Impatient governments push corporate supply chain due diligence

By Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct. This article was originally published on oecdonthelevel on 24 November 2017.

At the OECD’s Global Forum earlier this year, I was asked to talk about the state of play on the uptake of supply chain due diligence. To back up my talk with some killer stats, I turned to the recently published Corporate Human Rights Benchmark. This is the best available overview on human rights due diligence that also includes labour rights and, for example, standards concerning child and forced labour.

As often happens, I found good news and bad news. The good news is that a small group of companies, including BHP Billiton, Marks & Spencer Group, Rio Tinto, Nestlé, Adidas and Unilever, is taking a leadership role. They deserve praise for their efforts, despite the many challenges. The bad news is that only three companies scored more than 60% for their due diligence efforts, with the average score being 28.7%. If this were a school test, it would be classed as a ‘big fat fail’. The failure is even fatter when it comes to embedding respect for human rights in due diligence, with an average score of only 16%.

These disappointing findings are complemented by the recent Economist Intelligence Unit’s ‘No more Excuses’ study which reveals ‘a worrying degree of complacency’ within companies. Four out of five business executives responding to the Economist survey agreed or strongly agreed that their company’s supply chain was responsible, with just 2% disagreeing. The vast majority of respondents stated that their firms’ responsible supply chain standards were compliant with, or even more stringent than, government regulations and industry standards (94% and 97%, respectively). The physically closer a firm to its suppliers, the more likely respondents were to believe that its supply chains were responsible. However, the study shows that a sizeable proportion of businesses have actually allowed supply chain responsibility to slide as a priority in the past five years.

The study also reveals just how few companies are paying attention to key issues such as child labour (only 22%), climate change and carbon footprints (only 23%), and gender equality (only 28%). These results are a cause for concern, both with respect to the severity of these issues and their relevance to Asia where a majority of the companies surveyed are based. According to UNICEF estimates, for example, 150 million children are engaged in child labour globally. While the highest levels are in Africa, child labour is also a significant in emerging Asian economies. In addition, given that some of the most prominent exposés of child labour concern mining, it is disappointing to see that only 20% of companies in the raw materials sector address this issue, the worst-performing industrial group.

Governments are getting impatient

While some governments have been complacent in promoting the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, a number of governments are getting more and more impatient.

France took the lead in 2016 by adopting a Due Diligence Law. The EU has adopted a mandatory non-financial disclosure directive that includes reporting on due diligence. Germany’s compromise in its National Action Plan was to state that if more than 50% of all German-based companies with over 500 employees have not taken credible action to integrate human rights due diligence in their operations by 2020, the government will examine further steps, including legislative measures. Some advanced economy regulators are also extending the applicability of their due diligence regulations globally. The US Conflict Minerals Rule (Dodd-Frank Act, Section 1502) and the UK Modern Slavery Act have created a worldwide ripple effect.

The fragmented transition to hard law

The legislative toolbox is much bigger now than it was prior to 2011 when supply chain responsibility was defined for the first time in the revision of the OECD Guidelines. The central concept of supply chain due diligence is a process which can be regulated, whether it is on process, substance or simply reporting.

A very fragmented transition is underway from soft law to hard law in the field of corporate supply chain responsibility at different speeds and different tracks. It is led mainly by OECD countries, and most heavily impacts enterprises in European countries. This creates at times a chaotic and constantly changing regulatory system for multinationals.

Due-Diligence-Transition-Hard-LawThis transition is following different tracks. Some regulations focus on thematic issues, such as the UK Modern Slavery Act, the Supply Chains Act in California (slavery and human trafficking) or the proposed due diligence law on child labour in the Netherlands. Some initiatives have a sector-specific focus, such as the proposal by the EU parliament to adopt a binding regulation for due diligence in the garment sector. Others target a combination of theme and subject, such as the rules on conflict minerals. Other laws, such as the French Due Diligence Law, are much wider in scope, cover all areas of responsible business conduct and apply to all sectors. The pending Swiss referendum on due diligence looks set to follow a similar broad approach.

Hybrid multi-stakeholder sectoral responsible business agreements provide an innovative way to avoid the eternal dichotomy between voluntary and binding. Germany, Finland and the Netherlands have already signed agreements of this nature and the Swiss government is working on a similar approach with the commodities industry.

While not mandatory, these hybrid sectoral approaches may produce superior corporate responsibility results as many of the mandatory approaches lead to box ticking exercises and ‘empty’ reports. The hybrid sectoral agreements and approaches acknowledge that many supply chain challenges cannot be solved by individual companies on their own, and they are generally geared towards working together to produce real impact.

To conclude, businesses would be wise to dramatically increase their efforts on supply chain due diligence to ensure that society and governments do not get even more impatient. And, in these efforts, it is important that all parties involved – government, business and civil society – stick to the global standards of the OECD and the UN on due diligence. Don’t reinvent the wheel, but reinforce the wheel!

Links and further reading

Corporate Human Rights Benchmark
Economist Intelligence Unit (2017), No more excuses: Responsible supply chains in a globalised world
European Commission, EU Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups
France, Proposition de loi no. 924 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre
Germany, National Action Plan on Business and Human Rights
OECD Guidelines for Multinational Enterprises
OECD sectoral due diligence guidance
OECD report on National action plans on business and human rights to enable policy coherence for responsible business conduct
UN Guiding Principles on Business and Human Rights
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Outcomes from OECD National Contact Point cases: More remedy than you may think!

By Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct. This article was originally published on WGBizHRs on 10 November 2017.

The successful outcomes of the Heineken, Kinross and Statkraft cases have recently demonstrated that the National Contact Point system for the OECD Guidelines on Responsible Business Conduct can be effective for providing access to remedy in the business and human rights domain. However, management of expectations is needed with respect to a couple of issues.

But first of all, many people have asked me why the OECD countries are much more upbeat about the effectiveness of this state based non-judicial grievance mechanism (terrible jargon for a complaints mechanism) than civil society? Why does OECD Watch, a consortium of NGOs, claim that remedy remains rare in the NCP system, while the OECD Annual Report shows quite positive results?

For example, the 2016 Annual Report on the OECD Guidelines for Multinational Enterprises finds that in 2016 agreement was reached in 60% of all concluded specific instances where mediation occurred. Between 2011 and 2016, approximately half of all cases (47%) which were accepted for further examination by NCPs resulted in some form of agreement between the parties. That is of course good news. Additionally, in some cases which did not result in mediated agreements, recommendations were issued that were followed up on by the companies involved.

The Report by OECD Watch of June 2015 that coined the phrase ‘remedy remains rare’ in relation to the NCP system conveyed, in my perspective, an overly negative impression about the overall success of this system since 2011.

I would nevertheless agree that ‘compensation remains rare’ with respect to outcomes of cases handled by the NCP. That is a legitimate conclusion. It is good to stress that NCPs are a non-judicial grievance mechanism that have their limitations and can never be a substitute for a well-functioning rule of law. NCPs cannot mandate or enforce compensation, they are not a court nor arbitrator, but a problem-solving mechanism. In addition, NCPs often face extraterritorial issues where there is a non-functioning government involved that should have implemented its state duty to protect human rights. So what can NCPs do to encourage compensation? Two things, first they could facilitate mediated agreements which include agreements around compensation. Second, they could recommend compensation if supported by the OECD Guidelines (if there is a situation of an enterprise contributing to or causing the impact at issue).

OECD Watch makes some very valid points within their report that bear paying close attention to. For example, there needs to be more attention to follow-up after a mediation process is concluded to ensure agreements are actually implemented. NCPs should handle cases in an impartial and equitable way, including when deciding whether to accept them. For example, in some cases NCPs have applied an overly high threshold for accepting cases. Already during the revision of the OECD Guidelines in 2011 governments concluded that in assessing whether a case is sufficiently substantiated the measure should be reasonable plausibility, not full proof. And of course there is still a lot of work to be done to ensure a level-playing field among all NCPs. At present, two NCPs do not even exist and 12 do not have published procedures and 11 did not actively promote the OECD Guidelines in 2016. That is why the OECD Ministers this year decided to have all NCPs peer reviewed before 2023. This is a major opportunity for civil society and business to provide input to strengthen this unique business & human rights grievance mechanism.

There are a few differences in approaches with respect to how OECD Watch and the OECD look at outcomes in cases. For example, the OECD tracks cases which result in some form of agreement between the parties while the OECD Watch Report focuses in particular on remedy ‘on the ground’. However, the commentary to principle 25 of the UNGPs states: “The remedies provided by the grievance mechanisms discussed in this section may take a range of substantive forms the aim of which, generally speaking, will be to counteract or make good any human rights harms that have occurred. Remedy may include apologies, restitution, rehabilitation, financial or non-financial compensation and punitive sanctions (whether criminal or administrative, such as fines), as well as the prevention of harm through, for example, injunctions or guarantees of non-repetition.”

Many mediated agreements through the OECD National Contact Points focus for example on improved human rights due diligence or implementing a human rights policy. This is obviously aimed at preventing negative human rights impacts in the future.

The OECD Watch Report also includes cases within the scope of its analysis where ‘remedy on the ground’ was not received, even those cases where remedy on the ground was not requested, but instead a change of enterprise policy or other management change was being sought by submitters. Additionally, in some cases remedy on the ground is not appropriate according to the UN Guiding Principles and therefore the OECD Guidelines. If a company is not causing or contributing to a negative impact itself, but is directly linked to it through a business relationship it is not expected to provide compensation itself or on the ground remedy with respect to the impacts, but to use its leverage to push the company that causes the impact to change its behaviour or to provide remedy.

In its analysis and statistics with respect to outcomes OECD Watch also includes cases which have not been accepted for further examination by NCPs. However many cases filed with NCPs are dismissed for valid reasons, such as a lack of reasonable substantiation, parallel legal proceedings (related to forum shopping) and because they concern issues outside of the scope of the OECD Guidelines. OECD analyses success rates with respect to cases accepted by the NCPs and excludes those not accepted for further examination.

Lastly the OECD Watch Report looks only at cases filed by NGOs, whereas the OECD looks at all cases reported to it by the NCPs. Historically cases filed by trade unions with NCPs tend to be more successful than cases by NGOs. In such cases, remedy can for example concern a restoration of dialogue between social partners or the recognition of a trade union. This is at times less complex than complicated value chain business relationships with regard to human rights violations.

My conclusion on the effectiveness of NCPs as a non-judicial grievance mechanism on business & human rights is that the glass is half full, but we must take active steps to fill it to the brim. Functioning NCPs which currently have strong track records with respect to outcomes in cases can serve as mentors to those lagging behind. Furthermore all NCPs can look to recent successes for lessons learned to ensure that remedy in the context of cases handled by NCPs is routine, rather than rare.