05
MAY
2017

Supply Chain Due Diligence Increasingly a Requirement for Companies

In these times of significant political change, how will national policies affect compliance requirements for companies with overseas operations? Could the growing anti-regulation sentiment impact recently enacted national business and human rights due diligence requirements? Certainly, evidence exists that this could and has occurred. However, a more comprehensive and global review of new national laws and measures requiring mandatory corporate supply chain due diligence and reporting, as well as corporate good practices, show a different global trend developing.

On the one hand: Suspension of elements of the “conflict minerals” rule

In the United States, the U.S. Securities and Exchange Commission (SEC) recently announced that it suspended enforcement of the corporate due diligence requirements of the “conflict minerals” provision, Section 1502 of the Dodd-Frank Act. The law was enacted in 2010 to prevent warring militias from receiving funds through the sale of scarce minerals, and requires publicly-traded companies to examine, and annually report, if their supply chains utilize certain minerals sourced from the war torn Democratic Republic of the Congo or neighboring countries.

With the suspension of elements of Section 1502, public companies will no longer be required to conduct a due diligence review or an audit, both part of the process used to determine the origin of the minerals. In response to the SEC’s decision, Human Rights Watch, a human rights advocacy organization, pointed out that “suspending enforcement of the SEC rule sends a strong signal that the US is downgrading respect for human rights as a priority in US policy towards Congo.” Other civil society organizations voiced equally grave concerns to the SEC.

On the other hand: Several large companies continue with their corporate due diligence efforts

However, human rights organizations were not the only ones to protest this revision in U.S. regulation. Perhaps more unexpectedly, corporations that source minerals from the region have also spoken up against the suspension of the corporate due diligence requirements. Apple, Intel, Tiffany & Co., and others have all stated their commitment to opposing the revision.

While it is currently unknown how intact 1502 will remain in the end, what is clear is that several major companies do intend to continue with their due diligence responsibilities even if they are not compelled to do so. Why?

Simply put investors, managers, employees, customers, and the public expect these companies to maintain their commitment to the responsible sourcing of minerals and to provide “conflict free” products to the marketplace.

Increasing launch of National Action Plans on business and human rights

Governments are also expressing their expectation that companies respect human rights and undertake human rights due diligence in their supply chains and for all their operations. Drawing on international frameworks such as the United Nations Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises, states have developed National Action Plans (NAP) that among other things address corporate due diligence responsibilities to identify, prevent, and mitigate human rights risk, create redress mechanisms, and facilitate access to justice for victims of abuses. The number of launched NAPs has increased by 55% since December 2016 and more are currently under development.

In recent months, states with large numbers of resident multinational corporations have released NAPs, to include Switzerland, Italy, the United States, Germany, and France. According to the UN Working Group on Business and Human Rights, an additional 21 states are in the process of developing a NAP or have committed to creating one.

The global trend towards mandated corporate due diligence  

A review of current national level efforts related to human rights due diligence and reporting show an overall global trend of expanding mandated requirements.

Some examples of national measures include:

Australia:  In February 2017, the Australian parliament launched “an inquiry to inquire into and report on establishing a Modern Slavery Act in Australia”, comparable to the United Kingdom’s Modern Slavery Act of 2015. The Australian Government has also solicited input from interested persons and organizations with submissions from overseas governments, organizations and individuals welcome until May 19, 2017.

France: In February 2017, France adopted a law covering corporate duty of care obligations for respecting human rights and the environment for companies within the scope of the law, and includes specified penalties for non-compliance.

Germany: With the release of its NAP in December 2016, Germany established among other things its expectation that companies with over 500 employees based in Germany should voluntarily undertake a human rights due diligence process. The German government has established a metric of 50% of qualified firms conducting due diligence by 2020, otherwise it will consider making the corporate due diligence process mandatory.

The Netherlands: In February 2017, the lower house of the Dutch Parliament adopted the “Child Labour Due Diligence Law” a measure that requires companies to determine whether child labor exists in their supply chains and develop a course of action for mitigation. This law still requires approval by the Senate.

Switzerland: An NGO led effort – Responsible Business Initiative – Protecting Human Rights and the Environment – is pending and would mandate due diligence requirements for Swiss companies that operate abroad.

United Kingdom: The UK Modern Slavery Act, adopted in 2015, requires companies within its scope to make a corporate statement on the steps taken to ensure that slavery and human trafficking do not occur in company supply chains.

United States: The U.S. released its National Action Plan for Responsible Business Conduct in December 2016. While it is unclear of implementation of the plan is underway, other corporate due diligence requirements are already in place.

Released in 2013, the Department of State’s Reporting Requirements on Responsible Investment in Burma stipulate that any U.S. person who invests $500,000 or more in Myanmar, or invests in Myanmar’s oil and gas sector, is required to complete and submit a report, which among other things include information relation to human rights due diligence policies and procedures.

The U.S. also issued an Executive Order in 2012 to strengthen protections against trafficking in persons in federal contracting.  Among other provisions the Executive Order prohibits U.S. government contractors and subcontractors from engaging in specific trafficking-related activities as well as requiring specific corporate compliance measures for larger contracts (>$500,000) conducted abroad.  To comply with these provisions federal contractors and subcontractors must conduct specific actions to include certifying that neither it nor any of its contractors has engaged in trafficking-related activities and developing and maintaining appropriate compliance plans.

While the SEC’s suspended enforcement of the “conflict minerals” rule represents one set back in corporate due diligence requirements, the overall trend set by companies and states alike moves in the opposite direction. Multinational companies with international supply chains and operations would do well to consider this evidence, as their global business activities are likely to touch on one or more of the jurisdictions that have mandated corporate human rights due diligence.

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