to take steps away from purely voluntary corporate responsibility towards a smart mix of measures to regulate corporate conduct regarding the environment and people. Exemplary, I recommend looking at the multi-stakeholder initiative on textile and clothing in Germany, Textilbündnis, following the Rana Plaza disaster in 2013.

In order to conclude, I quote Alison Taylor and James Cohen:

 “The current approach of self-regulation in supply chains is likely to become untenable in the face of increasing transparency and awareness. Governments may seek a greater role in the regulation of corporate supply chains and of the expectations placed on companies. (….) Given the immense practical complexity that this presents for businesses, we might expect to see the emergence of an “adequate procedures” framework analogous to the emerging global consensus on anti-corruption compliance.”

… and you may guess whether human rights due diligence forms part of the adequate procedures or not.




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