Thursday, September 26, 2013

Do Corporations Have a Duty to Respect Human Rights? The View from Government, Investors and Academia

I have spent the past two days at West Virginia University attending a conference entitled “Business and Human Rights: Moving Forward and Looking Back.” This was not a bunch of academic do-gooders fantasizing about imposing new corporate social responsibilities on multinationals. The conference was supported by the UN Working Group on Business and Human Rights, and attendees and speakers included the State Department (which has a dedicated office for business and human rights), the Department of Labor, nongovernmental organizations, economists, ethicists, academics, members of the extractive industry (defined as oil, gas and mining), representatives from small and medium sized enterprises (“SMEs”), Proctor and Gamble, and Monsanto.

Professor Jena Martin organized the conference after the UN Working Group visited West Virginia earlier this year to learn more about SMEs and human rights issues. She invited participants to help determine how to ground the 2011 UN Guiding Principles on Business and Human Rights into business practices and move away from theory to the operational level. The nonbinding Guiding Principles outline the state duty to protect human rights, the corporate duty to respect human rights, and both the state and corporations' duty to provide judicial and non-judicial remedies to aggrieved parties.  Transnational corporations applauded the Principles when they were released perhaps because they are completely voluntary, but also perhaps because those specific Principles that focused on due diligence on human rights impacts in the supply chain were drafted after years of consultation with businesses around the world.

The UN Working Group has the daunting task of rolling out the Guiding Principles to over 80,000 companies and their suppliers in 192 countries.  Dr. Michael Addo of the Working Group confirmed that the conference was the first of its kind in the US where such a broad coalition of those affected by and thinking about these issues had convened to talk about how the Principles can work in the real world.  Participants discussed the risk management issues associated with human rights due diligence including avoiding reputational harm; addressing investor and regulatory pressure; facing internal pressures (recruiting and employee morale); and improved efficiency for project planning, forecasting and value preservation.  Other topics included strategies for transnational human rights litigation after the Supreme Court’s Kiobel decision, which significantly limited access to foreign litigants on jurisdictional grounds; the use of supplier codes of conduct as contractual vehicles; using contracts to implement the Principles; antitrust implications of consortiums working together to address human rights issues with suppliers; the benefits of hard law versus “soft law”  (voluntary initiatives) in the human rights arena; how the US Government is using its laws, trading leverage, procurement and investing power to support the Principles both domestically and internationally; and recent steps in the European Union to implement the Principles.

The issue of addressing regulatory and investor pressure was particularly interesting to me, and I addressed it in my remarks (which I will blog about separately when my paper is complete). But here are some facts I shared with the audience. US investors, international stock exchanges and governments increasingly value information on environmental, social and governmental (“ESG”) factors. As of 2012, the governments or stock exchanges of 33 countries require or encourage some form of ESG reporting. Earlier this year, the European Union proposed a directive on nonfinancial disclosure, which would require large companies to report annually on their major environmental, social and economic impacts.

The US government is farther behind than the Europeans but is catching up. The Federal Acquisition Regulations now require prospective contractors and subcontractors to certify that they are not engaging in a variety of human trafficking activities in supplying end products, and require changes in contractual clauses and compliance programs as well as cooperation with audits and investigations. Since 2012, certain companies in California have had to publicly disclose their efforts to eliminate human trafficking and slavery from their supply chains. 

Investors also seek nonfinancial information. Bloomberg publishes corporate ESG data for over 5,000 companies utilizing 120 ESG factors.  Currently, 95% of the Global 250 issues sustainability reports, which generally include impacts on the environment, society and the general economy. But these reports may be of limited utility to investors because industries may view materiality differently. To address this gap, the Sustainability Accounting Standards Board ("SASB") is a 501(c)(3) organization developing standards for publicly-traded companies in the United States in ten sectors from 89 industries so that they can disclose material sustainability information (including human rights) in 10-K and 20-F filings by 2015. Once completed, the SASB framework, which adopts the SEC definition for materiality, may have significant impact because its advisory council consists of the former chair of FASB, who was also an IASB board member, institutional investors, academics, several large corporations, representatives from most of the major investment banks as well Institutional Shareholder Services (“ISS”), the influential proxy advisory firm. According to today's SASB newsletter, thus far over 850 people representing five trillion in market capital and 12 trillion in assets under management have participated in working groups. The materiality standards for the health care industry have been downloaded over 730 times since they were released at the end of July.

As more companies begin to incorporate the Guiding Principles and consider human rights in their enterprise risk management programs and not just as line items in a sustainability report, business practices will start to change because investors and members of the public will demand it.  This year a pension fund filed shareholder proposals with three companies related to the Guiding Principles. All of them failed, including one in which a company indicated that they were already conducting the kind of diligence that the Principles recommend. ISS has issued guidance specifically on human rights impacts. It’s time for directors and executives to start considering their human rights footprint in anticipation of future requests for disclosures from investors, the government, regulators and the general public.

Business Associations, Corporations, Current Affairs, Ethics, Marcia Narine Weldon, Securities Regulation | Permalink


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