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The recent ‘bad week’ suffered by oil majors Chevron, Exxon and Shell has been widely reported. The first two were caused by activist shareholders. But Shell lost a case in a Dutch court that may well serve as a significant legal precedent. The court held Shell responsible for reducing not only its own greenhouse gas emissions in line with the Paris Agreement, but also its so-called Scope 3 emissions: the global emissions generated by end-users of its products.
All three are victories for combating climate change. But it has gone largely unnoticed that the Dutch court ruling against Shell was based on human rights grounds.
The court accepted plaintiffs’ claim that Shell’s reduction obligation ensues from a customary duty of care in the Dutch civil code. It further stated: “In its interpretation of the unwritten standard of care, the court follows the UN Guiding Principles [on Business & Human Rights]. The UNGPs constitute an authoritative and internationally endorsed ‘soft law’ instrument, which set out responsibilities of states and businesses in relation to human rights. The UNGPs reflect current insights.”
At the same time, a German Lieferkettengesetz (supply chain law) drawing on these Principles was adopted by Parliament this month.
Nor is that all. The EU has turned to the UNGPs as a core element in new regulations applicable to any large firms operating within its internal market – irrespective of their nationality.
On the investor side, the EU’s Sustainable Finance Disclosure Regulation (SFDR) is now being phased in. It imposes two requirements on “all financial market participants”. First, they must publish how they account for “sustainability risk” in their investment advising and decision-making. Second, they are required to publish how they conduct the ESG due diligence by which they identify those risks. Additional requirements apply where financial products are marketed as ‘ESG’ or ‘sustainable.’ Enforcement mechanisms include administrative measures and fines.
The European Commission is finalising another draft Directive, to be released later this summer. It will require companies to conduct human rights (and environmental) due diligence across their global value chains. The European Parliament has already recommended a draft law to this effect. It is not binding on the Commission, but as it was adopted by the overwhelming majority of 504-79, it sends a strong signal.
This Directive is also expected to require firms to establish grievance mechanisms accessible to stakeholders. For enforcement purposes, it will include a civil liability provision. And it, too, will apply to all large listed firms operating in the internal market.
Now, conducting due diligence will sound familiar to business. But they should not be misled by the similarity in terminology. All these initiatives draw on the construct of ‘human rights due diligence’ as prescribed in the UNGPs, which differs from the standard practice in three critical ways.
First, human rights due diligence is not a one-time transactional appraisal, as for a new acquisition, but an ongoing process. This reflects the fact that human rights risks connected to a company’s operations and value chain are themselves constantly changing, whether due to internal factors such as a new product development or evolving workforce composition, or due to external factors such as regulatory changes, moves into new markets or unexpected events in their operating contexts.
Second, human rights due diligence includes assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking the effectiveness of the responses, and communicating how the impacts are addressed. Such impacts may occur as a result of a company’s own activities, or they may be linked to its operations, products or services by its business relationships.
Third, human rights due diligence, as understood in these regulatory initiatives, requires engagement with affected stakeholders, or, where that is not possible, their legitimate representatives. This comprises the usual categories of stakeholders – employees, suppliers, customers and communities – that are typically cited in reference to stakeholder capitalism. Yet it avoids the common critique that these categories are too expansive and the interests of their members too varied for executives to make sense of in corporate deliberations.
That is because human rights due diligence is situational not formulaic. It places the focus specifically on those people whose basic dignity and equality are at risk of harm from a company’s particular activities and business relationships.
By making human rights due diligence mandatory, these European initiatives are requiring firms to bring their impact on stakeholders into greater prominence in corporate decision-making at operational and leadership levels as well as in their compliance and oversight functions.
This suggests that Europe is moving beyond mere debate about the purpose of the corporation, toward a more stakeholder-oriented construct. Firms based in other countries, including the UK and US, that wish to continue operating in those jurisdictions will need to consider abandoning their lingering legacy of shareholder primacy.
John Ruggie is a professor at Harvard’s Kennedy School. As UN Special Representative for Business & Human Rights he developed the Guiding Principles, endorsed unanimously in 2011.