Business and Human Rights: Developments and What to Watch For

Business and Human Rights: Developments and What to Watch For

February 2, 2023, Covington Alert

As we have done in previous years, we provide in this update an overview of key developments likely to impact companies in the coming year. The proliferation of legal and policy developments, including new and revised due diligence and forced labor import ban requirements, continues. While the legal requirements and risks vary among jurisdictions, companies increasingly are being required to demonstrate respect for human rights by implementing human rights due diligence programs to identify and mitigate human rights risks in their own operations and global value chains.

Although implementation dates are a year or more away for some of the laws covered in this alert, given the high standard of global due diligence required or likely to be required, companies should commence work now to ready their global human rights compliance programs.

A. European Union

Corporate Sustainability Due Diligence Directive

Status: The European Parliament and Council are each currently considering the European Commission’s Proposal for a Corporate Sustainability Due Diligence Directive (“CSDDD”) (published February 2022). As we previously reported, the Commission’s Proposal would impose broad-ranging human rights and environmental due diligence obligations on a significant number of companies that are based in or conduct substantial business in the EU. The CSDDD is likely to be adopted by the end of 2023 and to give Member States a two-year deadline to transpose its requirements into their national laws.  

The Commission, Parliament and Council are aiming to agree on the final text of the CSDDD later this year. In addition to the Commission’s Proposal, we have now seen the initial positions of both the Council and Parliament. The Council’s published negotiating position of December 1, 2023 and the Parliament’s draft proposal suggest that the EU institutions are far from agreement on some fundamental issues, including:

• Which companies will be caught by the due diligence requirements, and when: The Council and Parliament are pushing in opposite directions with respect to scope and timing. For example, the Council has proposed a more gradual phase-in approach, starting with certain very large companies three years after entry into force and allowing smaller companies four or five years to comply. In contrast, the draft Parliament proposal suggests a much wider scope, applying it to all large companies and SMEs listed on stock exchanges or operating in high-risk sectors, within two years after the directive has been transposed into Member States’ national laws.
• Application to the financial services sector: The Council has proposed that individual Member States should decide whether the due diligence requirements would apply to financial service undertakings, whereas neither the Commission nor the Parliament have suggested that there should be scope for financial services firms to be exempted from the Directive’s requirements (though their draft texts do suggest some degree of modification in due diligence requirements given the specificities of the sector).
• Directors’ duties: There are ongoing debates about whether the Commission’s proposal for a directors’ duty of care provision—which would oblige directors to consider the sustainability (including human rights, climate change and environmental) consequences of their decisions—be included in the final text.
• Scope of due diligence duties: Whereas the Commission and Parliament have proposed more expansive definitions of “value chain”, the Council has proposed limiting the due diligence obligation to cover a company’s “chain of activities” rather than the full “value chain.” It would define a “chain of activities” to include: (i) certain activities of a company’s upstream business partners related to the production of goods or provision of services; and (ii) certain limited downstream activities, including distribution, storage and disposal where business partners carry out those activities for the company, but not, for example, the use of the company’s products or services.

Separate from the EU due diligence proposal, and in addition to some significant national human rights due diligence laws already passed, a number of EU Member States, including The Netherlands, Austria, Belgium, Denmark, Spain and Finland, have published plans and/or are tabling draft bills considering cross-sectoral human rights due diligence legislation.

Issue-Specific Due Diligence Requirements:

In addition to the broad due diligence requirements of the CSDDD, certain upcoming and recently adopted EU environmental laws include human rights due diligence components. The increasing number of initiatives bringing environmental and human rights together will necessitate a coordinated, comprehensive approach by companies to implementing global due diligence programs. A further notable trend highlighted by these laws is the increasing number of commodities for which companies will soon be required to conduct supply chain tracing to the raw material level.

1. Deforestation Regulation

Status: On December 6, 2022, the Parliament and the Council reached a provisional political agreement on a regulation that seeks to address the environmental risks associated with deforestation. Before the regulation can enter into force, the provisional agreement must be adopted formally by both the Parliament and Council, a process likely to take several months. The final text has not yet been released and may not be released before it is adopted, likely in early 2023. Once adopted, companies subject to the regulation would have 18 months to implement the new rules.

Requirements: Based on the draft agreement, the regulation will impose stringent due diligence requirements on any company that sells into or exports from the EU market the following goods: palm oil, cattle, soy, coffee, cocoa, timber, and rubber, and derived products (including, for example, beef, leather, furniture and chocolate). Such companies will be required to implement various due diligence measures, including tracing the origin of commodities back to the farmland where they were produced (and publishing that geolocation data), conducting risk assessments, and adopting risk mitigation measures. While the Deforestation Regulation is primarily focused on the environmental harm caused by deforestation and biodiversity loss, it also encompasses the protection of human rights. Companies will not be able to place covered products on the EU market, or export them, unless the products are: (i) “deforestation-free” (i.e. not produced on land subject to deforestation after 31 December 2020); (ii) produced in accordance with the “relevant legislation of the country of production,” meaning laws in relation to land use, environmental protection, labor rights, human rights (including the principle of free, prior, informed consent), tax, anti-corruption and trade; and (iii) covered by a due diligence declaration.

2. Batteries Regulation

Status: On December 9, 2022, the Parliament and the Council agreed on the text of a new Regulation on Sustainable Batteries that will replace the existing 2006 Batteries Directive with a new Batteries Regulation. The Parliament and Council are expected to formally adopt the agreed text of the Regulation by Spring 2023. The Commission has indicated that, to become fully operational, the regulatory framework will require detailed secondary legislation, which would be adopted sometime between 2024 and 2028.

Requirements: The Regulation will require companies with a net turnover of EUR 40 million that first make batteries available on the EU market to conduct due diligence to identify and mitigate social and environmental risks linked to the sourcing, processing, and trading of prescribed raw materials: copper, cobalt, natural graphite, lithium, nickel and certain other chemical compounds. Required due diligence measures include a company due diligence policy overseen by top level management, supply chain traceability system, contractual terms with suppliers and a grievance mechanism. Due diligence measures must cover a range of environmental and social risks, with the social risks including labor rights, child labor, human rights, occupational health and safety, and community life, including that of indigenous peoples. The Regulation requires due diligence to be conducted in line with a range of existing international standards, including the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

Corporate Sustainability Reporting Directive

Status: The EU recently passed the Corporate Sustainability Reporting Directive (“CSRD”), which creates new rules designed to provide investors with reliable information on companies’ environmental, social, and governance (“ESG”) efforts (see our more detailed blog post on the CSRD for more information). There have been two key recent developments relating to the CSRD:

1. Legislative text: On November 28, 2022 the Council approved the CSRD, which will impose ESG reporting requirements on a significant number of companies with connections to the EU. Member States are required to adopt national implementing legislation by mid-2024. The application of those laws will then be phased in for different groups of companies from 2024, with first reports due in 2025. The law will initially apply to companies already subject to the more limited Non-Financial Reporting Directive and will ultimately apply even to non-EU parent companies generating more than EUR 150 million in revenue in the EU whose EU subsidiaries or branches meet certain thresholds.

2. Reporting standards: The Commission is expected to adopt a Delegated Act setting forth the reporting standards that companies subject to the CSRD will be required to follow. Proposed European Sustainability Reporting Standards (“ESRS”) are currently being developed by the European Financial Reporting Advisory Reporting Group (“EFRAG”) for consideration by the Commission. The first set of proposed standards under the draft ESRS were submitted to the Commission in late November 2022. EFRAG is working on additional sector-specific standards.

Requirements: The draft ESRS are comprised of a range of general and subject matter standards, including four sets of standards relevant to “social” issues, which relate to: (i) the reporting company’s own workforce; (ii) workers in the company’s supply chain; (iii) affected communities; and (iv) consumers and end users. The ESRS also include five standards on environmental reporting and one on business conduct, driving integration of reporting on ESG issues. The general standards reflect a central CSRD principle of “double materiality,” under which subject companies are required to report not only on matters material to the company’s financial results, but also on potential material impacts on people and the planet.

B. Germany

Supply Chain Due Diligence Act

Status: Germany’s Supply Chain Due Diligence Act came into force in January 2023 for companies with a head office, principal place of business, administrative headquarters or any registered branch office in Germany and at least 3,000 employees in Germany. From January 2024, businesses with at least 1,000 employees in Germany will also be subject to the law.

Requirements: Key elements of the law are covered in our earlier detailed alert. In summary, the law requires covered companies to implement a range of due diligence measures, including: governance structures for fulfilling due diligence obligations; annual human rights and environmental risk assessments in their own operations and their supply chains; mitigation of identified risks and violations; grievance mechanisms; and annual reporting to the Federal Office for Economic Affairs and Export Control (“BAFA”). Recent BAFA guidance indicates that companies will be required to report using a questionnaire (currently only available in German) that includes a range of detailed questions, including on specific risks the company identified and corrective actions taken to address those risks. Companies will then be required to publish the reports on their websites. Failure to comply with certain requirements under the law can lead to fines of up to EUR 8 million for each violation. Companies with an annual turnover of more than EUR 400 million may also be fined up to 2 percent of their global annual revenue and/or excluded from public tenders for up to three years.

C. United States

In November 2022, President Biden signed bipartisan legislation reinforcing anti-human trafficking prohibitions for government contractors (see our detailed alert). The End Human Trafficking in Government Contracts Act of 2022 builds on the existing anti-human trafficking framework at Federal Acquisition Regulation § 52.222-50 by requiring agencies to refer reports of potential human trafficking activity by federal contractors directly to an agency suspension and debarment official.

D. Canada

In December 2022, Bill S-211, the Fighting Against Forced Labour and Child Labour in Supply Chains Act, cleared the Standing Committee on Foreign Affairs and International Development. The bill would require Canadian companies that meet certain thresholds to report on whether they have taken measures to identify forced labor in their supply chains. The bill is expected to become law with support from multiple parties.

E. Japan

While no binding regulation has emerged from Japan to date, in September 2022, the Japanese Ministry of Economy, Trade and Industry published non-binding due diligence guidelines (a provisional English translation can be accessed here). The guidelines call on all enterprises engaging in business in Japan to respect human rights in their supply chains. More specifically, companies are encouraged to implement a human rights policy and conduct due diligence to identify and address potential adverse human rights impacts. The guidelines are the first to be published in Japan and reflect the government’s growing focus on business and human rights issues and its interest in working with global stakeholders to address human rights risks in supply chains.

A. United States

There were two significant developments in the course of 2022 with respect to the U.S. forced labor import ban regime, which is enforced by the U.S. Customs and Border Protection (“CBP”) within the Department of Homeland Security.

Uyghur Forced Labor Prevention Act

The Uyghur Forced Labor Prevention Act (“UFLPA”) took effect on June 21, 2022 (see our most recent alert here). The UFLPA expands CBP’s enforcement authority under Section 307 of the Tariff Act of 1930 by creating a rebuttable presumption that any goods produced in whole or in part in the Xinjiang Uyghur Autonomous Region (“XUAR”), or by an entity on the UFLPA Entity List, have been produced with forced labor and are barred from entry into the United States. CBP began detaining shipments under the law shortly after it came into effect. 

CBP’s June 2022 Operational Guidance for Importers explains the two paths that importers can pursue to seek release of goods detained under the UFLPA: (i) rebut the presumption by providing “clear and convincing evidence” that the detained goods were not made with forced labor; or (ii) show that detained goods are beyond the scope of the UFLPA because they have no supply chain nexus with the XUAR or a listed entity.[1] In practice, rebutting the presumption will be extremely difficult with respect to goods produced in the XUAR, in light of challenges associated with obtaining access to information and facilities in the region. Initial reports from CBP suggest that importers recognize this difficulty and have in most cases chosen to either re-export detained products or submit documentation to establish that they are not subject to the UFLPA. Such submissions require the importer to work with its supplier to undertake detailed, shipment-specific supply chain tracing, from the source of the raw materials through to the production of the finished goods.

Recent CBP enforcement statistics indicate that the number of “forced labor entries targeted”—a statistic that now includes shipments targeted under the UFLPA and Withhold Release Orders—rose from 1,469 in FY 2021 to 2,398 in FY 2022. CBP is currently working on further building its capacity to target and detain goods subject to Section 307 or the UFLPA; the agency has indicated that 300 additional personnel will be required to effectively implement these laws, and the 2023 appropriations bill allocated $101 million to CBP to combat forced labor, a $51 million increase from 2022.

Customs Trade Partnership Against Terrorism

As we previously reported, CBP has incorporated new forced labor requirements into its Customs Trade Partnership Against Terrorism (“CTPAT”) “trusted trader” program.

As of January 1, 2023, members of the CTPAT Security program must maintain a documented social compliance program, as described in section 3.9 of the Importers Minimum Security Criteria. CBP defines a social compliance program as consisting of a set of policies and practices to ensure maximum adherence to the elements of its code of conduct that cover social and labor issues, the environment, and health, safety, and rights of its employees, the communities in which the company operates, and the lives and communities of workers in its supply chains.

Further, since August 1, 2022, CBP has required that all new CTPAT Trade Compliance applicants meet certain forced labor compliance requirements. Existing members must meet the same requirements by August 1, 2023. The requirements have been published in CBP’s CTPAT Trade Compliance Handbook and include: risk-based mapping of supply chains; implementing a Code of Conduct, including a prohibition of forced labor in the company’s supply chains and related policies and procedures; implementing a social compliance program, including audits of high-risk supply chains, internal training programs, and other due diligence tools to identify forced labor in supply chains; supplier training; and remediation plans in the event that forced labor is identified in the company’s supply chains, including a process for disclosing the issues to CBP.

In the context of forced labor enforcement, CBP will also now provide certain additional benefits to CTPAT Trade Compliance members, including, for example, prioritized review of admissibility packages when shipments have been detained and alternative options for where detained shipments may be held while CBP reviews are underway. It is unclear at this stage whether the benefits will apply only to products detailed under WROs or also those detained under the UFLPA.

B. European Union

EU Forced Labor Product Ban

Status: On September 14, 2022, the Commission published a proposal for a regulation to ban products made with forced labor from the EU market (see our detailed alert for additional information). As the proposed regulation is still in the early stages of the EU’s legislative process, it is unlikely that it will be adopted before the end of 2023, which means that it is unlikely to come into force earlier than late 2025. Companies trading in the EU should nonetheless remain mindful of its potential impact in the coming years.

Requirements: Broader in scope than the U.S. regime, the proposal would ban the import, placing on the market, and export of products made with forced labor, whether the goods are produced domestically or abroad. Companies would also be required to withdraw from the EU market products found to have been made with forced labor, other than products already in the hands of end users. The inability to export such products would mean that they would need to be destroyed. While investigation and enforcement powers will rest with competent authorities designated by each EU Member State, all Member States would be obligated to recognize and enforce a determination by the competent authority of any other Member State with respect to products that share the same identification (e.g., brand) and supply chain. Targeted companies would be given the opportunity to demonstrate that they have due diligence processes in place to identify, prevent and mitigate forced labor risks.

C. Japan

On January 6, 2023, officials from the United States and Japan signed a memorandum of cooperation launching a new task force for the purpose of sharing information to eliminate forced labor from the countries’ supply chains. The task force will be co-chaired between the Office of the U.S. Trade Representative and the Japanese Ministry for Economy, Trade and Industry, and its membership will include other U.S. departments who have been key to U.S. enforcement on forced labor to date, including the Departments of Labor and Homeland Security.

If you have any questions concerning the material discussed in this client alert, please contact the members of our BHR practice.