international regulatory enforcement
Our Top 10 +1 Predicted Business and Human Rights Issues for 2022*
Perhaps more than most years, 2021 has been filled with an array of business and human rights challenges that were difficult to forecast. Looking forward to 2022, the rapid changes in business and human rights (and ESG more generally) adds a further degree of difficulty to devising a list of the 10 top business and human rights issues for the next calendar year. With that in mind, and in the bold spirit of Human Rights Day, we offer such a list, in no particular order, plus a bonus issue. The list includes some new regulatory obligations, some new rights that have been recognized, some themes from 2021 that will continue into next year, and a few oldies but goodies.
- New Regulatory Obligations: Mandatory Due Diligence
Throughout 2021, the prospect of mandatory corporate human rights due diligence laws being enacted throughout Europe was a dominant theme. The concept of mandatory diligence is a step beyond human rights transparency laws, like the California Supply Chain Transparency Act, or the UK or Australian Modern Slavery acts. Under mandatory diligence laws, companies must undertake affirmative assessments to identify their risks, institute measures to mitigate any negative impacts, assess the effectiveness of their measures, and publicly report on their approaches.
In 2021, two European countries, Germany and Norway, joined France in enacting domestic laws mandating human rights due diligence. Several other countries, including the Netherlands, Switzerland, and Finland, seem poised to enact their own laws. While the laws have similar goals, they differ in scope, thus creating a certain fragmentation. As France and Germany have been ranked as the first and third most influential countries in the European Parliament, we can expect that shortly before 2021 draws to a close the EU Commission will issue the long-awaited draft directive encompassing mandatory human rights and environmental due diligence, and it will include companies, their subsidiaries and their value chains (upstream and downstream). That leaves to 2022 the rich debate regarding the scope of the directive, its groundbreaking impacts and its worldwide repercussions.
- Who is a Worker
One of the most profound shifts in the business and human rights landscape involves determining who is a “worker.” Historically, employers generally have not provided contract workers or independent contractors with the same benefits as full-time workers. These include social security, health and vacation benefits, and minimum wages – which have been closely tied to human rights. This has resulted in profound cost savings and often reduced liabilities for companies.
However, over the past several years, with the rise of the gig workforce, the question of who a “worker” is, and what benefits they are entitled to receive, has become a prominent focus. Contract workers around the world have sought the same kinds of benefits provided to traditional full-time employees. The debate has led to class-action litigation in the U.S., Canada, the UK, and elsewhere, legislation variably providing and denying contract workers benefits, and protests by workers themselves. Next year, we believe the issue will continue to mushroom. We can expect to see increased litigation and judicial decisions throughout the U.S. and Europe. We also can see new laws proposed on either side of the debate. The impacts are substantial, as they will redefine the nature of company workforces, reshape the obligations and duties companies owe less than full-time workers, and disrupt company and consumer economics.
- Right to Health Care and Access to Medicines
The race to obtain COVID vaccines has exposed a chasm in access to medicines. Wealthy countries, and wealthy individuals in developing countries, are receiving third vaccines as boosters. In developed countries, such as the United States, Canada, Australia, Germany and the UK, the vast majority of the eligible populations have received at least one vaccine, and most are fully vaccinated. In contrast, as of today, in 20 developing countries less than 5% of the population has received even 1 dose, and less than 15% have received the vaccine in about 15 more developing nations. Within the U.S., there has been a substantial focus on vaccine equity, with references to income and wealth gaps, as well as racism and other forms of discrimination contributing to vaccine rate differentials.
While some of the focus has been on wealth disparity and accusations that prosperous countries are hoarding vaccines, civil society organizations are identifying company pricing structures, intellectual property policies, knowledge and technology sharing, and allocation of available vaccine doses as critical issues. The debate over access to medicine as a fundamental element of the right to health preceded COVID, and as 2022 progresses, there will be increasing scrutiny on the policies and practices of companies and governments in sharing potential life-saving medicines with populations in developing countries that otherwise may not access them.
- Corporate Accountability
Courts in the UK, the Netherlands and throughout the EU increasingly are holding parent companies liable for the acts of their subsidiaries. Cases are being filed and decided across Europe regarding company obligations to reduce their carbon emissions. Popular sentiment seems to be with them. In late November 2020, voters in Switzerland went to the polls to vote on the Responsible Business Initiative, which included a broad corporate accountability provision for domestic companies regarding overseas operations. While the initiative was not enacted, a majority of citizens voted in favor of it. In the U.S., courts are filled with cases under the Trafficking Victims Protection Reauthorization Act alleging that parent companies are liable for the acts of their subsidiaries, under deceptive trade and marketing theories regarding statements about their sustainability and human rights practices, and under securities and common law tort theories. Even the U.S. Department of Justice and U.S. Securities and Exchange Commission are getting into the act, examining allegedly false statements by companies regarding their products, programs and impacts. The inboxes of OECD National Contact Point Specific Instances also are being filled with cases against multi-national businesses, and the Canadian Ombudsperson for Responsible Enterprise has now come on line. In September 2021, the OECD launched a public consultation on the OECD Guidelines for multinational enterprises, which will help inform the Working Party on Responsible Business Conduct (“RBC”) identify key achievements, challenges and opportunities.
There have never been more cases against companies, in more forums, under more traditional and emerging legal theories. If anything, 2022 will bring even greater attention. The draft EU directive and debate around its provisions will cast a spotlight on when, whether and how companies should be accountable for their negative human rights impacts and those of their subsidiaries and affiliates who operate around the world. In the same vein, the nascent Business and Human Rights Treaty includes broad liability provisions for companies, including potential exposure for a failure to present a foreseeable harm caused by global subsidiaries or third parties whose work is controlled or supervised. As cases, regulations and treaty discussions continue to progress, a focus on corporate accountability and enforcement will be front and center.
- Conflict Affected Areas and Responsible Exit
According to the Geneva Academy of International Humanitarian Law and Human Rights, there are more than 80 armed conflicts involving at least 55 states and more than 70 armed non-state actors. Businesses operating in those environments face an increasingly evident dilemma. Those that stay risk being connected to gross human rights violations, as seen in a multitude of recent cases. These include a recent decision by the Supreme Court of France regarding a global business allegedly making payments to ISIL and other armed groups in the context of the Syrian civil war, war crimes charges by Sweden against the chairman and former CEO of a global energy company for operating in Sudan from 1999 to 2003, and an OECD National Contact Point Specific Instance against a telecommunications company for activities in Myanmar, to name a few. Conversely, those companies that choose to leave conflict-affected and high-risk areas create obvious economic impacts to their organizations, physical and economic risks to their domestic workforces who stay behind with reduced job opportunities, and even potential risks that any equipment and material left behind may be used in the conflict. They also can be criticized for abandoning the country if they determine that they cannot de-risk sufficiently.
Virtually all of the clashes have multi-national enterprises operating in or near conflict zones. Some are in resource rich areas, such as Mozambique, Nigeria, Myanmar and the Democratic Republic of Congo, where global companies have made substantial investments. How and why companies might choose to stay and try to stay neutral and avoid exacerbating these conflicts, or exit responsibly, will be another area of emphasis in 2022.
- Right to a Clean, Healthy, and Sustainable Environment
In October 2021, the UN Human Rights Council declared that a clean, healthy, and sustainable environment is a human right. That decision was not a tremendous surprise. A healthy environment, including in relation to climate change, biodiversity, air and water pollution, and deforestation, has been identified by the UN as a precondition to the enjoyment of human rights. The right also was referenced in other international instruments and conventions, and more than 150 countries directly or indirectly recognize the right. Further, the Office of the High Commissioner on Human Rights, as well as others at the UN and the EU, have advocated for the right to be formally recognized. Finally, the right to a clean and healthy environment is included in two of the three regional human rights conventions (the American Convention on Human Rights and the African Commission on Human and Peoples’ Rights). Given the momentum, the question was never whether it would be recognized, but only when – and the “when” is 2022.
For 2022, the implications of the newly recognized right will be amply debated, and further integrated into business processes. It will have increasing prominence in government regulations, government permitting and licensing decisions, company due diligence and risk assessment exercises, and company management processes. It also will work in tandem with the mandatory due diligence regime in the EU, which will include environmental and human rights within its scope.
- Forced Labor Import Bans
The human rights attention on the Xinjiang Autonomous Region of China will be entering its third year in 2022. In 2019, the U.S. government began issuing a series of executive actions in response to what it calls a system of repression against Uighurs and other Muslim minorities in Xinjiang. 2020 brought a new federal law and a variety of further steps, including sanctions against individuals and entities, export controls on certain companies and seizing goods at the border, among other measures. In 2021, the U.S. continued and expanded its efforts, and numerous other countries and the EU joined in, including Canada, the UK, Australia, and Japan. China enacted its own responsive law, and countries around the world began reassessing their supply chains for potential forced-labor goods. With the Olympics scheduled in Beijing in February 2022, the issues will stay high on the agenda in the first half of the year.
However, we believe the discussion will be much wider-ranging. The U.S. has been actively enforcing Section 307 of the Tariff Act of 1930 against goods from around the world suspected of being produced with forced labor. Canada, the UK, and Mexico have forced labor import bans of different types. Australia is considering a sweeping law. The European Commission has announced its own plan for a forced labor import ban. The concept of banning goods produced with forced labor is a natural extension of modern slavery acts and mandatory human rights due diligence regimes, which are premised on identifying and mitigating supply chain modern slavery risks. It will be a focus throughout 2022, and as it expands, will increasingly impact global commerce.
- Downstream: Responsible Product Usage & Product Misuse
Since the UK adopted its Modern Slavery Act in 2015, there has been a sustained “upstream” human rights focus, centered on human rights risks in supply chains. Australia followed with its own Modern Slavery Act, and Canada now has introduced similar legislation. In the United States, there is also a serious supply chain effort, given the Tariff Act of 1930 and a Federal Acquisition Rule that mandates steps that companies must take to protect against trafficking within their supply chains associated with certain federal contracts. In the mandatory due diligence realm, France’s Duty of Vigilance Law applies to company operations, subsidiaries, and upstream suppliers, as does Germany’s Supply Chain Due Diligence Act. The Dutch child labor law takes a comparable approach, focusing on whether goods or services have been produced using child labor.
As these laws and regulations encompass only company operations and upstream supply chain risks, companies often do not take steps associated with downstream product usage impacts, which are not similarly mandated. We believe that 2022 will be the year that downstream human rights mandates and diligence enters center stage. In June 2021, Norway passed its Transparency Act, a mandatory diligence and disclosure law that applies throughout all business relationships in the value chain, allowing citizens to request information from companies and giving the Norwegian consumer authority to issue injunctions and fines for non-compliance. The UN Guiding Principles on Business and Human Rights specifically contemplates that human rights responsibilities extend equally to downstream use of products by consumers and end users. Similarly, the future EU due diligence directive is likely to include both upstream and downstream due diligence obligations. That will further require that companies develop detailed strategies to identify and mitigate relevant customer and end-user related human rights risks, rethink product marketing, and ultimately reevaluate the relationships between companies and their customers and end-users.
- The Rise of Stock Market Listing Requirements
The past decade has seen a great deal of chatter around using stock market listings to compel company activity. Six years ago, Canada passed a “comply or explain” law requiring that its public companies appoint at least one woman to their boards of directors, or explain the lack of progress. In 2021, NASDAQ established its own comply-or-explain rule, which the SEC approved in August, mandating that listed companies have at least two diverse directors, or explain why they do not meet the benchmarks. Other stock exchanges are considering similar ESG-related initiatives, including in relation to climate.
Regarding human rights specifically, the UN Human Rights Working Group issued a report in June referencing the role that stock exchanges can play in driving human rights and implementation of the UNGPs. The report also notes that investors representing over $5 trillion have called on the SEC to mandate reporting that includes human rights disclosure, and it suggests stock exchanges and others should do more. The Sustainable Stock Exchange Initiative, a UN Partnership Program seeking to drive change, reports that 48 out of 56 stock exchanges talk about human rights in their disclosure guidance. In addition, most exchanges also specifically mention rights, like labor rights or diversity and inclusion or health and safety, while approximately 30% mention the UNGPs in their guidance. Finally, about half talk about human rights policies, practices and processes, and about 30% expressly mention grievance mechanisms or human rights diligence. As guidance can quickly become a rule, we believe the recent NASDAQ rule will lead to additional pressures to amend stock exchange listing rules to include human rights – such as policies and procedures – as “comply or explain” requirements.
- Reporting Robustness and Coherence
The steady focus on ESG generally, and human rights as the “S” in the middle of it, has emphasized the importance of – and increasingly demands for - transparency and programmatic reporting. These trends will certainly continue into 2022. The SEC is considering new sustainability disclosure requirements, the EU’s Sustainable Finance Disclosure Regulation heads into its second year, and proposals for the EU’s Corporate Sustainability Reporting Directive, which would dramatically expand its Non-Financial Reporting Directive, will be amply considered. At the same time, concerns have been raised about the thoroughness of reporting under existing human rights reporting regimes, such as the French Duty of Vigilance Law and the UK Modern Slavery Act.
As efforts will persist to increase reporting and address current shortfalls, the market is plagued by reporting inconsistencies. The Sustainability Accounting Standards Board has brought some level of coherence, the Global Reporting Initiative has incorporated human rights into its reporting standards, and the Principles for Responsible Investment will add human rights to its reporting framework by 2025. Further, following the 2021 G20 Rome Summit on October 30-31, 2021, G20 Leaders issued a joint declaration, committing to sustainable finance and welcoming the work of the International Financial Reporting Standards Foundation (IFRS) to develop global reporting standards for ESG disclosures. A few days later, the IFRS Foundation Trustees announced the creation of a new standard-setting board—the International Sustainability Standards Board (ISSB)—to help meet the growing demand for a common standard. The SEC is expected to initiate its rulemaking by the end of 2021 to consider disclosure and reporting requirements for ESG, and SEC Chair Gensler has indicated that the SEC may set its own standards and metrics or abide by established standard regimes. Discussions around common reporting standards will be a focus for 2022, building on the demand for increased corporate transparency around ESG and human rights.
- Financing and Lending Decisions
As a final bonus issue, 2022 will further elevate human rights into the lending and financing decisions of financial services firms. We have seen reference to human rights in promotional materials for some time. Increasingly, companies are being called upon to match rhetoric with action. Fund management firms are being called out for lending to countries that violated those rights. Emerging market bond indexes that use ESG scoring criteria are being called out for over-exposure to bonds issued by countries rated “not free” by leading NGOs. Banks are pressured to prioritize human rights in their financing decisions and to set internal standards regarding responsible business conduct and are being sued or investigated for sustainability indices that are claimed to be misleading, and a swath of OECD National Contact Point Specific Instances have been levied against financial services firms for lending and financing decisions. From a regulatory standpoint, the EU’s Sustainable Finance Reporting Disclosure Regulation, which went into effect this year and will be expanded next year, aims to protect investors by requiring financial sector institutions to be transparent about how human rights and other sustainability risks are integrated into investment decisions and advisory processes, how they consider the adverse human rights and other sustainability impacts of their investments, and the sustainability of their financial products.
We anticipate 2022 bringing enhanced scrutiny on the strategies and standards for financial services firms. That will include how they integrate human rights due diligence into their lending and financing decisions, and product offerings. It will include the nature of government bonds being purchased, and investments in state-owned entities. It will include insurance offerings, and a holistic review of sustainable offerings, such that “green bonds” are not being offered for countries with human rights abuses. Given the pronounced influence that access to capital can have, the financial services industry can expect focused attention next year.
*Note that this article originally was published in Law.com.