Momentum is growing globally among governments, businesses, major investors and civil society alike, to require and legislate companies to undertake human rights due diligence.

 

The European Union's new Sustainable Finance Disclosure Regulation (SFDR) came into effect in March 2021, marking a major milestone in the environmental, social and governance (ESG) world and raising the human rights bar for European Union financial market participants. Fund managers, investment firms, banks and insurers alike, throughout the EU (and non-EU fund managers marketing funds under the EU's National Private Placement Regime) are starting to disclose the depth of their commitments on a range of ESG factors.

 

Building on the United Nation's 2030 Agenda for Sustainable Development, the EU Green Deal, EU Non-Financial Reporting Directive, and the EU Conflict Minerals Regulation (applied to tin, tantalum, tungsten and gold imports), the SFDR lays down harmonised rules on transparency with regard to sustainability risks and impacts, with the intention of increasing comparability for end investors.

 

Companies with 500 or more employees, with ties to EU financial markets, will be expected to comply with greater human rights disclosure requirements, by January 1st, 2022 - and yes, this includes mining. What does this mean for mining companies?

 

In an effort to stamp out so-called "greenwashing," the SFDR has set disclosure expectations for EU financial market participants on key ESG indicators in their investment portfolios.

 

This means your EU-based investors will likely be asking you more questions to assess the risk your company poses to the ESG rating of their portfolios. Some of these indicators are related to performance on a range of environmental factors that your company is likely already being asked about, and gender indicators such as board gender diversity and unadjusted gender pay gap.

 

However, the key social indicators that may come as a surprise focus squarely on the emerging hot topic of Human Rights. Specifically, your investors' due diligence questionnaires are likely to start scrutinizing your company's performance regarding its alignment with the UNGPs and the OECD Guidelines for Multinational Enterprises, including whether you have established relevant policies, processes, regular compliance monitoring, and effective grievance/complaint handling mechanisms. How does the sector perform today?

 

The majority of the world's largest publicly traded extractive companies have a basic commitment to respect human rights currently. However, according to the 2020 Corporate Human Rights Benchmark (CHRB), less than half reference the UNGPs or the OECD Guidelines for Multinational Enterprises and only 10% describe how they go about the day-to-day management of human rights across their business and within their supply chain.

 

Human-rights due diligence is a core element of the UNGPs. However, almost half of the world's biggest extractive companies evaluated by the CHRB last year failed to show any evidence at all of a process. In short, the human rights practices and disclosure of many companies today would not meet the SFDR standard they will soon be expected to align with.

 

What can companies do to promote disclosure readiness? If your company does not have the expected systems in place to manage human rights risk and impacts (or if you're not sure), the time to act is now. Below are a few key steps you can start to take now, to help your company be ready for the impending increased scrutiny:

1. Identify human rights risks and impacts associated with your business activities, and in your value chain and act on your findings.

2. Ensure your company has a leadership-endorsed human rights policy commitment with board accountability.

3. Embed your company's commitment to respecting human rights and preventing abuses in company processes, strategies, governance structures, training and operational procedures, accompanied by a robust human rights due diligence process.

4. Become familiar with the four key components of human rights due diligence, and assess your company's alignment/

5. Assess your company's alignment with the UNGPs and the OECD Guidelines for Multinational Enterprises, and develop an action plan to fill any gaps.

6. Track the effectiveness of your actions, and disclose both your approach and the output of your actions through your external reporting.

 

If this effort feels overwhelming or well outside your wheelhouse, you're certainly not alone. Many companies do not have in-house expertise on this crucial ESG topic. Your company is nevertheless bound by these international principles. Luckily, there are several driven and dedicated specialists serving this industry who have a robust understanding and experience you can draw on. Seek out a social performance expert to help you.

 

Whether you engage consultants or do the work in-house, make sure you do not address the subject of human rights in a silo. These actions should be undertaken as part of your broader sustainability risk assessment, covering both those that may impact your activities, as well as those stemming from your activities.

 

There is no doubt that the EU is a first mover in the growing regulation of ESG disclosures, and human rights disclosure in particular. However, this movement is far from being restricted to the region and other jurisdictions and governing bodies are sure to follow.

 

For example, the UK introduced its Modern Slavery Act in 2015, Australia in 2018, and Canada introduced BillS-216 in 2020 (in Senate committee at time of writing), all seeking to protect human rights and combat modern slavery by imposing supply chain reporting requirements. Currently, both the UK and the US are considering the introduction of similar regulatory regimes to the SFDR, signaling a deepening scrutiny of ESG performance and disclosure that companies of all shapes and sizes will be wise to heed.