Human rights: The questions your board and executives should be asking

In brief

Australian boards and senior executives are expected to maintain oversight of risk and compliance issues such as bribery, sanctions, human rights and anti-money laundering. In-house counsel perform a central role in supporting this oversight and maintaining compliance. In the last of a five-part series, Partners Rachel Nicolson and Peter Haig, Senior Associate Christopher Holland, Associate Freya Dinshaw and Lawyer Sarah Rennie look at the key questions that Australian boards and senior executives should be asking about human rights.

What is happening in business and human rights this year?

Five years on from the adoption of the United Nations Guiding Principles on Business and Human Rights (UNGPs), the expectations on corporates to act ethically and demonstrate alignment with human rights have never been greater.

The implementation of the UNGPs in Australia is a hot topic this year, with the Australian Government recently holding the first meeting of a Multi-Stakeholder Advisory Group that will advise on Australia's implementation of the UNGPs, including the possible development of a National Action Plan on Business and Human Rights. Allens has supported the Australian Government and the Multi-Stakeholder Advisory Group by producing the world's first national 'stocktake' on business and human rights (available here). The Stocktake comprehensively maps existing federal, state and territory laws, Government policies and business practices in Australia against each of the UNGPs, and provides a detailed guide to business and human rights in Australia. It is being used as a platform for the Government's consultations and action on next steps towards implementing the UNGPs.

Australia is not alone in working towards the national implementation of the UNGPs: France, Germany, the USA, Italy and Switzerland are recent additions to the growing list of countries that have produced National Action Plans on Business and Human Rights, with many more in the consultation stages.

The expanding scope and impact of legislation affecting business and human rights is an area to watch in 2017. A key trend is the increasing requirement on corporates to report on 'non-financial' issues. As we have previously reported, the Australian Government has launched a broad inquiry into establishing an Australian Modern Slavery Act. If the UK approach is followed, we expect this will place new requirements on large companies to publish a 'slavery and human trafficking statement' setting out any steps taken to ensure that there is no slavery or human trafficking taking place in any supply chains, in any parts of the business regardless of where operations take place. The inquiry received more than 180 submissions, including many from Australian businesses.

The Corporate Human Rights Benchmark (CHRB) released its first results in March 2017, and is set to be a game changer for assessing and ranking the human rights performance of large businesses globally. It seeks to 'tap into the competitive nature of the market' to drive change in preventing adverse impacts on workers, communities and consumers. The CHRB assessed 98 companies on 100 human rights indicators, and has published a detailed analysis of each company's performance. Two of the three top performers this year were Australian businesses, with BHP and Rio Tinto leading the pack alongside UK retailer Marks & Spencer. The number of benchmarked companies is set to expand over the coming years, providing businesses with a window of opportunity to align their operations and practices with the CHRB indicators.

The business human rights debate presents risks but also opportunities. As more tools such as CHRB enter business stakeholder consciousness, the more likely they are to drive change by affecting sentiment and behaviour. The companies that benefit most will be those that grasp this potential to increase their attractiveness to stakeholders, broadening their 'licence to operate', while driving positive human rights impacts.

What human rights are relevant to your business operations? And what are the risks involved in non-alignment with human rights standards?

It is important for your company to understand the broad scope of human rights obligations that are potentially impacted by its business operations. The UNGPs require businesses to respect human rights – including those expressed in the International Bill of Human Rights (which comprises the Universal Declaration of Human Rights, the International Covenant on Economic, Social and Cultural Rights, and the International Covenant on Civil and Political Rights and its two Optional Protocols) and the International Labour Organisation's Declaration on Fundamental Principles and Rights at Work. Other human rights instruments may also be relevant to your business, such as the UN Declaration on the Rights of Indigenous Peoples.

The activities of your company, and companies in your supply chain, that impact on human rights may include (but is by no means limited to):

• environmental practices, including use of water, pollution control and waste disposal, which, for instance, may impact upon right to life, right to health and the right to water;
• company operations that impact on the individual or collective rights of indigenous peoples;
• supply chain practices, which may require consideration of the protections against child labour and forced labour;
• industrial relations activities, which may require consideration of international standards informing the rights to freedom of association and collective bargaining; and
• dealings with governments in states known to be engaged in serious human rights abuses, particularly if your operations or activities are dependent on government involvement, for instance in provision of security, law and order.

Failure to identify and manage business practices that attract human rights risk poses a range of risks, including  potentially litigation, shareholder activism (including divestment), risk to project financing, operational delays and significant reputational damage. As well as using tort law as a vehicle for claimants to bring cases against corporations, a key trend to watch is the trend toward human rights issues being raised in investor-State arbitrations, where claimant investors challenge the adverse actions of foreign governments based on human rights grounds, including water access, land rights and the environment.

How much is 'enough' human rights due diligence?

Corporates are expected to prevent or mitigate adverse human rights impacts that are linked to their operations, products or services through their business relationships – regardless of whether the company directly contributed to those impacts. This means that due diligence is expected to include a human rights assessment of contractors, suppliers, customers, joint venture partners, and other business partners. This is particularly relevant for corporates investing in unfamiliar jurisdictions, or in jurisdictions considered high risk from a human rights perspective.

When prioritising where to focus due diligence efforts, under the UNGP framework your company  should consider:

• the severity of the relevant human rights impacts;
• which third parties pose the highest level of risk of adverse human rights impacts, and particularly the risk of complicity in gross human rights abuses; and
• the degree of your company's direct or indirect involvement with the potential or actual adverse human rights impacts.

Human rights due diligence should be conducted periodically, and prior to new business activities, changes in business operations, and in response to changes in-country that may affect human rights (such as political change, security incidents or public unrest).

There is also an increasing focus on human rights due diligence in domestic laws. We've discussed the UK Modern Slavery Act, and proposed Australian Modern Slavery Act, above, which encourage businesses to undertake due diligence on practices throughout local and global supply chains. In addition to these developments:

• the Child Labour Due Diligence Law was adopted in February 2017 in the Netherlands, which requires companies to examine whether child labour occurs in their supply chain;
• in France, the National Assembly adopted the Corporate Duty of Vigilance Law in February 2017, requiring parent companies to identify and prevent adverse human rights and environmental impacts by creating a ‘vigilance plan’ for company and controlled company actions;
• in Asia, new sustainability reporting requirements have been introduced affecting listed companies in Singapore and Hong Kong;
• in November 2016, EU institutions agreed on an EU Regulation on conflict minerals, such that more than 95 per cent of all EU imports of tin, tantalum, tungsten and gold will be covered by due diligence provisions as of 1 January 2021, requiring EU companies to ensure they import these metals and minerals from responsible sources only and that the products purchased have not been produced in a way that funds conflict;
• in 2014, the EU made non-financial reporting compulsory for certain large companies (at least 500 employees), including on the company's  'development, performance, position and impact of its activity' on respect for human rights, with first statements expected in 2018; and
• the OECD recently released additional guidance, including on Responsible Business Conduct for Institutional Investors (highlighting key considerations for due diligence to identify and respond to environmental and social risks), and Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector.

How can we require and incentivise human rights alignment?

It is important for companies to create a corporate culture that respects and protects human rights. The UNGPs require businesses to have in place policies and processes appropriate to the company's size and business model, including a policy commitment to respect human rights, human rights due diligence processes, and processes to enable the remediation of adverse human rights impacts.

In addition, companies are expected to embed human rights practices across their business. This may be through business processes such as risk management frameworks and other corporate culture 'levers' such as training.

Companies should be careful to ensure that business models or practices do not incentivise human rights violations, such as by cutting corners on minimum wages or health and safety requirements. In addition to considering direct business activity, actively recognising and engaging contractors that implement effective safeguards and demonstrate improvements on human rights performance can be a good way to promote a culture of compliance within your supply chain.

Does your company have appropriate processes to report and resolve human rights grievances?

Your company should have processes in place to facilitate reports of suspected breaches of human rights in connection with operations or activities, and escalate issues where appropriate. The reporting channel for human rights violations will typically fall under the company whistleblower policy, which should be drafted to include human rights issues as reportable conduct.

Operational-level grievance mechanisms can be an effective means to resolve disputes and provide a remedy to affected individuals. For the aggrieved party, grievance mechanisms provide a direct channel to raise concerns with the company, and make it possible for adverse impacts to be remediated early and directly by the company. For the company, grievance mechanisms may provide a useful means of identifying human rights risks (an 'early warning system'), encourage direct engagement with stakeholders, and minimise costs of formal disputes and reputational harm.

The effectiveness criteria set out in the UNGPs require that company level grievance mechanisms are legitimate, accessible, predictable, equitable, transparent, rights compatible, a source of continuous learning and based on engagement and dialogue. Developing the best model for your company can be challenging. However, there is a growing body of best practice, which provides guidance to corporates looking to implement or update their grievance mechanisms.