Lise Smit: Why companies need to know their impact on human rights

Until a few years ago, corporate decision-makers often worried that knowledge about their company’s human rights impacts may increase risks of litigation, prosecution and investment withdrawal.

Recent developments are shifting the debate in the opposite direction, with corporate counsel now pushing for more proactive knowledge-gathering and transparency.

Here are some reasons for this change:

First, the UN Guiding Principles on Business and Human Rights are increasingly finding their way into binding law through regulation, case law and industry standards.

The Guiding Principles expect companies to exercise human rights due diligence to “identify, prevent, mitigate and account for how they address their adverse human rights impacts.”

A recent study by the British Institute of International and Comparative Law (BIICL) and Norton Rose Fulbright showed that where companies undertake specific human rights due diligence, 77 percent identify adverse human rights impacts related to their operations, and 73 percent identify such impacts linked to the activities of their third parties.

In contrast, where companies only look at human rights through piecemeal existing processes such as those for health and safety or labor standards, only 19 percent identified their own impacts and 29 percent identified impacts linked to third parties.

Moreover, 59 percent of those companies that undertook specific human rights due diligence had been connected to allegations of human rights impacts in the past, and 62 percent had concerns about their own risks after allegations of human rights impacts surfaced around peers in the same sector, country or context.  

This suggests that companies with knowledge about their human rights risks are more likely to undertake human rights due diligence, and are in turn significantly more likely to identify impacts and put in place processes to address, prevent and mitigate them. 

Second, the absence of knowledge does not insulate a company from legal liability.

Courts and regulatory bodies have made clear in other areas where due diligence is required that companies can be held liable for having knowledge when they “should have known.”

Companies are often presumed to have knowledge, particularly in circumstances when the risks are obvious or high. In other words, even when companies may not have actual knowledge about their impacts on human rights, they could be held liable on the basis that they should have taken active steps to find out.

Third, corporate entities can no longer safely hide behind the corporate veil. 

Claims are arising based on parent companies having knowledge or control over the practices of their subsidiaries or suppliers. Examples of jurisdictions where courts have followed this line of reasoning to pierce the corporate veil include Canada, the Netherlands, the UK and the U.S.

Indeed, new French legislation called the Corporate Duty of Vigilence requires certain large companies to exercise and report on human rights due diligence for their own activities, as well as for the activities of entities within their control and third parties in their value chain.

Finally, a rigorous human rights due diligence system can protect a company.

The aim of due diligence is to prevent any adverse impacts from taking place at all. If an impact does occur, it has been shown in other areas of legal liability that having undertaken comprehensive due diligence can form a defense against legal claims. Due diligence can also provide protection against outraged public opinion, which can nowadays be triggered by a single negative social media post.

Where publicly made claims are often disseminated without supporting evidence, undertaking systematic human rights due diligence can serve as insurance against false allegations. If a company can describe in detail which steps it has taken and the lengths to which it has gone to prevent that specific human rights impact, it may assist to restore confidence in its brand and amongst its own employees.

Three of the top four incentives for human rights due diligence identified in the BIICL / Norton Rose Fulbright study were law-related — namely avoidance of legal risk and compliance with regulatory reporting requirements and other applicable laws. (The other top incentive was reputation.)

As a result of these legal developments, the question that companies are asking themselves has changed from “Do we really want to know?” to “Can we really afford not to know?”

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Lise Smit is Research Fellow in Business and Human Rights at the British Institute of International and Comparative Law (BIICL). BIICL offers in-house training to companies and law firms on business and human rights issues.