|by Anthony Ewing | Bio | Posts
8 Apr 2015
Mandatory human rights reporting is coming soon to a jurisdiction near you. Is your company ready?
Large European companies need to review their human rights policies and the risks of human rights impacts linked to their operations over the next two years. The catalyst is a European Parliament Directive adopted in October that requires companies to report annually on non-financial issues, beginning in 2017. Under the Directive, large, publicly listed European companies must report annually on how they are meeting the corporate responsibility to respect human rights, as well as environmental, social and employee-related, and anti-corruption and bribery matters. The Directive mandates corporate disclosure of human rights due diligence and consideration of human rights risks, consistent with the UN Guiding Principles on Business and Human Rights. Non-financial reports must include a “description of the policies pursued” relating to respect for human rights, including “due diligence processes implemented;” “the outcome of those policies;” principal human rights risks linked to the company’s operations, including its “business relationships, products or services” likely to cause adverse impacts; and relevant non-financial performance indicators. While the regulation is of the “comply or explain” variety – companies must disclose existing policies or explain why they have no policies on these matters – and carries no penalty for noncompliance, the twenty-eight member states of the European Union will implement the Directive through national legislation, in which each country is free to set more stringent disclosure requirements and possible penalties.
The European Non-Financial Reporting Directive is part of a broader trend of mandatory reporting that seeks to promote corporate respect for human rights through greater corporate transparency. Like financial reporting that provides material information for investors, human rights reporting informs consumers, investors and policymakers about the human rights impacts of business operations. Advocacy organizations, like those in the European Coalition of Corporate Justice, and investors, like those in the sustainable and responsible investment network Eurosif, pushed for adoption of the Directive. In the United States, mandatory corporate human rights reporting is emerging around specific issues, such as conflict minerals, forced labor and human trafficking, and specific geographies, such as Central Africa and Burma. No non-financial reporting regulation to date in the United States applies as broadly as the European Directive, however, which is estimated to cover some 6,000 European companies.
The Directive and similar regulations will force many companies to address their human rights impacts for the first time. How should executives prepare? Companies can take a number of steps to meet escalating expectations of greater transparency about corporate human rights impacts:
- Conduct human rights due diligence.
Companies that understand the human rights impacts of their operations and business relationships are in a better position to prevent or mitigate those risks. Conducting a human rights impact assessment can reveal actual and potential human rights risks and allow a company to prioritize actions to address the most severe risks. Nestlé, for example, based on information from human rights impact assessments (PDF), has taken steps to reduce excessive working hours, improve road safety training for its drivers, add human rights principles to its contracts with security providers, and develop an external grievance mechanism.
- Integrate human rights considerations into existing policies and procedures.
A growing number of companies have made explicit commitments to respect human rights in corporate codes of conduct, supplier standards and corporate responsibility reports. Adopting a human rights policy is an important step. Companies are also finding ways to integrate human rights considerations into existing management systems, which can be easier than creating stand-alone policies. Even without “human rights” language, corporate policies and procedures can relate to a company’s human rights impacts. Executives should review their employment, security and compliance policies, for example, to identify ways that they can address the human rights impacts of the company’s operations and business relationships.
- Become familiar with human rights reporting frameworks.
Meaningful human rights reporting accounts for how a company addresses its human rights impacts, especially risks of severe human rights impacts, and serves as a basis to measure future performance. Companies are developing key performance indicators relevant for their businesses and the particular human rights risks they face. Almost all of the world’s 250 largest companies are publishing non-financial reports. More than 7,000 companies have reported non-financial issues consistent with the Global Reporting Initiative Sustainability Reporting Guidelines, which include human rights indicators. The recently launched Reporting and Assurance Frameworks Initiative (RAFI), piloted by the European multinationals Unilever, Ericsson, Nestlé and H&M, can help companies report on their human rights performance in line with the UN Guiding Principles. The European Commission is expected to issue non-binding guidelines for reporting non-financial information under the European Directive.
While European companies now have a regulatory deadline to start reporting, all companies would do well to better understand their non-financial impacts and how to manage them. Whether mandatory or not, non-financial and human rights reporting is an emerging business practice and stakeholder expectation of leading companies with the potential to influence your company’s reputation and bottom line for years to come.