The Carrots and Sticks of Due Diligence

Mandatory human rights and environmental due diligence are evolving from a utopia to an achievable goal.
Corporate due diligence, human rights due diligence, UN business and human rights, corporate responsibility legislation, international humanitarian law, human rights due diligence litigation, corporate human rights abuses, legislation on human rights, human rights due diligence incentives, corporate responsibility on human rights

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December 17, 2019 11:33 EDT

Throughout history, France has often been on the frontlines of leading change. This time it is about state regulation of transnational business activity. It was only in March 2017 when France’s Corporate Duty of Vigilance Law entered into force. Over two years later, mandatory human rights and environmental due diligence are evolving from a utopia to an achievable goal elsewhere too.

Last May, the Dutch parliament adopted a Child Labor Due Diligence Law that is expected to come into effect sometime in 2022. Draft proposals are before the legislators in Switzerland and Austria. Civil-society campaigns are underway in the UK, Finland, Germany, as well as countries such as Italy, where early government commitments have fallen by the wayside.

The Way Ahead for a UN Treaty on Business and Human Rights


To top that off, on October 23, four French NGOs and two based in Uganda brought the first lawsuit under the duty of vigilance law against Total as the principal operator of a giant oil project in Lake Albert and Murchison Falls, a protected natural park in Uganda. The six NGOs had formally demanded that Total revise the content and implementation of its vigilance plan for the oil project in June. Total rejected the charges after a three-month legal deadline, allowing the complainants to take the judicial route.

Whether or not a new vigilance plan — or even urgent preventative measures — will be necessary lies now in the hands of the court of Nanterre. The stakes are high, and not only for Total, which may soon face yet another lawsuit from a coalition of 14 cities and NGOs over insufficient action on climate change in its vigilance plan. The case over the Uganda oil project is also, as one of its promoters said, “a real test to see if it [the duty of vigilance law] does indeed allow us to prevent future human and environmental catastrophes.”

Reference Points

Whatever the outcome is, the French example has provided focus and momentum. But the narrative that is spreading across Europe finds its underpinnings in the United Nations Guiding Principles on Business and Human Rights, and therein particularly in human rights due diligence. This notion is critical in that it provides the standard of conduct required of companies to discharge their duty to respect human rights. Put differently, the guiding principles flesh out the responsibility of companies in terms of the need to manage the risk of involvement in human rights abuses.

In this sense, due diligence for human rights abuse is conceptually akin to other processes to manage business risks. It speaks to business people because it is framed primarily as a business process. Not surprisingly, voluntary initiatives, both at company and industry level, have so far dominated the field of human rights due diligence.

The guiding principles, however, allow leeway on how to achieve the standards of business and state conduct that they incorporate. So now campaigners, banking on the poor performance of voluntary initiatives in recent assessments, are pushing for states to take legislative action. They argue that imposing mandatory due diligence for companies when it comes to human rights is neither more nor less than what the complete application of the guiding principles requires.

Only a few, and quite unsuccessfully, have contested the outright appropriateness of legislative action on human rights due diligence. Most recently, the suggestions along those lines by a collective of Swiss businesses have drawn an unequivocal rejection from the author of the guiding principles, John Ruggie. The episode, albeit relatively minor, tells of how coveted it is to tap into the legitimacy of the guiding principles.

Their relevance, indeed, is not only strategic but also conceptual. The guiding principles provide a relatively neat way to grapple with the complexities of global supply chains. They distinguish three scenarios — causation, contribution or direct linkages to human rights impacts — and focus on the extent of leverage by the company over the entity that is causing harm. The actions that satisfy the due diligence standard vary accordingly.

Grey Areas

Let us start from a situation of the third scenario: a supplier that uses child labor without any intended or unintended pressure from the enterprise to do so. Here, the enterprise should use its leverage over the supplier to mitigate the adverse impact, or it should try to get to that position. If no increase in influence over the supplier is possible, it should cut the business relationship. By contrast, had the enterprise caused or contributed to the adverse impact, thus falling into one of the two other scenarios, it would have had the additional duty to change its conduct and practices.

At a closer look, of course, things are messier than that. For instance, the extent to which failures to supervise or intervene in the harmful conduct of a business entity qualify as a form of contribution is pretty much a grey area in the guiding principles. More profoundly and systematically than that, the very line between contribution and direct linkage is flimsy, and particularly so in highly-integrated supply chains. Not only some extraordinary conduct, such as changing product requirements for suppliers without adjusting production deadlines and prices, but the standard purchasing practices of lead firms place a strain that will eventually lead suppliers to breach labor standards.

The extent of the measures that a lead firm should take does not depend on the correct ascription of the situation to one or the other scenario, nor is it merely a question of leverage. It is instead a choice about the function of due diligence as a policy tool for shaping business relationships and, more broadly, global supply chains.

Nonetheless, the appeal of the guiding principles remains strong. All the current legislative proposals borrow from them the idea that the greater the control over adverse impacts, the greater the company’s duty should be. The functions of human rights due diligence are also the same — namely, to detect, prevent, mitigate and account for how a company addresses its adverse human rights impacts. Yet the step forward for legislation would be to establish a clear link between corporate due diligence and corporate liability, which is at best implicit in the guiding principles.

Curbing Box-Ticking

But what does it mean to focus on the consequences of failing to carry out proper due diligence? Unlike a previous wave of due diligence laws, such as the 2015 UK’s Modern Slavery Act, that only include reporting obligations, the current drafts require comprehensive human rights due diligence. Most of the bills either adopted or under discussion, however, contain little on how companies should prove that they have exercised human rights and environmental due diligence in their supply chains.

The French law requires French companies employing more than 5,000 people to establish a vigilance plan to identify risks to human rights and the environment as a result of their activities, and those of their subsidiaries and suppliers, but it leaves implementation issues to governmental decrees. The Swiss and the Dutch bills, which by now have a long pedigree in their respective parliaments, do as much and postpone even more issues for later decision-making.

The focus is instead on liability and on what form and scope are best suited to ensure that failing to carry out adequate due diligence can cost companies. Options range in nature, from civil to administrative to criminal liability, with the most popular one being civil liability. The transnational element also plays out differently. For instance, the French law ensures virtually the same scope between the coverage of due diligence and that of liability; the Swiss proposal, by contrast, restricts liability to a limited portion of the value chain over which Swiss companies shall exercise due diligence. Aside from differences in how robust accountability is intended to appear on paper, the emphasis is quite consistently on the deterrence side, on some form of sanction.

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And hard law is not where it ends. The shadow of sanction permeates the narrative, particularly of lawmakers, even where there is no bill on the table yet. The cases of Germany and the UK are exemplary. In both countries, members of the government have announced that they may consider introducing laws on mandatory human rights due diligence if the voluntary measures by businesses did not yield the necessary improvements. The message sounds at the same time as a warning to the private sector and a concession to the pro-legislation campaigns. Still, legislation hovers like a threat.

The notion of sanction is far from out of place. Nor is its specific use in the current context disproportionate or unfit for curbing superficial approaches by companies. The emphasis, however, is almost exclusively on sticks, but this doesn’t need to necessarily be the case. The latest draft of the treaty on business and human rights provides useful guidance by insisting on the role of positive incentives in prevention — for instance, financial benefits and preferential treatment in public procurement for role-model companies. A few well-devised carrots could prove beneficial in a context such as the present one, where decentralization may turn into a sounding board for polarization.

Avoiding Free-Riding on Liability

If liability raises the costs of non-compliance for companies, along with their duties, there is a reverse to this coin. Accordance with due diligence may, in turn, become a shield from liability. We would then end up back to square one, and to box-ticking being the norm. Avoiding this risk is the ultimate test for legislation, in addition to overcoming the usual barriers against transnational liability. Among these are legal doctrines that disaggregate supply chains, such as separate legal personality and material hurdles in the collection of evidence.

Overall, the solutions provided reflect the specificity of each jurisdiction. Yet the leitmotif is to focus on the overseas responsibility of the home company, which translates into variations on the theme of the parent company’s civil liability. The French and the Swiss bills provide a good glimpse into the spectrum. According to the latest draft, Swiss companies would be liable only for the conduct of their direct subsidiaries rather than for all the entities over which they have some leverage. The scope of due diligence would instead cover the entire value chain. The French law is potentially broader in scope because a French company would be liable for the failures to exercise due diligence over the companies over which it has some form of control.

Being able to sue home companies for their overseas abuses has been the holy grail for generations of human rights advocates and lawyers. This model, known as transnational tort liability, is not the only option. The Dutch Child Labor Due Diligence Law in particular stands out as an alternative by providing a mix of mild administrative fines and criminal sanctions in cases of repeated non-compliance. The law covers all companies that sell or supply goods or services to Dutch consumers, including companies registered outside the Netherlands. The focus is on the conditions to gain access to a specific market and not on establishing a link from upstream to downstream in the supply chain of a home company.

The point is far from anodyne because it reshapes, at least in part, the allocation of carrots and sticks. Think, for instance, of the Swiss case, where a vocal lobby of companies is trying to sabotage legislation by brandishing the prospect of Swiss companies suffering a disadvantage compared to their competitors abroad. This narrative would not be available under the Dutch model because any business entity would be subject to the same obligations. After all, it is perhaps not a coincidence that the Netherlands were able to pass their law despite not having a reputation for business-bashing.

As new models of liability emerge, it may then be worth taking a look at issues outside the perimeter of transnational tort liability. Thinking along the lines of the Dutch model may revive the power of consumers, particularly in the northern countries. It could also, at least in some cases, weaken the standing of anti-legislation domestic business lobbies.

Shifts in Regulative Authority

Against this backdrop comes the return of the state as a regulator of transnational business activities. One relatively stylized way to narrate this legal development would be through the metaphor of waves. Public law is back at the forefront after decades of eclipse by soft legal regulatory frameworks, particularly the guiding principles and private codes of conduct. But the simplification here is misleading. For one thing, businesses will remain the first regulators of their supply chains, including through risk mitigation strategies.

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The question for business will instead be one of adaptation. How are the current rights risk mitigation strategies going to fit an emerging but somewhat fragmented regulatory environment? At one level, this is a practical question. Most drafts do not wholesale translate the three scenarios of the guiding principles. Schemes devised along those lines may, therefore, not be enough or appropriate to satisfy the requirements of mandatory due diligence.

At the same time, the need for businesses to adapt to new public law requirements may also lead to increased activity in areas of self-regulation that so far have attracted less attention than codes of conduct and monitoring. One such area is remediation. Companies have started devising complaint mechanisms at both site, company and industry level. But the sophistication and diffusion of these practices remain relatively low. In the future, remediation may take center stage to address the consequences of their adverse impacts.

One important caveat is in place. Due to power imbalances, grievance mechanisms may provide poor remediation deals for affected individuals and communities. The gap with transnational litigation may prove severe, even when a case does not proceed to the merits. Examples range from women at the Porgera North mine in Papua New Guinea to villagers in Tanzania’s North Mara mine. Those who sought relief in UK courts were able to conclude out-of-court settlements far more advantageous than the remediation packages under the respective company-led compliance mechanism.

These two cases do not directly concern the issue of due diligence, but they do provide a useful lesson. Private remedy mechanisms may misrepresent the adverse impacts of a company, thus lowering its exposure to legal liability. This misrepresentation may limit the protection of rights, even where due diligence laws are in place. 

At the opposite end of the spectrum of actors, the role of civil society is also likely to change. Insofar as human rights due diligence is an ongoing process, it needs sustained scrutiny. State authorities have a role to play there. But most legislations, more or less implicitly, bestow the role of a watchdog on civil society. Just months ago, for instance, Sherpa, a leading NGO in the area of business and human rights, released a detailed study on the vigilance plans adopted so far, including suggestions on necessary improvements.

Such monitoring functions may also support the development of new pressure techniques by NGOs. Again, the French law allows any concerned party to ask for changes to a given vigilance plan. If the company fails to meet obligations after three months, then the case proceeds to the litigation phase. This two-step procedure, in a way, institutionalizes the threat of judicial action as a pressure technique. As a result, not only does NGO scrutiny gain higher visibility, but transnational alliances also become more meaningful.

Having coalitions to track due diligence over time may increase the agency of NGOs in the “global south,” which all too often engage only in the litigation stage and mostly as representatives of victims of human rights abuses. 

What’s On the Horizon?

The debate across Europe is still polarized and the attitudes of business in the same country (think of the Swiss drama) divided. But as William Anderson, the human rights in-house counsel for Adidas, eloquently said: “it is not a question of if, but when such laws will be in place and how they will impact current business operations and practices.”

Perhaps the most balanced assessment would be that the attitudes of business are in flux, oscillating between two positions. One is to pressure against piercing the corporate veil; the other is to push for leveling the playing field. The supporters of the latter options say it would solve the dilemma for companies of being confronted with contradictory standards and would also prevent the problem of free-riding, which they have often lamented as a drawback of national laws on human rights due diligence.

As the new European Commission has just obtained the seal of approval from the European Parliament, efforts will likely focus on getting an EU framework. In the meantime, the stakes are higher not in the adoption of new laws but in the not-so-distant implementation challenges ahead.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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