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Human Rights and ESG 

Navigating business challenges with ethical solutions

Recent and impending EU legislation will change the landscape for many businesses when it comes to considering the rights of individuals and communities. It will require more action to identify, manage and remediate salient risks, and more transparent reporting to stakeholders on outcomes.

Until recently, human rights concerns were addressed by companies on a voluntary basis, led by the 2011 UN Guiding Principles on Business and Human Rights (UNGP), and OECD Guidelines for Multinational Enterprises. The UN Guiding principles recognise every state’s obligation to protect and fulfil human rights – and for businesses to respect human rights while complying with relevant laws. Those principles will, to varying extents, be increasingly enshrined in legislation, to require businesses to report their impact on human rights, and take remedial action where necessary. Ahead of the changes, some organisations – such as major players in the food, retail and financial services sectors – have paved the way in reporting on social impact, but, even for these businesses, there is more to be done.

Legislation

The Corporate Sustainability Reporting Directive (CSRD), applying from 1 January 2024 in a rolling programme of adoption, is currently at the heart of the new legislative framework. Together with the EU Taxonomy regulation, it focuses on improving the quality of disclosure on corporate non-financial information, including on human rights.

The real gamechanger could be the Corporate Sustainability Due Diligence Directive (CSDDD), which is likely to be adopted in the coming months. This final piece of the puzzle will require companies to implement a sustainability due diligence process to demonstrate what they’re doing to manage their environmental and human rights impacts within the immediate control of the company, and further along the value chain. The outcomes of that due diligence process should inform the double-materiality assessment within the CSRD and, as such, the CSRD will ultimately be the reporting vehicle for CSDDD. However, having such a due diligence process in place, is already implicitly part of the CSRD, as the reporting standards follow a similar approach.
 

ESG reporting

When it comes to reporting, the CSRD is underpinned by European Sustainability Reporting Standards (ESRS), developed by The European Financial Reporting Advisory Group (EFRAG), to include greater transparency concerning the impact of business on human rights alongside other ESG outcomes. For those businesses affected, all ESG data published within the scope of the new directives will need to be reviewed by an accredited independent auditor or certifier.

There are four social reporting standards (S1–4), spanning impacts on:

  • Own workforce, including those of contractors;
  • Workers in the value chain;
  • Communities affected along the value chain; and
  • Consumers or end-users of the company’s products or services.

Human rights are at the very core of these social standards, and alignment with the UN Guiding Principles on Business and Human Rights has been sought throughout all four. Although the final disclosure requirements still need to be adopted, it is already clear that companies need to consider a wide range of human rights, from child labour and forced labour in their supply chain, to Free, Prior and Informed Consent of Indigenous Peoples to privacy and non-discrimination of the end-users of their products and/or services.
 

Compliance

To an extent, each business will need to devise its own path to compliance with the relevant legislation. Done properly, businesses that embrace this requirement with focused attention should be able to enhance brand equity by acting responsibly.

Each sector will have its specific issues as to how workers, consumers and others affected by its products and services can be best protected and respected – for example, how armaments are deployed by specific regimes; and the health impact of confectionery products on children. More typically, the issues most likely to come under scrutiny are those involving child labour or forced labour. In contrast to, say, environmental outcome measures, many infringements on human rights are not as easy to assess and control or influence – particularly those further along the value chain.
 

Action

Although the CSRD is essentially a reporting directive, the implications for business go far beyond ‘just’ reporting. Increased transparency on the identified risks, opportunities and impacts and how these are addressed, implicitly already requires business to follow the steps from the due diligence process of the UNGPs.

There will be an expectation that highlighting a social or human rights issue will be followed up by remedial action, subject to the degree of control and influence the company has. Within its own operation, the expectation for improving outcomes will be high, but further along the value chain, organisations will still be expected to exert whatever influence and leverage they have over suppliers to change policy or practice.

Equally, when it comes to reporting on value chain issues, there may be data insufficiency in the initial phase of adoption, but companies will have a transitional period of three years to get the data processing and reporting system to meet requirements.

What’s key to adopting the new legislation sensibly is a process of prioritising what’s material from an impact or financial perspective, and engaging with all those who can make a difference within the private and public sectors. A thorough understanding of the actual human- and labour rights at risk is a precondition for efficient actions to manage those risk.
 

How Deloitte can help

We have experience of working with global organisations at the forefront of social impact and broader ESG reporting, and our multidisciplinary expertise from legislation-driven transformations more generally means we’re well placed to support any business faced with the requirement to report on human rights impacts, and adjust their business activities accordingly.

Typically, these projects start with a comprehensive risk assessment and stakeholder engagement programme, to understand the situation, followed by prioritisation and materiality exercises, to focus on the changes required both to comply and to generate business benefits, where possible. As with other change programmes, it is vital to get buy-in to what’s required at all levels of the organisation, and put controls in place before embarking on wholesale change. We can also advise on all aspects of reporting and audit preparation required to be compliant for human rights impacts specifically and for ESG reporting more broadly.


 

To discuss any of the themes raised in this article, or for support with any aspect of your sustainability journey, contact Wim Bartels or Thijs van Brussel.

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