Canada: The Convergence Between Supply Chain Regulation And ESG Metrics: A Human Rights Perspective

With new human rights reporting and due diligence legislation being adopted by several jurisdictions throughout the world, corporate compliance and other pressures facing multinational enterprises, including environmental, social and governance (ESG) are set to converge. As we noted here, Canada is the most recent jurisdiction to adopt human rights reporting legislation. This follows several other jurisdictions - including the UK, US, EU and Australia - that have adopted or are contemplating several measures. Regulatory reporting requirements work alongside ESG standards which encourage many of the same actions and behaviours, and in many instances go beyond regulatory requirements. In most cases, companies that adhere to globally recognized ESG standards will already have the policies and internal operationalize of those policies in place for all criteria mandated by regulatory reporting requirements.

A. Key metrics that focus on human rights

Key ESG reporting standards for human rights include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Carbon Disclosure Project (CDP) and the Task Force on Climate-Related Financial Disclosures (TCFD). The GRI and SASB offer comprehensive frameworks for reporting on human rights performance, while the UN Guiding Principles on Business and Human Rights provide specific guidance on managing business and human rights risks. The CDP and TCFD primarily focus on environmental metrics, but have significant overlap with social factors, including human rights, as they address issues such as climate justice and forced labour in supply chains. ESG metrics provide for the identification, assessment and mitigation of potential human rights risks associated with businesses' operations. These standards provide industry-specific guidelines for reporting human rights-related metrics, thereby ensuring consistency, comparability to other businesses, and accountability in disclosures. Notably, for investors these baselines provide a qualitative and comparable manner to assess social performance of companies.

B. Contents of human rights standards

The GRI and SASB¹ specifically address human rights concerns with suppliers for international supply chains. We provide a few of these examples here.

• GRI Standard 408-1 addresses disclosure of activities relating to human rights risk assessment and includes reporting on the management approach to human rights assessments, and operations that have been subject to human rights reviews or assessments.

• GRI Standard 408-1 addresses disclosure of activities relating to child labour and includes reporting on the management approach to child labour, and operations and suppliers at significant risk for incidents of child labour.

• GRI 409-1 Standard addresses disclosure of activities relating to forced and compulsory labour and includes reporting on the management approach to forced and compulsory labour, and operations and suppliers at significant risk for incidents of forced and compulsory labour.
  
• GRI Standard 411-1 addresses disclosure of activities relating to the rights of Indigenous peoples, and includes reporting on the management approach to the rights of Indigenous peoples and the disclosure of incidents of violations involving of Indigenous peoples.

• GRI Standard 413-1-2 addresses disclosure of activities relating to the welfare of local communities, and includes reporting on the management approach on local communities, as well as operations with local community engagement, impact assessment and developing programs.

SASB addresses many of these concerns as well through broad categories. For example, the Consumer Goods: Apparel, Accessories & Footwear accounting standard includes several criteria for "Labour Conditions in the Supply Chain." This standard requires businesses to report the three greatest - one labour and two environmental - health and safety risks in the supply chain, which may include child labour and forced labour. Beyond this, SASB requires businesses to report auditing percentage of suppliers (tier one and beyond) and to disclose the rate of non-conformance with supplier codes of conduct as well as the actions taken to remedy these failures.

C. Conclusion: Convergence in global reporting requirements and voluntary standards can be leveraged for disclosure reports

In brief, many of the voluntary ESG standards and metrics require reporting on the same topics that are now mandated reporting criteria in several jurisdictions. To the extent that an entity is required to file a disclosure in one jurisdiction, that reporting obligation can be leveraged into a strong "ESG score" by also adopting one of internationally recognized ESG metrics. For entities that have previously been reporting on an internationally recognized ESG standard, those reports or material that is substantially repurposed, in many cases, will meet the regulatory reporting requirement.

Best practices now include indexing how reports on human rights and a supply chain meet both regulatory requirements and voluntary standards. This facilitates reviews by relevant governmental authorities, investors and third-party ESG rating agencies. These transparency standards increasingly demonstrate that trend for supply chain management of further and more stringent voluntary and regulatory requirements on international supply chains.

This article is part of a series of business and human rights articles. For questions on Business and Human Rights, please reach out to Sean Stephenson.

This article was written with the assistance of Nikki Bhatia and Kailyn Johnson.

Footnote

1 SASB has 77 industry specific standards, each with tailored content and an independent numbering system. For this piece, SASB Consumer Goods: Apparel, Accessories & Footwear (Consumer Goods: Apparel) was used. All references to SASB sections are to the Consumer Goods: Apparel,unless explicitly stated otherwise.

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