Liability for network and human rights due diligence: What are the limits?  

Fernanda Barroso, Regional Managing Director for LatAm, Kroll - IBA Negligence & Damages Committee,  September 30, 2024

The global IBA Conference in Mexico held a panel exploring the responsibility of supply chains and value chains is an emerging trend in Europe, the US and other parts of the world. Human rights violations by agents in a certain supply or value chain are one of the most common issues when we look at the current ongoing cases in Europe and US. The goal of this panel was to discuss the current state of affairs on the topic and also to try to anticipate what the next challenges to deal with will be in the coming years.

Kroll’s regional Managing Director for LATAM, Fernanda Barroso participated in the panel along with Session/ Workshop Chair Paulo Araujo, Ana Chagas from Simões Pires Advogados, São Paulo, Rachel Cropper-Mawer from Ogier, St Helier, Jersey, and Eduardo Sotelo-Cauduro of Sanchez Devanny, Mexico.

Building on that discussion during the panel, Fernanda and her team deliver the following article, where they present the importance of HRDD, they explore the associated liabilities and they provide comprehensive guidance to help organizations navigate this complex yet essential terrain:

Human Rights Due Diligence: A Fundamental Pillar for Ethical Business Practices 

Fernanda Barroso, Regional Managing Director for LATAM, Kroll, Brazil
Emanuel Batista, Managing Director, Kroll, U.S.
Maria Alejandra Vahos, Senior Manager, Kroll, Regional

In the modern, interconnected world, the ethical landscape for businesses extends far beyond their immediate operations to encompass a global network of suppliers, partners and stakeholders. Human rights due diligence (HRDD) across global supply chains has emerged as a pivotal process for ensuring that companies not only achieve financial success but also uphold and respect human rights.

The Imperative of Human Rights Due Diligence

HRDD is not merely a compliance exercise but a moral and strategic imperative that reflects a company’s commitment to ethical practices. As businesses expand globally, the potential for human rights violations increases, requiring robust due diligence processes to identify, prevent and mitigate such risks. In addition, companies need to account for how they address the potential and actual negative human rights impacts of their operations, considering potential legal, financial and reputational liabilities.

Legal Liability

In the context of HRDD, legal liability refers to the legal consequences a company may face if it fails to uphold human rights standards. Various jurisdictions have enacted laws to hold companies accountable for human rights abuses within their supply chains. For instance, the UK’s Modern Slavery Act 2015 mandates businesses to report on their efforts to combat modern slavery, while France’s Duty of Vigilance Law requires large companies to establish vigilance plans to prevent human rights abuses. Noncompliance can lead to significant legal repercussions, including fines and sanctions.

Financial Liability

Failing to conduct adequate HRDD can result in substantial financial liabilities. This includes costs associated with legal proceedings, fines and compensation to victims. Additionally, investors and consumers increasingly demand ethical business practices, and companies that fall short may face financial repercussions. High-profile cases, such as those involving allegations of child labor in the supply chains of major corporations, highlight the financial risks of inadequate HRDD.

Reputational Liability

Reputational damage is perhaps one of the most significant risks of failing to carry out proper HRDD. In an age where information spreads rapidly through social media and other channels, revelations of human rights violations can lead to swift public backlash and long-term damage to a company’s brand. For example, an American athletic footwear company faced significant reputational challenges in the 1990s due to reports of poor labor practices in its overseas factories, illustrating the critical importance of maintaining robust HRDD processes.

Guidance for Implementing Effective Human Rights Due Diligence

Effective HRDD requires a structured and systematic approach. Here are key steps that companies should follow to embed HRDD into their operations:

1. Develop a Comprehensive Human Rights Policy

A robust human rights policy is the cornerstone of effective HRDD. This policy should clearly articulate the company’s commitment to respecting human rights and aligning with international standards, such as the UN Guiding Principles on Business and Human Rights. The policy should be integrated into the company’s governance frameworks, risk management strategies and operational processes.

2. Identify and Assess Human Rights Risks

Regular risk assessments are essential to identify and evaluate potential and actual human rights risks across a company’s operations and supply chains. This involves mapping the supply chain to pinpoint where risks are most likely to occur and engaging with stakeholders to gather diverse perspectives. For instance, the electronics industry often faces labor rights violations in factories in Asia, while the agricultural sector may encounter issues related to land rights and working conditions in developing countries.

3. Implement Preventive and Mitigative Measures

Companies must take proactive steps to prevent and mitigate identified risks. This can include revising supplier contracts to incorporate human rights clauses, providing training and resources to suppliers, and conducting regular audits to ensure compliance. Establishing grievance mechanisms for workers and communities to report violations is also crucial. An American multinational corporation and technology company, for example, has implemented stringent supplier standards and conducts regular audits to ensure compliance with labor and environmental policies, aiming to mitigate labor rights abuses in its supply chain.

4. Monitor and Evaluate Effectiveness

Continuous monitoring and evaluation are vital to ensure the effectiveness of HRDD measures. Companies should establish key performance indicators (KPIs) to track progress and conduct regular reviews to assess the impact of their efforts. This allows for adjustments and improvements as needed. A British multinational consumer goods company, for instance, tracks several KPIs related to human rights, including the percentage of suppliers meeting its responsible sourcing policy requirements and the number of suppliers audited annually.

5. Communicate Transparently

Transparency is key to building trust with stakeholders. Companies should regularly report on their HRDD efforts, including the risks identified, measures taken, and outcomes achieved. This can be done through sustainability reports, websites and other communication channels. A Swedish multinational chain of clothing stores, for example, publishes an annual sustainability report detailing its efforts to improve labor conditions and reduce environmental impacts in its supply chain.

6. Provide Remedies and Take Responsibility

When human rights violations occur, companies must take responsibility and provide appropriate remedies. This might include financial compensation, rehabilitation or other forms of support for affected individuals. Companies should collaborate with suppliers and other partners to implement corrective measures and prevent future violations. A German automobile manufacturer, after facing allegations of human rights abuses in its supply chain, has taken steps to improve its HRDD processes and provide remedies to affected workers.

Challenges and Best Practices

Conducting HRDD can be challenging. Among the main challenges we identified, we highlight the following:

- Complex Global Supply Chains: Mapping and monitoring extensive supply chains can be difficult, especially when suppliers operate in regions with weak labor laws or regulatory oversight.

- Lack of Transparency: Gaining visibility into suppliers’ practices can be challenging, particularly when dealing with indirect suppliers and subcontractors.

- Resource Constraints: Implementing HRDD requires resources, including time, money and expertise, which may be limited for some companies.

However, adopting the following best practices through a corporate culture of respect for human rights can help overcome these challenges:

- Engage Stakeholders: Engage with a wide range of stakeholders, including workers, local communities, nongovernmental organizations and industry groups, to gather diverse perspectives and insights.

- Leverage Technology: Use technology, such as blockchain and supply chain management software, to enhance traceability and transparency.

 - Implement Ethical Supply Chain Management: Set clear expectations for suppliers; conduct supplier audits; and provide training, resources and support to help suppliers understand and uphold human rights standards.

- Collaborate with Industry Peers: Join industry initiatives and multi-stakeholder groups to share best practices and collectively address human rights challenges.

- Continuously Improve: Regularly review and update HRDD processes to reflect evolving risks, regulatory requirements and best practices.

Liability for network and HRDD is a critical consideration for modern businesses. By conducting thorough HRDD, companies can mitigate legal, financial and reputational risks while promoting ethical business practices. Following the guidance and best practices outlined in this article will help companies effectively manage human rights risks and uphold their responsibility to respect human rights.

Fernanda Barroso, Regional Managing Director for LATAM, Kroll, Brazil
Emanuel Batista, Managing Director, Kroll, U.S.
Maria Alejandra Vahos, Senior Manager, Kroll, Colombia

Sources

Journal Officiel De La République Française, French Corporate Duty Of Vigilance Law, Law No. 2017-399 of March 27, 2017, on the duty of care of parent companies and ordering companies, 2017.
Parliament of the United Kingdom, Modern Slavery Act 2015, 2015.
United Nations, Universal Declaration of Human Rights, 1948.
United Nations, International Covenant on Civil and Political Rights, 1966.
United Nations, International Covenant on Economic, Social and Cultural Rights,1966.
United Nations Human Rights Office of the High Commissioner, Guiding Principles on Business and Human Rights. Implementing the United Nations "Protect, Respect and Remedy" Framework, 2011.

kroll.com