Australia: Practical tips on conducting human rights due diligence

Business ethics and anti-corruption world

There is increasing focus on the responsibility of businesses to respect human rights, most notably since the UN Human Rights Council endorsed the UN Guiding Principles on Business and Human Rights (the Guiding Principles), formulated by Professor John Ruggie, the former Special Representative of the UN Secretary General for Business and Human Rights.

The Guiding Principles are of international significance, setting out the standards of behaviour expected of States to protect, and businesses to respect, human rights. Although they do not form part of hard international or domestic law, and do not have statutory force, nonetheless they invoke respect for internationally recognised rights and are of increasing relevance legally in areas such as investment treaty disputes, state operated procurement processes, project finance contracts and rising litigation aimed at seeking redress for alleged human rights abuses.

The Guiding Principles provide guidance on the steps that businesses should take in order to mitigate possible human rights impacts and risks. As explained below, human rights due diligence (HR due diligence) is an essential step and requires the active involvement of in-house lawyers. That said, it requires a different approach from what commercial lawyers may be familiar with. This article seeks to explain the key differences and provide some practical tips on how to go about the process.

Why should lawyers engage in their business's HR due diligence?

Applicable Laws and Recognised Rights
First, Principle 23(a) of the Guiding Principles requires businesses to comply with all applicable laws. Every country in the world has some form of labour, privacy, health & safety or other law which will need to be assessed in order to meet the expectations of the Guiding Principles. Beyond domestic law, Principle 23(a) calls on businesses to respect "internationally recognised rights", set down in international treaties ratified by States such as the International Labour Organisation Conventions and the documents comprising the International Bill of Rights (i.e. the Universal Declaration on Human Rights, International Covenant on Civil and Political Rights, and International Covenant on Economic, Social and Cultural Rights). In the event of a conflict between local and international rules, businesses must "seek ways to honour" the internationally recognised rights. Depending on the circumstances, this process may require significant legal scrutiny and analysis.

Indirect Legal Risks
Second, a business's failure to comply with the Guiding Principles can, indirectly, lead to legal risk; even if the Guiding Principles themselves are not binding in law. For example:

  • It is well-documented that in some jurisdictions it is possible to bring claims against companies for human rights abuses committed abroad. In jurisdictions such as the US and UK, for example, these claims typically manifest themselves as tort actions, often brought by or on behalf of multiple claimants. Moreover, there have been many instances of companies unwittingly inheriting expensive, protracted legal disputes through mergers or acquisitions. Given the possibility of such claims, Principle 23(c) calls on businesses to treat gross human rights abuses as a legal compliance issue.
  • Tribunals in investment treaty claims (such as the International Centre for Settlement of Investment Disputes tribunal in Phoenix Action v Czech Republic (2009)) have determined that "investments made in violation of the most fundamental rules of protection of human rights" should not benefit from investment protection.
  • In the context of project finance, signatories to the Equator Principles1 (EPs), 79 of the largest financial institutions worldwide, require borrowers to comply with the IFC Performance Standards on Environmental & Social Sustainability (Performance Standards) when undertaking due diligence. If a borrower fails to do so, this could amount to an event of default under the loan documents. The latest version of the Performance Standards requires that HR due diligence, as envisaged by the Guiding Principles, be conducted in "limited high risk circumstances".

When conducting HR due diligence, any human rights issues identified should be assessed with an enquiring legal mind taking into account possible legal risks such as the ones described above.

Legal Principles Third, the language in the Guiding Principles evokes familiar legal concepts when describing how a business should go about conducting HR due diligence. For example, Principles 17 to 21 outline the main components of an effective HR due diligence process, which should include procedures designed to identify, prevent, mitigate and account for a business' human rights impacts. Principle 17(b) acknowledges that the appropriateness of any such steps will "vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations". This language suggests the need to examine issues of scope and proportionality that lawyers frequently come across.

Further, HR due diligence should, according to Principle 17(a), "cover adverse human rights impacts...a business...may cause or contribute to". Assessing causative links is a familiar legal exercise, and the Commentary to Principle 17 relating to contribution includes references to the criminal law principle of complicity. This reinforces the need for lawyers to play an active role in HR due diligence.

Equally, it is worth noting that the Guiding Principles do not explicitly prescribe legal tests for assessing causation and contribution, but instead advocate a risk based approach, which should begin with an analysis of the risks of adverse human rights impacts. This is explained more fully below.

Human Rights Due Diligence – In Practice

HR due diligence should be an essential part of a company's risk management strategy, not least if the company operates in "high-risk" jurisdictions. Today, there exists a global trend towards developing due diligence mechanisms to assist companies in complying with relevant professional standards, sometimes against a background of increasing regulation.

Although HR due diligence is not a legal requirement, it is increasingly recognised that it is good business practice to manage potential human rights risks associated with the company's activities, in the same way that an increasing number of companies seek to manage risks such as bribery and environmental damage. HR due diligence addresses a company's responsibility to:

  • Identify and assess human right risks;
  • Prevent and mitigate adverse human rights impacts; and
  • Account for how it addresses human rights impacts.

According to the Guiding Principles, HR due diligence should be initiated as early as possible in the development of a new activity or relationship. How this is to be done will depend on the circumstances - there is no "one-sizefits- all" approach to implementing HR due diligence.

Identify and assess human right risks
The first step in carrying out HR due diligence is to identify and assess the nature of the actual and potential adverse human rights impacts with which a company may be involved. This involves carrying out human rights impact assessments (HR impact assessment) to identify potential human rights issues in existing and anticipated projects and operations. The approach to this assessment will depend on, among other things, the country and industry in which the company operates. But there are two key questions which companies should consider when carrying out any HR impact assessment of a project or operation:

  • Who are the potentially affected stakeholders?
  • What are the potential human rights impacts of the project or operation?

In the context of oil and gas companies, for example, the European Commission's Guide on Implementing the Guiding Principles sets out five steps of the HR impact assessment process.

The European Commission's Guide on Implementing the Guiding Principles comments on these steps:

  1. Building a Systematic Approach to Assessment
  2. HR impact assessment is an on-going process, which should be repeated whenever risks to human rights may change substantially. There may also be other important sources of information on impacts that need to be considered, e.g. expert reports, complaints from NGOs and grievance mechanisms at an operational-level.

  1. Understanding Your Operating Context
  2. Companies need to understand the context in which they operate at a country level so they can take steps to avoid contributing to human rights abuses. Where national laws fail to protect human rights, companies should respect internationallyrecognised human rights.

  1. Reviewing Business Relationships
  2. Companies' responsibility to respect human rights extends to its business relationships. This also includes relationships down the supply chain.

  1. Drawing on Expertise
  2. Companies need to draw on relevant expertise to make sure that their assessments of impacts are as well informed as possible. These sources of expertise may be internal to the company or external, e.g. by commissioning relevant NGOs to advise on specific issues and/or prepare reports where appropriate. This is a good opportunity to engage individuals across different functions and departments internally in a conversation about potential human rights impacts.

  1. Consulting Affected Stakeholders
  2. Meaningful consultation with affected stakeholders is vital in identifying potential human rights impacts and finding sustainable ways to address them. It is important for companies to demonstrate that they properly take into account the concerns of affected stakeholders.

In summary, an HR impact assessment is a structural process by which the company gathers the information it requires in order to understand what its human rights risks are so that it can decide how best to mitigate them. Part of any HR impact assessment must be to consult human rights experts and engage with affected stakeholders in decision making processes.

Prevent and mitigate adverse human rights impacts
It is important to stress that the identification and assessment of human rights risks and impacts should be an inherent part of the company's decision making about its business activities, and not simply be seen as a process to be followed after making a decision to pursue a project or operation. The business needs to engage with affected stakeholders at an early stage in the decision making process and throughout the life cycle of a project and provide appropriate mechanisms to raise human rights issues.

Account for how human rights impacts are addressed
Companies should be prepared to communicate externally about how they address human rights impacts. Since the amendment to the Companies Act 2006, Section 414C(7)(b)(iii) requires UK quoted companies to report on human rights issues in their strategic reports. With greater reporting obligations being introduced in countries such as the UK and the USA, companies will likely be put under increasing pressure to explain publicly how they address human rights issues and how they assess their human rights impacts, including through HR due diligence and HR impact assessments.

What makes HR due diligence unique?
First, the focus of HR due diligence includes risks to the human rights of individuals and extends beyond risks to the business itself. That requires the company to ensure that its focus is not purely internal and gives HR due diligence a dimension that may not exist in other due diligence exercises.

Second, the scope of HR due diligence, and the issues that it needs to consider, can be extremely broad. Not least, it needs to take into account all internationally-recognised human rights, including standards applying to relevant vulnerable groups. Companies need to ensure that the human rights issues and their potential scope are properly understood by drawing on relevant expertise.

Third, a proper due diligence exercise may require the company to address potentially affected stakeholders' perspectives through meaningful consultation. Again, this may require the company to address issues outside itself (and its comfort zone).

Fourth, it is difficult to measure and respond to human rights issues that are identified. For instance, human rights issues can be qualitatively different from bribery issues (where specific behaviour, such as unlawful payments, can be identified and addressed based on an examination of the company's books and records) and environmental issues (such as GHG emissions, where the impacts, and the effects of remediation, are often more measurable).

Finally, HR due diligence involves companies considering what impacts may arise from their business relationships, and may imply a greater responsibility to influence the activities of business partners than the company is used to.

Conclusion

There is a global trend towards developing more effective due diligence mechanisms to enable companies to understand and comply with relevant legal and professional standards. At the same time, there is growing pressure on companies to "know and show" that they are managing human rights risks effectively. HR due diligence and HR impact assessments are essential means of ensuring that this is done properly.

Footnote

1The EPs apply to all project financing with a value of over US$10 million and to certain types of corporate loans, bridge loans and project finance advisory services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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