Posted by Matthew Waller
What to look out for in 2023
Posted by Matthew Waller
2023 is well-underway and we wanted to take this opportunity to wish our readers a happy New Year.
This newsletter includes our insights for the upcoming year across the fields of business and human rights, labour standards, and gender – and is derived from our work with leading organisations and professionals.
In 2022, the ongoing recovery from the COVID-19 pandemic and the impacts of Russia’s invasion of Ukraine have plunged millions worldwide into poverty. Through 2023, supply chain disruptions, the potential for further international security crises, continuing high levels of inflation and reduced consumer spending will continue to pose challenges for businesses. Our clients in the retail sector, for example, report cost pressures across their businesses – which historically has been a signal that social and sustainability programmes will be deprioritised. However, there is a strong argument that this pattern may not play out as it has previously.
These pressures mentioned above are being felt in a context where there is an even greater focus among regulators and the public on transparency and accountability from companies and investors. And where there is also greater maturity among businesses and other organisations in integrating human rights principles into their activities. Increasingly, addressing human rights issues is not just seen as a ‘voluntary’ add-on, flowing from an understanding that issues such as paying living wages or understanding the human rights impacts of digitisation can also bring operational benefits and resilience. Moreover, the connection between human rights and other fields has become more prominent, with the climate crisis or sport activities increasingly recognised for their linkages to human rights impacts. All of which should incentivise and push governments and organisations to carefully consider these issues.
Needless to say, throughout 2023 we will be keeping a close eye on these and other developments and will continue to support our clients in responding to the challenges they face in strengthening positive impacts across their organisations, portfolios and supply chains.
Mandatory due diligence laws bring human rights into the boardroom
The key cross-cutting driver for change affecting our clients over the next year will be the various regulatory developments at supra-national or national levels.
Much attention in 2023 will continue to focus on the proposed EU Directive on Corporate Sustainability Due Diligence (CSDD). The proposal’s scope has recently been narrowed by the European Council, and will now be negotiated in the European Parliament, which may result in a number of changes with new legislation not likely until 2024. Simultaneously, the EU is proposing a Regulation on Deforestation-free supply chains, which, like the CSDD, has mandatory due diligence elements. Though the Deforestation Regulation will have a much more focused remit in terms of sectors, it could have a positive knock-on effect in other sections of relevant supply chains.
In Germany, the Supply Chain Act came into force on 1 January 2023 and will have wide ranging implications and influence for the conduct of human rights and environmental due diligence by larger companies incorporated or registered in Germany. Meanwhile in both the Netherlands and in Spain, there are proposals on legislation designed to meet the requirements of the CSDD.
The EU and the US Government have also both introduced various import bans on goods made with forced labour. These will come into force over the next two years, but companies will need to start introducing new risk assessment procedures now in preparation. Alongside this, various other countries including Canada and New Zealand are considering whether to follow the example set by the UK and Australia by introducing due diligence or reporting legislation more narrowly focussed on modern slavery.
Crucially, all of the various legislative measures – and there are more than those mentioned above – will firmly place the issue of human rights and the environment in front of senior directors and corporate counsel. This will inevitably lead to more consideration and resource from companies in scope. We should expect major changes in the way in which companies approach human rights and environmental due diligence as well as more efforts to assess whether all this leads to significant reductions in negative impacts on people and planet.
From human rights silo to human rights strategy
We anticipate that there will be more companies and organisations looking to carry out broader strategic reviews in relation to how they manage human rights issues across their wider operational context. This is a consequence of the regulatory developments set out above and also broader investor and other scrutiny on company performance on business and human rights.
Failing to think more strategically about this topic risks human rights being siloed. And while existing work carried out by company human rights teams may appear to be strongly aligned in methodology with the UN Guiding Principles on Business and Human Rights (UNGPs), in practice they may fail to have significant influence or leverage throughout the broader organisation, or to have sufficient high level support.
Over the last year or so we have seen more companies establishing cross-cutting working groups. These have a responsibility for developing a human rights approach, and for ensuring that this makes sense for the organisation, in alignment with both parallel and integrated functions and programmes. We therefore anticipate more strategic efforts and discussions at more senior levels, creating greater pressure to provide for an integrated approach to human rights due diligence.
Human rights impact assessments – growing up?
We continue to see strong demand for human rights impact assessments (HRIAs) among a range of international companies both in respect of supply chains and on fixed location projects. However, certainly among retailers located at some distance – geographically and in terms of their position in the value chain – from where most impacts lie, there is an emerging desire to review learnings from conducting supply chain HRIAs and reflect on whether these are the most efficient ‘tool’ for identifying problems and developing subsequent actions.
As many corporates have gained greater experience with HRIAs, we have also observed an increasing understanding among companies that in order to best prevent and mitigate impacts, they may need to re-think the way they do business – for example, reviewing purchasing practices across categories, building closer relationships between buying teams and sustainability teams, and securing commitment for changes at the top of the organization. When it comes to addressing impacts, this kind of critical assessment of corporate behaviour is important, as well as a willingness to take on shared responsibility – with retailers pro-actively supporting supply chain actors, such as their suppliers, to address impacts – rather than simply introducing more rigid and potentially costly requirements.
Going forward, one area we would highlight immediately is the need for greater collaboration between retailers on HRIAs, as well as the prompt sharing of outcomes with both suppliers and stakeholders who participate in such studies. Otherwise, companies run the risk of creating as much fatigue among suppliers through HRIAs as they do through multiple audits, and depleting stakeholders’ goodwill to participate in these processes. Overall, we expect to see some new thinking on the best application of HRIAs during 2023.
Investor ESG claims to face continued regulatory scrutiny
ESG credentials are increasingly touted as common for businesses as a means to attract (or placate) investors, enhance brand reputation, or to align with regulatory requirements.
The past twelve months has seen an ideological backlash as well as increased regulatory interest in the probity of such claims. For example, advertisements by HSBC which emphasised its climate initiatives, were deemed by the UK’s Advertising Standards Authority (ASA) to be misleading given the Bank’s contributions to emissions and greenhouse gases. Such exaggerated ESG claims are now in the regulatory crosshairs of the U.S. Securities and Exchange Commission (SEC).
The potential for scrutiny, and the possibility that companies may fall afoul of regulators, will only be heightened by the EU’s recent passage of the Corporate Sustainability Reporting Directive (CSRD) which will require even more companies to report on sustainability matters such as environmental, social, and human rights.
There is no reason to believe that regulatory interest will subside in 2023. While recent developments have largely focused on the financial services industry and claims of ‘greenwashing’, businesses from a range of sectors will need to be increasingly wary. Claims and commitments pertaining to labour and human rights, for instance the promotion of living wage or elimination of child labour in supply chains, can be notoriously difficult to measure or verify. Perhaps these challenges are precisely why regulators have not tackled claims connected to the ‘S’ in ESG with equal vigour applied to environmental or governance considerations? These developments are likely to promote some caution from businesses, but also greater efforts to understand what assurance is reasonable and required before making claims on social sustainability related topics.
The year that living wages go mainstream?
In June 2022, the International Labour Conference called on the ILO to play a global leadership role on a number of issues, including living wages. This might sound a bit theoretical but it will mean the ILO will have closer engagement with the concept of living wages and occurs against a backdrop of growing international awareness of the urgent need for action on this topic in Belgium, Germany and the Netherlands, and the EU. The latter’s proposal for CSDD positions living wage explicitly as a human right, stating that companies must ensure an adequate living wage, including in their supply chains.
This year will also see the progressive development of a range of initiatives focusing on inadequate wages in supply chains. These include IDH rolling out the Living Wage Action Guide and the Think Lab on Living Wage launched by UN Global Compact – both of which Ergon contributed to. Furthermore, the OECD will publish a handbook on living wages and living incomes focusing on the agricultural and garment and footwear sectors, where low incomes and wages have been identified as prevalent risks. Lastly, Shift and the Capitals Coalition will launch the final version of their Living Wages Accounting Model, which companies can use to measure and report publicly on progress towards living wages across their workforces and supply chains over time.
Evidently, significant challenges remain: real and meaningful participation of workers and their representatives in these processes, the appropriation of the concept of a ‘living wage’ (and associated benchmarks) by employers in exporter economies, the improvement of worker purchasing power in a high-inflation environment, and at an exporter country level, addressing perceived risks both to export competitiveness and employment. All the more pertinent then, that at least one Southern exporter association has suggested European actors look to the approach outlined in the EU Directive on Minimum Wages – encouraging the use of collective bargaining in wage setting, not prescribing a specific minimum wage level, and establishing a procedural framework for setting and updating these minimum wages.
Human rights in technology and digitisation
‘Governments have a duty to protect citizens against abuse and misuse of digital technologies.’ This was the view of the UN’s Deputy High Commissioner for Human Rights, Nada Al-Nashi in September last year. Such calls are not new, but they are growing in prominence with concerns spanning a range of issues linked to the use of digital technologies. These range from artificial intelligence collecting huge amounts of personal data, to automation leading to job losses, and misinformation undermining democratic processes and more. The backlash poses a challenge as such technologies have become central to our lives, underpinning not only how we communicate with each other, but how we work, relax, exercise etc.
Governments are playing catch up in trying to better understand and regulate a fast-evolving area. The EU has already shown leadership in this space with the passing of the General Data Protection Regulation (GDPR) and the Digital Services Act (DSA). These both place significant obligations on companies in scope to respect fundamental human rights, and in 2023 a new Artificial Intelligence Act (AIA) is anticipated to go through the EU’s legislative process before being adopted, further reinforcing protections for EU citizens. In its current form it would ban certain uses of AI and require those using AI to demonstrate due diligence broadly aligning with the UNGPs to identify, mitigate and prevent adverse human rights impacts.
These new requirements will no doubt pose challenges for companies and for the EU’s member states in implementing and monitoring effectively. However, they will likely serve as a blueprint for future and wider strengthening of human rights protections in the application of new technologies. In practice, this means companies will have to do more to understand their risks and impacts, and to prevent and mitigate these.
The integration of environment and human rights
It’s now well documented that climate change contributes to a range of human rights violations and has important implications for all internationally recognised human rights. Nevertheless, there is still a tendency to approach human rights and climate change as separate issues. Indeed, discussions at COP 27 highlighted the current lack of progress in mainstreaming human rights into climate change discussions, or ensuring that policymaking in the area of climate change is adequately informed by human rights obligations and principles.
On the back of this, we can expect to see a greater push for holistic, integrated approaches to human rights and the environment in 2023. For companies and investors, there is likely to be increased pressure to understand and respond to the social and human rights implications of transitioning to a green economy based on renewable energy. Here, one key priority will be managing supply chain risks associated with the “transition minerals” which underpin wind, solar and rechargeable battery production, many of which have been linked to destructive human rights and environmental impacts including child labour, forced labour, displacement of indigenous communities and deforestation.
Another priority will be understanding how the transition is likely to impact on jobs across global value chains and taking steps to ensure that the benefits of the green transition are shared equitably, including by vulnerable groups who may need support in developing skills and accessing opportunities linked to the renewables sector.
The legacy of 2022 for sport and human rights
As we anticipated this time last year, human rights were a hot topic in sporting circles during 2022. The FIFA Men’s World Cup in Qatar stood out, attracting unprecedented media attention in Europe and North America in relation to migrant workers and the LGBTQI+ issues. With a new year underway, what next? And what legacy, if any, will the events in Qatar and elsewhere have on human rights in sport?
For one, there is now an established connection between sports and human rights in the public mind. From the standpoint of focusing public attention and pressure to address serious issues associated with sports, this is positive. However, there is the danger that once an event is over, attention and energy dwindle or go elsewhere. There is also a danger that the sports and human rights agenda becomes – if it hasn’t already – a relativist one, focusing only on a limited number of countries or issues that seem to meet a particular threshold of severity. Looking ahead, it will be interesting to see whether the sports and human rights nexus becomes a broader rallying point to highlight issues in other countries, including those in North America and Europe, and on a more diverse array of human rights issues.
In this context, sporting bodies are also strengthening how they integrate human rights due diligence into their organisations and across their activities. In 2022, the International Olympic Committee (IOC) published a Strategic Framework on Human Rights and announced the composition of an Advisory Committee on Human Rights. This sets the standard for sports bodies, and the year ahead will see the possibility of others developing their own human rights strategies.