News reports on human rights issues have become a steady drumbeat for companies in a variety of industries that operate in and source from nations in the developing world. The risks to companies posed by human rights abuses in their supply chain are real and present: such abuses risk undermining brand value and reputation, and causing supply chain disruption. Given these risks, respecting human rights is no longer solely an issue of corporate social responsibility.

Avoiding value destruction now needs to occupy centre stage for the Board, legal and compliance teams and risk functions.

We are entering an era of rapid change in this area within a new legislative landscape. What was historically dominated by "soft law" obligations is now becoming an issue of "hard law"; something which will have an significant impact on the way that multinational companies do business. Director will increasingly have to personally sign off statements and reports on where their business impacts human rights.

Human rights reporting

Certain companies throughout Europe (those with over 500 employees group-wide) will shortly be required to issue a non-financial statement reporting on human rights impacts. A failure to provide these reports will be a criminal offence. This is both a company and individual director responsibility. In any event, human rights reporting requirements are already mandatory in some EU countries, including the United Kingdom, Denmark, France, Norway and Sweden, and also exist outside the EU, for example, in Switzerland. Companies are expected to report on the human rights impacts with respect to their entire value chain. [Read more]

Companies' responsibilities with respect to their supply chains

In addition, some governments are implementing laws targeted at corporations as a means to address issues of forced labour and human trafficking. Most recently the UK Parliament enacted a law modelled on the California Transparency in Supply Chain Act of 2010, which requires large businesses to disclose the policies they have put in place to address human trafficking in their supply chains. Under this new law, relevant businesses will need to report on slavery and human trafficking issues. The UK law calls for director level assurances that slavery and human trafficking is not taking place in supply chains; the act theoretically creates offences which can be committed by the company or its officers being an accessory to the criminal acts of suppliers outside of the UK. Any business with a sizeable presence in the UK should now be taking steps to comply. [Find out how]

Addressing risk within the supply chain

These developments give real legal urgency to the need to address human rights issues. However, it is not just the compliance landscape that is changing. So too are public attitudes. Getting it wrong in the supply chain brings the potential for real PR damage, but also could give rise to class action lawsuits, public boycotts or stockholder divestment campaigns. Conversely, a clear commitment from a company to respect human rights, including in its suppliers and other business relationships, can provide a competitive advantage in the marketplace.

There are a number of steps that businesses can take now in response to this developing challenge. For example, a company should set out its responsibility to respect human rights in a human rights policy. To begin to identify possible risks, companies should undertake an effective due diligence process to consider the possible human rights impact in a company's supply chain and how best to manage the same. Stakeholder engagement is also a critical part of the jigsaw. [Find out more]

Facing the challenge: The EIU report

The debate continues to move on. DLA Piper co-sponsored a report launched by the Economist Intelligence Unit (EIU) which reviewed the preparedness of business in respecting human rights. The findings showed that while many companies feel unready for these new challenges and opportunities, all accept the need to tackle the issue. [Read the report]

The EIU report revealed that companies are still learning what their responsibilities mean and how they can be put into operation. This means keeping existing human rights policies and audit procedures under constant review, looking for continuous improvement. The key is understanding how to integrate respect for human rights into existing risk management, compliance and quality management systems. Materiality thresholds, salient risks and human rights relevance - and prioritising steps that need to be taken - will vary from business to business.

In summary, the damage that an adverse human rights impact can have on a company's reputation and profitability is clear. The obligation on business to respect human rights is no longer considered to be a "soft" responsibility. There are increasing legal obligations on companies in connection with reporting requirements in general and, in particular, in relation to reporting on the possible human rights impacts of their supply chain. However, there are actions that companies can take now to address these challenges.