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April 26, 2022

Listed companies expected to disclose human rights issues in supply chains

As new EU legislation on mandatory supply chain due diligence is proposed, stock exchanges reflect on the role they can play in improving companies’ disclosure.

A briefing paper by the World Federation of Exchanges (WEF), a global industry association for exchanges and clearing houses, says that while companies have made real progress in achieving a better understanding of their environmental impact and governance standards, social issues have not necessarily been given the same level of attention. This includes human rights violations, which are one of the most pervasive issues under the ‘social’ category.

The paper states that while globally accepted voluntary frameworks for human rights-related disclosure are available, “the level of maturity on reporting varies, with disclosure being criticised as ‘tick-box’ and companies failing to account for their impacts on people”. 

In 2021, the UK’s Financial Reporting Council examined the extent to which companies are reporting on their modern slavery risk strategy, as part of their duty to shareholders and wider stakeholders. The review concluded that modern slavery is not yet a mainstream concern for the boards of many major UK listed companies.

So, given its importance, what can be done to improve companies’ disclosure regarding human rights? 

Role of stock exchanges

A report by the United Nations’ working group on the issue of human rights and transnational corporations and other business enterprises, recognises stock exchanges as one of the key actors that play a critical role in driving the implementation of the UN’s Guiding Principles for Business and Human Rights at scale, by allowing large flows of capital, and in facilitating a level playing field for investors. 

However, the report also notes that actors such as stock exchanges are not sufficiently integrating human rights considerations in the products and services they provide, with the effect of confusing, rather than improving, the process by which investors uphold their responsibility to respect human rights.

The report concludes: “Significantly greater efforts are needed to ensure that ecosystem actors refer to international human rights standards and frameworks in their activities, products and services.”

Tara K. Giunta, co-lead of ESG and human rights practice at law firm Paul Hastings, says stock exchanges are important in addressing human rights risks since, as noted by the WFE paper, “effective disclosure of these risks will be a first step in encouraging transparency and accountability to shareholders and wider stakeholders”. 

At the London Stock Exchange Group, group head of sustainability Jane Goodland acknowledges exchanges’ part in guiding issuers and demonstrating best practice on human rights and she encourages listed companies to follow guidance on reporting it provides. Meanwhile, a Nasdaq spokesperson says a focus on uniform standards is consistent with the exchange’s work to develop practical and flexible guidelines to support its listed companies and investors as they consider ESG-related disclosures.

Need for legislation

WFE chief executive Nandini Sukumar says that while there is currently an array of voluntary frameworks that issuers and exchanges can choose to report against, “this has led to a disparity in the level of disclosure”.

This should change soon, however, since the European Commission has adopted a proposal for a corporate sustainable due diligence directive that would introduce mandatory assessments across a company’s supply chain. Released in February, the proposal set out a corporate due diligence duty to identify, prevent, bring to an end, mitigate and account for adverse human rights and environmental impacts in a company’s own operations, its subsidiaries and their value chain. It builds on the UN’s Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises and responsible business conduct.

In practice, this will require companies to: identify actual or potential adverse human rights and environmental impacts; prevent or mitigate potential impacts; establish and maintain a complaints procedure; monitor the effectiveness of the due diligence policy and measures; and publicly report on due diligence. Certain large companies will also be required to ensure that their business strategy is compatible with limiting global warming to 1.5C.

Giunta says this directive is moving human rights from “soft law” to “hard law” with obligations and accountability on companies for their own operations, as well as their value chains. 

Legislation on human rights-related issues will help to level the playing field as well as provide legal certainty for companies on what to report upon, according to Sukumar, and will also provide greater transparency and accountability to investors. However, she says: “As with broader developments on sustainability-related disclosure, international coordination will remain desirable, and we support the intention of the International Sustainability Standards Board to move its focus from climate to social issues, in due course.”

Country initiatives

Some individual countries have already set up their own legislation for reporting on human rights issues. For example, Germany’s Act on Corporate Due Diligence Obligations in Supply Chains was passed in 2021. This obliges enterprises to respect human rights by implementing defined due diligence obligations. The core elements of these new obligations include the establishment of a risk management system to identify, prevent or minimise the risks of human rights violations and damage to the environment. 

Companies will be responsible for their own business area, for the actions of a contractual partner and for the actions of indirect suppliers. From 2023, the supply chain act will apply to around 3,500 enterprises, many of them listed on capital markets. A spokesperson for German stock exchange Deutsche Börse Group says: “Capital markets ensure not only transparency and accountability regarding the social dimension of sustainability, but also a holistic approach in supply, value and investment chains.”

Deutsche Börse Group’s commitment as a company to protect and uphold human rights around the world is embedded in its corporate culture and reflected in its policies and actions, the spokesperson added. “In doing so, we are holding our employees, business partners and clients, as well as the communities in which we operate, accountable.”

Hurdles to overcome

While the new legislation is welcomed, there are likely to be issues with implementation. The WFE’s Sukumar says: “Any voluntary action to tackle human rights abuses has focused on the first link in the supply chain, when we know that harm can occur much further down the supply chain. Stock exchanges often operate with complex global value chains, which makes it particularly difficult for them to get reliable information on their suppliers’ operations, despite requirements for suppliers to sign up to codes of best practice.”

Giunta, at Paul Hastings, says: “Given the challenges in defining precisely what is covered under ‘human rights’, what standards should govern, what should be expected of which stakeholders, and where accountability should rest, progress requires the collective effort and collaboration of all stakeholders, including corporates, investors, legislators, regulators and civil society.”

 

A service from the Financial Times