EU legislators must put people and small holders at the centre of incoming corporate accountability legislation

The European Union is blazing a trail to introduce one of the most significant pieces of corporate accountability legislation in recent times. This potentially game-changing piece of legislation could drive a new social contract between companies and the people they impact. However, to truly have a systemic impact, the recently published 2023 Corporate Human Rights Benchmark highlights two key current gaps which the government must address when implementing this law.

As the World Benchmarking Alliance outlines in our paper Corporate accountability: Closing the gap in pursuit of sustainable development, regulation is a cornerstone in enabling stakeholders to take legal action against companies’ violations of social and environmental conventions and giving governments the power to hold companies accountable to a minimum standard of behaviour.

The United Nations Guiding Principles (UNGPs) were introduced to empower governments to enforce regulation that holds businesses accountable for their impacts on human rights and the environment. This was a significant development as it clearly outlined that companies have a duty and role to play in respecting human rights. There have been attempts for this duty to be mainstreamed via various voluntary actions and guidelines; however, we must accept that “voluntary efforts have failed to bring about systemic change and we need legislation to set minimum legal standards to define effective corporate accountability.

But what makes an effective corporate accountability law? And what are the key gaps that need to be urgently addressed in implementation?

Any regulation is only as effective as its enforcement. As the European Union (EU) works to finalise the so called Corporate Sustainability Due Diligence Directive (CS3D), the attention is moving towards implementation to ensure this regulation has the intended positive impacts. Under CS3D, companies will need to conduct due diligence to identify, address and mitigate the human rights and environmental risks across their value chains. As part of this due diligence obligation, they will need to engage with impacted stakeholders to fully understand their risks as well as engage directly with their suppliers to address these risks.

It’s important to note publicly that this law is not intended to allow companies to draw up a good and bad list of suppliers; or for them to pay lip service to stakeholders in far off places. It is intended to outline their legal obligation to uphold human and environmental rights – not simply pass off their responsibility to someone else.

Coinciding with this political moment, WBA has just published the 2023 iteration of our Corporate Human Rights Benchmark (CHRB) which can act a guiding light to identify the current gaps that CS3D must address to effectively hold companies to account. In particular, the benchmark’s findings show where companies are not taking their responsibilities seriously and what governments should address urgently:

• Most companies fail to include rightsholders in their human rights due diligence processes
  More than half (55%) of the human rights due diligence processes did not include disclosure of consultation with rightsholders. Genuine engagement ensures that the voices of those most affected are not only heard but also considered, fostering trust, legitimacy and sustainable solutions between a company and its rightsholders. Companies that fail to gather the perspectives and concerns of rightsholders regarding decisions and actions that affect them encounter barriers in understanding local contexts and identifying hidden risks and key considerations for mitigating specific risks.

• Suppliers are set up to fail by larger companies who do not live up to their responsibility
  Only 27% of companies demonstrate responsible purchasing by committing to timely and accurate payments to suppliers and providing production needs in advance. The disparity between high expectations and the lack of a conducive environment to meet them creates a scenario where suppliers struggle to meet both human rights and gender equality standards and commercial demands.

These findings highlight important recommendations for governments as they seek to roll out and supervise this vital legislation.

While legislation is an effective way of addressing issues in supply chains, this often places increased pressure on suppliers without simultaneously enabling them to meet both human rights standards and commercial demands. To ensure that these legislative changes truly benefit workers downstream in the supply chain, it must be spelled out that companies have the legal obligation to support their suppliers in achieving success and they should not abruptly cut ties when risks are found. The final CSDDD legislation must clearly state that there is no legal obligation for companies to abruptly discontinue supplier relationships, and that instead the company’s legal obligation is to engage and support their supplier in addressing human rights risks.

Similarly, CS3D must put rightsholders and impacts people at the centre of the risk assessment and mitigation process. While rightsholder engagement is increasingly being integrated into HRDD processes for companies, the CS3D must mainstream this as a legal obligation to engage with rightsholders, as well as publicly disclose both the process and outcomes of this engagement.