Legislation on responsible business conduct must reinforce the wheel, not reinvent it

Global Forum RBCThis article by Prof. Roel Nieuwenkamp was originally published on OECD Insights on April 15, 2015. 

The global economy has evolved at an impressive rate over the past several decades. Supply chains spanning dozens of countries are a common feature of businesses large and small. However, global regulatory frameworks have largely not kept pace with these trends. Rule of law remains weak in many developing countries and significant uncertainty and enforcement issues continue to exist in the context of transnational litigation and arbitration.

Some international instruments, such as the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) and the UN Guiding Principles for Human Rights and Business (UNGPs) have been important tools for filling these regulatory gaps. For example the OECD Guidelines establish an expectation that businesses behave responsibly throughout their supply chains, not just within their direct operations, extending to activity in potentially institutionally weak contexts where international standards and domestic laws may not be adequately enforced.

Recently domestic law has also begun to follow suit in this regard by introducing legally binding obligations. Section 1502 of the US Dodd-Frank Act represents one of the first examples of legislation incorporating due diligence regarding human rights along the supply chain. Section 1502 provides that companies must report on whether they source certain minerals (tin, tantalum, tungsten and gold) from conflict areas. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas which was adopted as an OECD Recommendation in 2011 was the first instrument to define responsibilities in this context and is explicitly referenced in section 1502. Currently the EU is considering introducing similar obligations in a proposal aimed at regulating the import of conflict minerals into the EU. The proposed initiative will go through three separate reviews within the EU Parliament before being submitted to the EU Council level later this year.

Another example in the extractives sector where non-binding initiatives have acted as the harbinger for binding law is in the context of revenue transparency. The Extractive Industry Transparency Initiative (EITI), founded in 2003 was one of the first efforts to encourage government and private sector reporting on revenue streams of extractive operations as a strategy for battling corruption. Section 1504 of Dodd Frank, passed in 2010, requires that companies registered with the Securities and Exchange Commission (SEC) must publicly report how much they pay governments for access to oil, gas and minerals. The EU has since mandated similar obligations through Accounting and Transparency Directives and Norway and South Korea have expressed interest in doing the same.

In Drilling down and scaling up in 2015, I mentioned that the trend of hardening of soft law was among the top 5 issues to watch in RBC for 2015. I also noted that the UK, Switzerland and France had proposals in the pipeline to make due diligence regarding aspects of RBC mandatory. Since January, interesting progress has been made on these initiatives.

The Swiss motion, which proposed mandatory human rights and environmental due diligence for Swiss corporations was recently narrowly voted down in the Swiss Parliament. The deciding vote was 95 against and 86 in favour. In response to this result, the Swiss Coalition for Corporate Justice has announced that it will begin collecting signatures for a popular initiative on the proposal. If they gather 100,000 signatures in 18 months, the measure will be put to a binding public referendum.

The UK Modern Slavery Act was approved and enacted into law in March of this year. This act provides that commercial organisations must prepare a slavery and human trafficking statement annually detailing, among other matters, their due diligence processes in relation to slavery and human trafficking in their operations and supply chains.

The broadest scheme of the three remains the French legislative proposal which aims to mandate supply chain due diligence in accordance with the OECD Guidelines for Multinational Enterprises, thus covering a comprehensive range of RBC issues. Under the law French companies employing 5,000 employees or more domestically or 10,000 employees or more internationally would be responsible for developing and publishing due diligence plans for human rights, and environmental and social risks. Failure to do so could result in fines of up to 10 million euros.

An amended proposal approved by the French National Assembly will now be sent to the Senate, which might turn it down. However, in this case the National Assembly could still overrule the Senate. My assessment is that the proposal is likely to be adopted.

If such a law is passed in France there is speculation that it could generate spillover effects within the EU. The rapporteur for this proposal, Dominique Potier, has indicated that he will push the European Commission to develop a EU directive along similar lines.

The move from soft to hard law is a concern for many businesses. However, when it concerns the more severe issues of responsible business conduct, the jump between the two is not that high. Many companies already have due diligence systems in place. This means that the playing field for the more progressive companies will be levelled. That was one of the reasons why many British businesses supported the Modern Slavery Act. In addition, the UN Guiding Principle 23(c) already provides specific guidance on how companies should manage the risks of the most severe impacts; it says that businesses should “Treat the risk of causing or contributing to gross human rights abuses as a legal compliance issue wherever they operate”.

Another concern that businesses may have is that all these proposals will create a mess of different hard and soft standards. A proliferation of obligations (national, regional and international) has the potential to generate regulatory disarray and create challenges for businesses in navigating their obligations.

Uniformity and clarity around obligations and expectations will be important for establishing a level playing field for business. A large imbalance or contradictions in obligations regarding due diligence or reporting across jurisdictions may unfairly penalise companies operating in multiple jurisdictions or subject to more onerous standards. In ensuring that standards are aligned, administrative burdens for business will be eased and competitive risks will be mitigated.

Additionally such laws must be drafted carefully in order to be practical and fairly enforceable. Presently the language included in both the French legislation and UK law is highly general and therefore the obligations under the law remain somewhat abstract.

In order to ensure that such regulation is realistic, reasonable and effective, the regulations and guidance that will accompany these laws should be developed on the basis of carefully drafted non-binding standards, such as the UNGPs and the OECD Guidelines. They will also need multi-stakeholder input. In the context of the OECD, all due diligence guides interpreting the expectations of the Guidelines are developed in consultation with industry, government, civil society and worker organisations. This process has ensured that recommendations included in the guidance are endorsed by businesses, the ultimate users of the guidance, and that they are ambitious yet reasonable. Additionally, the role of non-binding instruments, as well as the organisations that crafted and implemented them should not be overlooked. The UN and OECD will be important sources of guidance on these issues.

Legislative proposals related to existing international instruments should not seek to reinvent the wheel, but to reinforce it. Existing instruments that are widely recognised and proven to be effective and reasonable should represent a foundation for their legally-binding counterparts.

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EU & Singapore promote Responsible Business Conduct and the OECD Guidelines in Free Trade Agreement

Reference to responsible business conduct is becoming increasingly common within investment treaty law, including within bilateral trade agreements.[1]

This trend is reflected within the latest EU-Singapore Free Trade Agreement which makes explicit reference to social responsibility practices and the OECD Guidelines for Multinational Enterprises:

”When promoting trade and investment, the Parties should make special efforts to
promote corporate social responsibility practices which are adopted on a voluntary
basis. In this regard, each Party shall refer to relevant internationally accepted
principles, standards or guidelines that it has agreed or acceded to, such as the
Organization for Economic Cooperation and Development Guidelines for
Multinational Enterprises
, the UN Global Compact, and the ILO Tripartite Declaration
of Principles concerning Multinational Enterprises and Social Policy. The Parties
commit to exchanging information and cooperating on promoting corporate social
responsibility.”

Full text of the agreement can be found here.

[1]  For more information see Investment treaty law: sustainable development and responsible business conduct: A fact finding survey OECD, 2014; Information on OECD work on international investment law generally is available here.

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Proposed EU responsible trading strategy for minerals from conflict zones

Proposed EU responsible trading strategy for minerals from conflict zones

News release: OECD Guidelines for Multinational Enterprises

21/03/2014 – The European Commission has proposed an integrated EU approach to stop profits from trading minerals being used to fund armed conflicts. The package of measures aims to make it more difficult for armed groups in conflict-affected and high-risk areas to finance their activities through the mining of and trade in minerals. The focus of the approach is to make it easier for companies to source tin, tantalum, tungsten and gold responsibly and to encourage legitimate trading channels [….]

©Thinkstock.Istockphoto/Tajarja

©Thinkstock.Istockphoto/Tajarja

 

Professor Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct, welcomed the new EU initiative, and noted that he looks forward to the on-going legislative process on the draft regulation, bearing in mind the different views of stakeholders. “The European Commission’s use of the OECD Due Diligence Guidance as the standard for responsible mineral sourcing is vital to maintain clarity for business and contribute to a level playing field” he said. “The accompanying measures in the Commission’s communiqué also offer a good basis to promote responsible sourcing of minerals, avoid unintended consequences, and encourage private sector investment and trade in all areas of conflict and high-risk.”

European Parliament and Council reach agreement on Commission proposal to improve transparency of company social and environmental conduct

European Parliament and Council reach agreement on Commission proposal to improve transparency of company social and environmental conduct

 

Press release European Commission Feb. 26, 2014

“The European Parliament and the Council have reached agreement on an amendment to existing accounting legislation to improve the transparency of certain large companies on social, environmental and diversity matters. Companies concerned will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.” The OECD guidelines on multinational enterprises are recognized within the legislation as a model upon which declarants may base their disclosures.