Why human rights and environmental due diligence matters for investors

The EU Corporate Sustainability Due Diligence Directive (CSDDD), formally approved by the European Parliament in April 2024, responds to the growing demand for unified requirements across the European Union for companies to undertake human rights and environmental due diligence. The Directive stands to have major implications for corporate accountability, as entities that do not comply could be subject to sanctions of up to 5% of revenue within relevant jurisdictions.
 
While the CSDDD puts both enterprises and investors under pressure to take human rights and environmental due diligence seriously, it is not guaranteed that companies follow the law and carry out HREDD effectively. Moreover, while the Directive contains a provision for civil liability, monitoring corporate compliance with the CSDDD cannot rest with civil society and trade unions alone. A quantum change in corporate accountability will also require the active participation of regulators—and equally important—investors. Bound by their fiduciary duty to base investment decisions on financial materiality, investors increasingly recognize that investee exposure to social and environmental risks affects returns. Investors have the power through active stewardship, the standards they endorse, and the rights they exercise on behalf of their shareholders (for example, by voting against directors) to hold corporations accountable for failing to undertake robust due diligence, mitigate risks to people and the environment, and remedy harms. However, most investors are not well equipped to evaluate the quality of portfolio companies’ HREDD, which is essential to grasping a portfolio’s true risk exposure. The tools on this website aim to meet this investor need.

What is human rights due diligence?* 

​​HREDD is a dynamic, ongoing process whereby companies must identify, prevent, mitigate, account for and, where appropriate, remediate any potential or actual adverse human rights impacts in their supply chain. The concept of HREDD is enshrined in the United Nations Guiding Principles for Business and Human Rights (UNGPs) and guidance from the Organization for Economic Cooperation and Development (OECD). 

The overriding objective of HREDD is to prevent adverse impacts from occurring. While HREDD certainly contemplates and emphasizes the importance of providing remedy to adversely impacted stakeholders/rights-holders if an actual adverse impact does occur, the emphasis is on prevention to avoid the adverse impact in the first place.
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HREDD is first and foremost a forward-looking, risk management regime. It does not expect perfection, it expects continuous improvement and best efforts to prevent harm and provide remedy if a harm occurs. To be effective at preventing adverse human rights and environmental impacts, HREDD processes and measures must be designed to proactively and responsively manage human rights risks to prevent such them from escalating into actual adverse impacts. 

Overall, with HREDD, the inquiry does not stop at the question, “Are there any human rights risks in your supply chain?” because there almost always are such risks. Rather, HREDD goes on to ask: “What are the companies involved doing, in an on-going, dynamic fashion, to mitigate identified risks to prevent them from graduating into harm?” And, if prevention is unsuccessful and/or something bad happens, HREDD asks: “What are the companies involved doing to remedy the situation to ensure the adverse impact stops and that the victim(s) are restored to the position they were in prior to the impact?”

Examples of mandatory human rights and environmental due diligence (HREDD) laws and sustainability disclosure laws already enacted include: 

• The German Supply Chain Due Diligence Act (LkSG), in force since January 2023
• The Corporate Sustainability Reporting Directive, in force since January 2023
• The Norwegian Supply Chain Transparency Act, in force since July 2022 
• The French Duty of Vigilance Law, in force since March 2017

*As stated in Investor Guidance on Responsible Contracting.