The big news in mandatory human rights and environmental due diligence legislation is last week's political agreement on the EU's Corporate Sustainability Due Diligence Directive. However, legislation also was recently proposed in the United Kingdom. Baroness Young of Hornsey introduced a Bill proposing the Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Act in the UK House of Lords on November 28.

In this post, we discuss and provide our observations on the proposed Act.

Duty to prevent human rights and environmental harms

Under the Act, commercial organisations would have a duty to prevent human rights and environmental harms, so far as reasonably practicable, with respect to their own operations, products and services and those of their subsidiaries, and throughout their value chains. This duty would include the obligation to conduct human rights and environmental due diligence, as further described below.

"Commercial organisations" would include UK-organized corporations and partnerships, wherever they carry on business. It also would include other corporations and partnerships (wherever incorporated) that carry on business in the United Kingdom.

The "value chain" would include all activities undertaken by an entity during the lifecycle of a good or service upstream or downstream of the commercial organisation.

The Act would address human rights harms broadly. As used in the Act, human rights harms would include any adverse impacts on a person's ability to enjoy any of the internationally recognized human and labor rights, including those recognized in the International Bill of Human Rights and the International Labour Organization Declaration on Fundamental Principles and Rights at Work.

Environmental harms also would have wide coverage. These would consist of adverse impacts on the environment resulting from (1) the violation of environmental law, including internationally established environmental principles or conventions, (2) ecocide (unlawful or wanton acts committed with knowledge that there is a substantial likelihood of severe and widespread or long-term damage to the environment being caused by those acts) or as part of a contribution to climate change contrary to the pathways for limiting global warming to 1.5°C or (3) any other adverse impacts on specific environmental categories as specified by the Secretary of State in regulations.

Due diligence

The Act would require "reasonable due diligence." Consistent with how due diligence is typically thought of in the human rights context, at a minimum, this would be required to include:

  • Integrating human rights and environmental due diligence into policies and management systems;
  • Identifying, assessing and addressing actual or potential human rights and environmental harms, through prevention, mitigation and remediation;
  • Establishing or participating in and maintaining effective grievance mechanisms;
  • Tracking, verifying, monitoring and assessing the effectiveness of measures taken and their outcomes; and
  • Communicating with stakeholders and reporting publicly on findings.

Whether a commercial organisation's due diligence is reasonable would depend on the context. Under the Act, reasonableness would be determined by, among other things:

  • The size, sector, operational context, ownership, structure, country or region of operation, and the nature of the human rights or environmental harms in question;
  • The severity of the human rights or environmental harms, as determined by the scale, scope and irremediability of the harm;
  • The extent to which the commercial organisation has exercised leverage over third parties in the value chain and made attempts to increase leverage for the purposes of the Act;
  • The organisation's prioritization of human rights and environmental risks within its due diligence process and the reasonableness of the prioritization; and
  • The extent to which due diligence was an ongoing process with continuous monitoring and improvement.

Human rights and environmental due diligence would expressly require informed, meaningful and safe engagement with stakeholders, particularly workers, affected rightsholders and those defending human rights and the environment, throughout the entire process. In addition, audit reports, certification schemes and membership in industry or multi-stakeholder initiatives for dialogue and learning would not on their own be sufficient to fulfill the due diligence obligation.

Responsible disengagement

If a commercial organisation decides to suspend or terminate a business relationship as a result of its due diligence assessment, the decision would be required to satisfy specified requirements. It would be required to:

  • (1) Reflect reasonable human rights and environmental due diligence, taking into account human rights or environmental harms that might arise from the suspension or termination of the business relationship, (2) consider how the harms might be prevented or mitigated and (3) take into account the remediation of harm that commercial organisations had failed to prevent prior to the disengagement decision;
  • Be based upon informed, meaningful and safe engagement with stakeholders that are or may be affected by the disengagement decision; and
  • Be taken in a timely manner, considering (1) disengagement as a last resort after failed attempts at mitigation, in contexts where the prospect of change by using or increasing leverage is possible, and (2) rapid disengagement in contexts where the harm is severe, including where gross and systemic harm is imposed and enforced by state policy, and the commercial organisation lacks the possibility of using and increasing leverage to prevent, mitigate or remediate the harm.

Reporting

Commercial organisations that exceed an annual worldwide turnover threshold to be specified by the UK Secretary of State would be required to publish and submit to a government registry an annual report describing their due diligence procedures to be adopted in the then-current fiscal year and assessing the effectiveness of the previous year's actions. More specifically, the report would need to include:

  • Information relating to human rights and environmental due diligence, any outcomes achieved and how measures would be continuously improved;
  • A disclosure of the value chain enabling full traceability;
  • Detailed reporting on scope 1, 2 and 3 greenhouse gas emissions; and
  • Any other information required to evaluate the adequacy of the organisations' response to actual or potential human rights and environmental harms in line with the UN Guiding Principles on Business and Human Rights.

Reports would be due six months after the end of each fiscal year.

Third-party information requests

Under the Act, any person would have the right to request from a reporting commercial organisation information relating to human rights and environmental due diligence, including general information and information relating to a specific product or service. Some requests for information could be denied, but generally commercial organisations would need to respond to requests within one month.

Readers may recall that the Norwegian Transparency Act also provides for third-party information rights. With the completion of the first reporting cycle under the Norwegian Transparency Act, many companies are receiving information requests. See our recent post on the Norwegian Transparency Act.

Public sector procurement implications

The Act would require public authorities to engage only suppliers that conduct, or have a plan to conduct within a reasonable timeframe, reasonable human rights and environmental due diligence in accordance with the Act. Additionally, public authorities would be required to establish human rights and environmental due diligence requirements for their suppliers at the tender stage, specific award criteria related to due diligence policy and practice and contract performance conditions relating to the implementation of such duties, including provisions for remediation for those affected by human rights or environmental harms.

Regulatory oversight

Within six months after the Act comes into effect, the Secretary of State would be required to appoint a regulatory authority with oversight responsibility for compliance with the Act. The regulatory authority's duties would include providing guidance on due diligence approaches and best practices, providing reporting requirements, hosting a website listing all organisations subject to mandatory reporting requirements and enforcing compliance with the Act. In furtherance of these duties, the regulatory authority would have the power to investigate companies, issue a civil sanction following a finding of infringement of the Act and refer criminal offenses under the Act to the Crown Prosecution Services.

Violations

The Act contemplates liability for damages if a commercial organisation fails to prevent human rights or environmental harms in its own or its subsidiaries' operations, products or services or throughout its value chains and the commercial organisation is unable to prove it took all reasonable steps to prevent the harm from occurring, including by conducting reasonable human rights and environmental due diligence. Remedies also could include injunctive relief, restitution and remediation, among others.

Additionally, organisations that fail to meet their duty to prevent human rights and environmental harms or to comply with the Act's reporting requirements could be fined up to 10% of their global turnover, among other penalties contemplated by the Act.

Directors or the equivalent management body of a commercial organisation would be collectively responsible for the organisation's compliance with the Act. Subject to specified defenses, they will have committed an offense if the commercial organisation did not conduct human rights or environmental due diligence or the individual knows (or there is recklessness) that reported human rights and environmental due diligence information is materially false or incomplete. An individual guilty of an offense could be fined, disqualified from serving as a director and even imprisoned.

The Act also contemplates criminal liability under some circumstances. Those provisions are not discussed in this post.

Five quick observations

  • The Bill introduced by Baroness Young is a Private Members' bill. These are bills introduced by Members of Parliament and Lords who are not government ministers. A small minority of Private Members' bills become law. The current Bill should therefore be viewed as a potential catalyst for further UK discussion rather than legislation likely to be adopted.
  • If the Bill moves forward, there will undoubtedly be disagreement over many of the same topics that were hotly debated in the European Union. Among others, these will include (1) covered human rights and environmental harms, (2) compliance thresholds, (3) covered industries (in particular financial services), (4) the portions of the value chain that are covered, (5) directors' duties and (6) liability for violations. If the Bill does move forward, expect it to change significantly given its breadth in terms of covered commercial organisations, duties and liability.
  • If the UK moves forward with mandatory human rights and environmental due diligence legislation, there also will be debate over whether to harmonize with the EU's Corporate Sustainability Due Diligence Directive (CS3D) to minimize incremental compliance burdens on UK companies.
  • Expect mandatory human rights and environmental due diligence proposals to continue. Legislative proposals are not limited to Europe. For example, legislation was recently proposed in South Korea, as discussed in this post.
  • We likely have already reached – and if not are quickly approaching – the tipping point for human rights due diligence. A large number of companies already are required to conduct human rights due diligence under French, German, Norwegian and Swiss laws, among others. CS3D will dramatically expand upon existing requirements. Commercial requirements to conduct human rights due diligence also are increasing.

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.