What is effective human rights due diligence (human rights DD)? Going beyond regulatory compliance to lead to sustainable initiatives

Zeroboard
Consulting Department
Senior Sustainability Expert
Nao Okayama

There is a growing trend among Japanese companies to formulate and disclose "human rights policies." However, issuing a policy is not the goal; it is merely the starting point. Investors and global business partners are not interested in whether or not a policy exists, but rather its effectiveness. This means whether a company is continuously identifying risks, preventing and correcting them, monitoring, and disclosing information, protecting and respecting the human rights of vulnerable people, and leading to improvements.

This article outlines the specific processes and practical points for human rights due diligence (human rights DD), which companies that have disclosed their human rights policies should take as their next step. It also touches on international trends that have been gaining attention in recent years, and explains how to go beyond simply complying with regulations and embed effective initiatives into business strategies to develop sustainable initiatives.

1. A "Human Rights Policy" is the first step in human rights due diligence (human rights DD)

In recent years, in addition to responding to environmental issues such as climate change, respect for human rights has rapidly gained attention as an important corporate responsibility. Human rights due diligence (hereinafter referred to as "human rights DD"), which is becoming increasingly mandatory mainly in Europe, is no longer just something that a few global companies are doing.

The adoption of the UNGPs in 2011 was a major catalyst, and in the following few years, we have begun to see examples of Japanese companies also beginning to set out policies that include respect for human rights. However, human rights due diligence does not end with simply disclosing a human rights policy. Disclosing a human rights policy means that a company will incorporate human rights initiatives into its management processes and will continue to implement human rights due diligence, in other words, it is a declaration that it will seriously address human rights Issue throughout its value chain. The real work of human rights due diligence begins after a human rights policy is formulated.

Of course, formulating a human rights policy is an important first step, but recently, investors, customers, and other stakeholders have begun to measure a company's "seriousness" based on the following criteria:

• Based on that policy, how do you identify risks?
• Are specific measures being taken in areas identified as high risk?
• Do you have a monitoring and remediation mechanism?
• Are you engaging in dialogue not only with your own company but also with your suppliers?

In other words, whether or not the PDCA cycle of "policy → execution → evaluation → improvement" is in place is now the key to determining the reliability of investors and business partners.

2. Specific processes for human rights due diligence (human rights DD)

Let us now take another look at how to proceed with human rights due diligence as required by the UN Guiding Principles.

Figure 1: Human rights due diligence process
Reference: "OECD Due Diligence Guidance for Responsible Business Conduct" and "United Nations Guiding Principles on Business and Human Rights" * 1

The actual process may vary depending on the location, size, and nature of the target company's supply chain, and will require flexible implementation. However, the UN Guiding Principles on Business and Human Rights and OECD guidance recommend the following approach:

2. Identifying 1 impacts

Identifying Initial Risks: Identify the business areas within your company's value chain where human rights risks are most likely to exist and where the risks are most severe. This involves identifying risks by industry, country/region, and product. Some industries are prone to repeated human rights violations due to Industry structure. Other countries are prone to human rights violations due to inadequate legal systems, government repression, or corruption. These trends are identified at this stage. This process allows you to initially prioritize the most significant risk areas for further assessment. This can also serve as a weighting standard for the Self-Assessment Questionnaire (SAQ).

- Collecting data from suppliers: Based on the initial risk information identified up to this point, the next step is to identify recipients of the SAQ, design the questionnaire, and distribute it. If the supply chain is not particularly complex, one approach is to use the SAQ when identifying initial risks. However, since the SAQ is ultimately a self-assessment, physical audits may be conducted as necessary. The results are then analyzed and a primary assessment is conducted.

・Evaluation and prioritization based on severity x likelihood of occurrence: Human rights risks identified through supplier surveys, etc. are prioritized based on severity and likelihood of occurrence. However, when it comes to human rights risks, severity is important, and even if the likelihood of occurrence is low, it is recommended that high-severity risks be addressed as a priority.

2. Stopping, preventing, and mitigating negative impacts

Identifying and halting adverse impacts: Companies are responsible for identifying and halting any adverse impacts that their activity have caused or contributed to. To ensure this occurs, appropriate senior administrator is responsible for Create a roadmap for halting these impacts, working with internal legal counsel and potentially affected stakeholders as needed.

Preventing and mitigating future impacts: Companies should develop and implement plans to prevent and mitigate potential future negative impacts. This may involve updating corporate policies, providing relevant training to employees, and strengthening management systems for risk warnings. Consultation with potentially affected stakeholders is also important.

・Using influence through business relationships and considering ceasing transactions: Companies use their influence to prevent or mitigate negative impacts arising from business relationships with suppliers and others. This includes concrete actions such as encouraging the development of corrective action plans and working with other companies to build collective influence. Companies may also consider ceasing transactions as a last resort if attempts to prevent or mitigate serious impacts fail. However, ceasing transactions may result in a more serious human rights risk, and companies must carefully consider the social and economic impacts of ceasing transactions.

2. Monitoring of implementation status and results (follow - up survey)

Conducting due diligence and tracking effectiveness: Companies will regularly track the implementation and effectiveness of measures they have taken to identify, prevent and mitigate adverse impacts. This includes not only monitoring internal activity and progress against targets, but also conducting regular third-party reviews and audits.

・Regular assessment of business relationships: We regularly assess business relationships, such as suppliers, to verify that efforts to prevent and mitigate negative impacts are actually effective. This allows us to verify that risk mitigation measures are being implemented appropriately and that negative impacts are actually being mitigated.

・Continual improvement and application of lessons learned: Lessons learned through monitoring are used to improve future due diligence processes. This includes identifying adverse impacts and risks that may have been overlooked in the past and incorporating them into future processes. In addition, when it comes to human rights impacts, it is also important to incorporate feedback into the process through consultations with potentially affected parties.

2- 4. Information Disclosure

External disclosure of due diligence activity: Companies must disclose appropriate information about their due diligence policies, processes, and activity taken to address adverse impacts. Such information is typically made public on their company websites, annual reports, etc.

・Providing information in an accessible manner: We will consider providing information that is easily accessible to everyone, such as on our company website or in local languages. With regard to human rights impacts in particular, we must take care to communicate information to those affected in a timely, culturally sensitive, and accessible manner.

2- 5. Grievance Mechanisms: Correction and Relief for Human Rights Violations That Have Already Occurred

- Grievance mechanism coverage: Many Japanese companies have introduced internal reporting systems. (The grievance mechanism not only involves so-called "grievance processing," but also includes "corrective measures" in response to legitimate protests by rights holders.)

However, the reality is that many systems are considered insufficient in terms of human rights. It is common for companies to limit those who can report to their "whistle-blowing hotlines" to internal employees and consumers. However, international norms such as the UN Guiding Principles call for grievance mechanisms to be targeted at a broader range of stakeholders. While it is possible to utilize existing whistle-blowing hotlines, it is recommended that consideration be given to whether the scope of these can be expanded further. It is also important to inform targeted stakeholders of the existence of grievance mechanisms.

- Effectiveness of the Grievance Mechanism: Furthermore, the UN Guiding Principles (Principle 30) recommends that a grievance mechanism meet eight requirements for its effectiveness: legitimacy, availability, predictability, fairness, transparency, compatibility with rights, a continuous source of learning, and engagement dialogue with stakeholders. *2 Grievance mechanisms can only achieve their purpose if the target audience is aware of, trusts, and can use them. If the number of reports to an existing whistle-blowing hotline is low, it may be that the Issue are truly few, or that necessary voices are not being heard due to reasons such as a lack of trust or fear of retaliation. For example, the automobile manufacturer Stellantis prohibits all "retaliation" against whistleblowers in its human rights policy. * 3 If it is difficult for a company to establish a grievance mechanism on its own, it may be possible to consider using an external organization. * 4

3. Effectiveness evaluation and new trends in human rights due diligence (CSDDD/TISFD)

In Japan, an increasing number of companies, particularly large ones, are establishing frameworks (risk identification, prevention, remediation, monitoring, and disclosure) in line with the United Nations Guiding Principles on Business and Human Rights (UNGPs) in addition to their human rights policies. However, not many companies understand the essential necessity of such frameworks and evaluate and disclose their actual effectiveness and the impact and improvements they have produced. It is expected that the transparency and reliability of human rights due diligence will be questioned not simply as a measure to address reputational risks or comply with European laws and regulations, but also as a more fundamental management Issue.

At the heart of this trend is the European Union's Corporate Sustainability Due Diligence Directive (CSDDD), which legally requires companies above a certain size to identify, prevent, mitigate, and remediate adverse human rights and environmental impacts in their supply chains. The CSDDD elevates human rights due diligence, which has previously been left to the voluntary efforts of companies, to a legally binding obligation, potentially subjecting non-compliant companies to penalties. This directive positions human rights due diligence as an essential part of business risk management for corporate activity, and it is likely to affect Japanese companies with global business operations.

While the CSDDD imposes an obligation for effective due diligence, the Taskforce on Inequality and Social-related Financial Disclosures (TISFD), launched in 2024, is a framework for requiring companies to disclose information and be accountable from an investor perspective. A draft is currently being Create. Like the TNFD, the TISFD is expected to require companies to disclose impacts, dependencies, risks, and opportunities on social aspects. (The TCFD only identifies risks and opportunities. However, the 4 pillars of the disclosure framework, like those of the TCFD and TNFD, are expected to be "governance," "strategy," "risk management," and "metrics and targets.") Particular emphasis is placed on companies disclosing their performance on human rights, inequality, and human capital, measuring improvements in social outcomes. Companies are expected to collect and report data on living wages, labor practices, health, and safety within their own companies and their value chains as key performance indicators (KPIs) in a comparable format. * 5 Like the "nature" aspect of the TNFD, this is based on the premise that companies depend on the state of "people" involved in their business activity throughout the entire value chain, and is based on the idea that they should grasp the impacts, risks, and opportunities of their business activity. This sends a message that it is not enough for companies to simply say, "We have a policy," but that they need to measure how effective the measures they are actually taking and whether their monitoring, engagement, and recurrence prevention measures are appropriate.

Unilever, a consumer goods manufacturer, is a pioneering example of a company that discloses the results and progress of supplier audits. It also clearly states its corrective process, stating that auditors report serious incidents within 24 hours, suppliers Create corrective action plans within 7 days, and follow-up audits are conducted within 90 days to verify that the measures taken have been sufficiently effective.

Figure 2 : Unilever "Supplier Audit Data (Severe Incidents in 2020)"Source: Unilever 2021 Human Rights Progress Report * 6(translated by Zeroboard)

4. Summary

Indicators and data are also useful for decision-making regarding the "S" (social) aspect of ESG. Compared to competitors, where are the risks and opportunities in your company's value chain? Sharing this information with internal and external stakeholders can help demonstrate the need for social initiatives and promote ongoing efforts. While international discussions on human rights regulations, such as the CSDDD and TISFD, are still ongoing, waiting for the results of these discussions before acting will result in a delayed response. Japanese companies are expected to promote effective human rights due diligence, taking into account the essential significance of corporate human rights initiatives, by referring to the "OECD Due Diligence Guidance for Responsible Business Conduct" published by the OECD in 2018.

When promoting effective human rights due diligence, many companies face the difficulty of monitoring the implementation status and results.
To address these Issue, we offer the Dataseed SAQ.

• Design a simple questionnaire that suppliers can answer without any burden
• Automatically aggregate and visualize response data to streamline daily management tasks
• Creating a system to encourage constructive dialogue with business partners

By not only setting out a "human rights policy" but also establishing it as an "effective system," we can fulfill our responsibilities as a company and contribute to the realization of a more sustainable and fair society.
Please feel free to use it.

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* 1 OECD "OECD Due Diligence Guidance for Responsible Business Conduct" https://www.oecd.org/ja/publications/oecd_8a0c9422-ja.html

United Nations "Guiding Principles on Business and Human Rights" https://www.unic.or.jp/texts_audiovisual/resolutions_reports/hr_council/ga_regular_session/3404/

* 2 United Nations Information Centre, Report of John Ruggie, Special Representative of the Secretary-General on Human Rights and Transnational Corporations and other Businesses, Guiding Principles on Business and Human Rights:
"Implementing the United Nations 'Protect, Respect and Remedy' Framework" https://www.unic.or.jp/texts_audiovisual/resolutions_reports/hr_council/ga_regular_session/3404/

* 3 Stellantis “Human Rights Policy”
https://www.stellantis.com/content/dam/stellantis-corporate/sustainability/human-rights/Stellantis-Human-Rights-Policy-EN.pdf

* 4 Jacer "Complaint Handling Form"
https://jacer-bhr.org/application/form.html　　

* 5 TISFD “People in Scope”
https://www.tisfd.org/resources/scope 

* 6 Unilever “2021 Human Rights Progress Report”
https://www.unilever.com/files/cefcd733-4f03-4cc3-b30a-a5bb5242d3c6/unilever-human-rights-progress-report-2021.pdf