Policy Outlook

Mandatory Environmental and Human Rights Due Diligence: An Overview

Policy Outlook research includes ongoing monitoring of 29 topics related to sustainable finance and corporate responsibility regulatory developments across the globe. As of July 2020, Policy Outlook research has identified more than 115 regulatory frameworks, including 50 binding regulations, that expect corporations, including financial institutions, to conduct due diligence in relation to environmental and social/human rights issues.

The main trigger of the due diligence regulatory wave we have been following closely is the sustained action of international organizations, such as the UN and the OECD. In this context, national governments have been continuously encouraged to assess the possibility of adopting regulatory due diligence measures. Civil society organizations and business associations have been dominant forces in framing the scope and setting the pace of these regulatory discussions. Therefore, it is not a surprise that long and contentious debates are associated with adopting mandatory environmental and human rights due diligence.

The complexity of the due diligence regulatory landscape is not expected to diminish any time soon. Instead, it is expected to grow and become even more complicated. For instance, a major characteristic of mandatory laws on due diligence is the adoption of vague terms, such as reasonable and appropriate measures or adverse impacts. These concepts derive from international soft law standards, like the UN Guiding Principles on Business and Human Rights, which are often acknowledged by lawmakers explicitly (e.g. in the recital of a law) or implicitly (e.g. only during parliamentary debates, but not in the final text of the law). To add complexity, in the last few years there has been a key trend for international organizations, in particular the OECD, to pursue the adoption of supplementary due diligence guidance documents that tailor general expectations to particular industry sectors, including finance. As a result of laws on due diligence, national courts and regulators are increasingly taking action, leading to the establishment of case law directly related to due diligence expectations.

There are two major characteristics of mandatory due diligence regulation that financial institutions should pay attention to:

  • Stakeholder centric: These laws demand financial institutions place individuals, society, and the environment at the center of their due diligence processes. This means that when conducting due diligence, financial institutions are expected to assess the actual and potential adverse impacts their activities, including the provision of finance, can be linked to. For example, the EU Sustainable Finance Disclosures Regulation requires financial institutions to annually issue a statement on their due diligence policies with respect to investment decisions’ principal adverse impacts on sustainability factors. The regulation considers “principle adverse impacts” to be the impacts of investment decisions and advice that result in negative effects on environmental, social, and employee matters, as well as human rights, anti‐corruption, and anti‐bribery matters.
  • Know and show approach: As coined by the UN Guiding Principles on Business and Human Rights, a know and show approach consists of entities demonstrating their knowledge on the impacts linked to their activities and taking necessary steps to mitigate/remediate negative impacts as well as to communicate on both aspects. Examples of regulations adopting a know and show approach are the French Duty of Vigilance Law and the UK Modern Slavery Act; both require entities to identify and address adverse impacts as well as to annually report on the actions taken.

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