Koen de Roo[1]
Business involvement in human rights violations as laid bare by cases such as the 2013 collapse of the Rana Plaza – a building housing clothing factories situated in Bangladesh’s capital Dhaka – has led to the introduction of several legal and non-legal mechanisms which aim to enforce corporate responsibility to respect human rights. The most recent step in integrating this responsibility in corporate governance regulation is included in the European Union Directive on non-financial disclosure (the ‘Directive’). The Directive contains the obligation for large companies (>500 employees) to describe policies, outcomes and principal risks related to human rights matters in their management reports.
Worldwide awareness of the responsibility companies have to respect human rights was created when the United Nations published its ‘Protect, Respect and Remedy framework’,[2] or Ruggie framework (after professor John G. Ruggie, Kennedy School of Government, Harvard), in 2008. In 2011, this framework was substantiated by the UN Guiding Principles on Business and Human Rights, providing companies with general guidelines on human rights involvement. With the new regime set out in the European Union’s directive on non-financial disclosure, the EU appears to have made a significant step toward operationalising the Ruggie principles. It does however contain considerable lacunas which require filling before the implementation deadline of 2017.
In a recent publication in the journal European Company Law,[3] I aim to answer the question of what role the Directive can play in human rights reporting by European transnationally active companies. I discuss the desirability of mandatory reporting as a regulatory tool, covering the limitations of voluntary reporting in the light of Ronald Coase’s theory of social cost, and the manner in which a mandatory reporting regime could function in view of current market conditions. These conditions chiefly consist of the rise of social responsibility of private actors in the equity markets (socially responsible investing) and the debt markets (following the recent entry into force of the renewed ‘Equator Principles’ for financial institutions), as well as the increase of human rights oriented clauses in public procurement and business-to-business contracting.
The way the interaction of a mandatory reporting regime and the activity of socially responsible private actors can lead to effective enforcement of the UN Guiding Principles on Business and Human Rights (‘UNGP’) depends largely on two processes which take place in companies, namely internal due diligence and mutual learning. The Ruggie framework defines due diligence as ‘the steps a company must take to become aware of, prevent and address adverse human rights impacts’. This requires companies to acquire country-by-country information on human rights conduct, to analyse business practice and policy carried out by the company, as well as to refrain from contributing to, or keeping in place of activities carried out in its supply-chain which infringe or pose the risk of infringing human rights. The resulting human rights reporting, in turn, provides other companies with valuable information about the way in which competitors fulfil their responsibility, creating the foundation for mutual learning.
An oft-stated downside of the UN Guiding Principles is their generic character which causes them to provide insufficient guidance to facilitate useful and comparable reports. However, an initiative by Shift, a non-profit organisation chaired by professor Ruggie, and accounting firm Mazars, could prove likely to fill the gaps which resulted from the open-endedness of the Ruggie principles. The Shift/Mazars project [4]consists of two pillars: the creation of a UNGP reporting framework (published in February 2015) and a corresponding assurance framework (planned to be finalised in 2016). These frameworks can resolve key issues formerly considered inherent to the UNGP: they provide a practical substantiation of the principles, they can diminish the lack of comparability among human rights reports and they can enhance reporting reliability. Together, this could render the UNGP the most practicable standard worldwide for human rights reporting.
At first glance, the EU Directive appears to allow for integration of these frameworks for business and human rights reporting into corporate governance regulation throughout Europe. According to the European Commission, the regime will cover approximately 6,000 large companies and groups across the EU. Nonetheless, the Directive contains a number of salient aspects suggesting the positive effects it aims to achieve could be limited. The main weaknesses being (i) a lack of harmonization regarding integrated reporting and assurance, and (ii) an excess of possibilities for companies to deviate from reporting requirements. Since its harmonization efforts do not cover integrated reporting and third-party assurance, the Directive falls short in facilitating comparability and reliability of human rights reporting. Also, the leeway it gives for withholding information on related parties’ conduct in the company’s supply chain is an undesirable regulatory gap. Finally, in the light of the existing and functional frameworks, companies are given too much flexibility in their choice of framework.
Despite the opportunities the EU has lamentably missed, there are possibilities for improvement at a member state level. Third-party assurance and integrated reporting can be included in national legislation, rules on supply-chain disclosure can be substantiated in national implementation processes, and prescription of the United Nations reporting framework can be included in national corporate governance codes. If these steps are taken by the member states, the Directive could play a pivotal role in the enforcement of the corporate responsibility to respect human rights.
The article ‘The Role of the EU Directive on Non-financial Disclosure in Human Rights Reporting’ is available at http://ssrn.com/abstract=2659519.
[1] LLB (Maastricht), LLM (VU Amsterdam), LLM (Lond), PhD candidate, Zuidas Institute for Company Law and Financial Law, VU University Amsterdam.
[2] http://www.reports-and-materials.org/sites/default/files/reports-and-materials/Ruggie-report-7-Apr-2008.pdf.
[3] KHM de Roo, ‘The Role of the EU Directive on Non-financial Disclosure in Human Rights Reporting’, (2015) 12(6) European Company Law 278.