Essential ESG: Episode 19 – Emerging drivers of change in business and human rights

Phoebe Wynn-Pope, Head of Responsible Business and ESG, Corrs Chambers Westgarth

Professor Justine Nolan, Director of the Australian Human Rights Institute and Professor in the Faculty of Law and Justice, University of New South Wales

Phoebe: Welcome to another episode of Essential ESG coming to you from the lands of the Gadigal people of the Eora Nation. My name’s Phoebe Wynn-Pope, and I’m joined today by a very special guest, Professor Justine Nolan. Justine’s a Director of the Australian Human Rights Institute and Professor in the Faculty of Law and Justice at the University of New South Wales in Sydney. Welcome, Justine.

Justine: Thanks, Phoebe.

Phoebe: Today we’re going to do a bit of a ‘round the grounds’ on business and human rights from transformational business approaches to drivers of change, and some context from overseas and at home. You’ve also recently published an article on the rise of strategic litigation and its impacts on corporate behaviour. But enough from me. Let’s dive in. Could we start, Justine, with some good news stories about how some businesses are doing things differently and really adopting some of those transformational business approaches?

Justine: Sure. So, I think that for a lot of my career, I have looked at what business is doing wrong, and what companies shouldn’t be doing, and, you know, all the problems that are associated with that, particularly around abuses of human rights and environmental rights. And more recently, as, we’re sort of, you know, pushing for a lot of change for how to deal with this issue of how you integrate business and human rights, we’ve started to try and search out and try and find examples of where companies are doing something right. But not just one-off pilot projects – we’re sort of trying to understand where companies are taking what we’re calling quite a transformational approach. So often it means they’re doing something quite differently in their supply chain: disruptive practices, innovation. And we’re not looking at examples where we’re trying to study a whole company and understand, you know, come up with the perfect company, because that rarely does exist. But we’re sort of looking at one example of where they’ve done something radically different and how that might transform a supply chain and then how that integrates human and environmental rights into their business.

Phoebe: That’s taken you quite off the beaten track hasn’t it.

Justine: Yeah, from the previous ‘don’t do this’, now we’re saying ‘please do this’. So perhaps if I give you an example to sort of put it in context. Last year, I travelled to the Amazon in Brazil with my two co-researchers, and we were looking at how Veja, a French sneaker company, is sourcing rubber sustainably from the Amazon. And this is a French company, but it basically took a very purposeful approach when it was co-founded by its two French founders, to try and locate it in a country where they could sort of have an ecosystem of supply. And in particular, we were looking at how they’re sourcing rubber from the Amazon. And this company is doing some really interesting things. So they’ve decided to build relationships directly with the cooperatives that sell the rubber, so they’ve cut out a lot of that sort of middle process of the supply chain which really helps them in terms of traceability and verification, but then they co-designed with the worker cooperatives and the rubber tappers, a model which built in social and environmental standards, and when those standards are met, then workers receive an annual bonus. So what happens is that Veja is actually paying four times the market price of rubber because workers are building in and meeting these standards. So for example, one standard relates to deforestation. So prior to Veja coming along, deforestation in the Amazon was increasing rapidly and cattle production was on the rise, and the long history of rubber production was very much fluctuating up and down with the price of rubber. And Veja decided to send in a long-term plan where workers had security, Veja had supply security, and they built-in prices that were above the market price to give them a sustainable income. And then they monitor the workers by satellite to check that the deforestation requirements are met, so basically that the trees aren’t being cut down. So there’s social and environmental standards built into this worker bonus which is co-designed with the workers, and so it’s really interesting. So they’re managing to pay a premium on rubber, and one of the ways they can do this is that Veja doesn’t spend money on advertising, largely. A lot of it is guerilla social media marketing advertising, but it’s become a very successful company and it’s very interesting how it, from the start, was steadfast about aligning profits with principles, but then it built that into its model and it’s still maintaining that now. 2004 it was co-founded, so now it’s really ramping up production and revenue.

Phoebe: And it’s incredible to think that they can pay so much over the market price for rubber and still be profitable.

Justine: Yeah, so some of it is about cutting out some of those costs in the middle of the supply chain. Some of it is about having long-term security with their suppliers, so there’s a set price that they know that they’re meeting and security of contract. And, you know, as I said, they’ve got that sort of leeway in their supply chain by having that gap around advertising revenue that they’re not spending. But there’s other major companies that also source rubber from the Amazon, including really large companies like Michelin. And so the challenge when you have a business model like this, is to then look at how you replicate and scale it, you know, to other companies, perhaps for rubber for another purpose, or potentially for other sectors. And so part of what we’re looking at is what are the key things that make this type of model work. And so yes, the payment, the worker payment, is one. But another was basically taking the time to build up, over a number of years, trust with the worker cooperative, and also build up the financial literacy of that cooperative so when Veja was providing, you know, finance to the cooperative, it had security in knowing the money would end up with the workers, and how it would be spent. Trust was built up with the rubber tappers over a number of years. Using really innovative technology is another way that they’re doing it. And also the principle of co-design where you’re getting input from the very start about how you’re building up, you know, payments and supply etc.

Phoebe: It’s fascinating, too, the length of time in terms of building those relationships, that’s often an issue, isn’t it? I’ve had a few conversations with business that are, you know, are still trying to work out why they will go the extra mile to make some of these sustainability kind of goals that are being, not necessarily imposed, because in this instance, definitely a co-design, but is creating a new kind of sustainability infrastructure if you like in the global market, as opposed to maybe finding some customers that might be happy to purchase without the scrutiny on their ESG practices.

Justine: Yeah. I mean I think you get that, you can, I mean, this is clearly a product that is also appealing to the sustainable consumer, though these days much more, many more people than that are buying, you know, these sneakers. And so I think what we’re seeing are drivers from within, and this company, you know, it was definitely a driver from within, but we’re also seeing the external drivers that are now imposing these types of requirements on companies, whether it’s through regulation or investor demand, etc. And so while this company was sort of, you know, has been doing this work on its own initiative, it is now neatly fitting into the regulatory framework which is basically demanding more scrutiny and, you know, concepts like due diligence which is exactly what this company is doing in practice.

Phoebe: Yeah it’s good to have those examples of where it’s working so effectively. That’s a nice segue into what we’re going to talk about next which are some of these other drivers, so not so much the customer drivers, but maybe the regulation. And I wonder if we could start with the goings-on, maybe overseas, some of the new regulations that are coming in? And particularly I was wondering if you could explain to our listeners what’s going on with the CSDDD, the Corporate Sustainability Due Diligence Directive?

Justine: If only we knew!

Phoebe: Well, that’s right. But may be the on-again, off-again, and where we’re at, and just outline that a little bit.

Justine: So within the EU, which is where you’re really seeing most of the regulatory innovation at the moment around business and human rights, for the last, you know, two to three years and longer than that really since the drafting time, there’s been a concerted effort to develop what’s called the Corporate Sustainability Due Diligence Directive which is often referred to as the EU CSDDD. And basically what this is trying to do is build in transparency and mandatory human rights due diligence as a regional directive that would then be filtered down through the Member States of the EU. And over the last couple of years we’ve seen various drafts come forward to the EU, and the EU has sort of a three-tiered process for approval. And what we saw this year, last week really, was the sort of the final stage of this approval. And it was expected about a month ago that this would sort of pass through quickly after it had gone through the previous two. And all of a sudden there was sort of political machinations behind the scenes, in particular led by Germany, which started to want changes around the drafting of the Directive. So they’ve been scrambling, and then Belgium, who has been holding the Chair of the EU and been leading this drive to get the Directive adopted, came up with a compromise last week which has been provisionally approved, but we’re still awaiting that final step. You know, at the moment I don’t think anyone can be confident until it’s sort of signed, sealed, and delivered. But broadly what this Directive is trying to do is socialise this concept of reporting and transparency, which many jurisdictions are already all over, but also setting out that select companies will need to conduct mandatory human rights due diligence. So the concept that was sort of born in the UN Guiding Principles as a soft law concept that companies should do this to show how they respect human rights, is now becoming hardened through law. So the compromise that Belgium offered means that there’s you know, far fewer initially European companies that will be caught by this Directive. Some estimates are only around 5,000 companies that will fall within it. But clearly the goal is that, you know, this is the first step and that over time, and this is built in to the Directive, that its scope would expand and bring in more companies. And, you know, people might say well that’s only relevant to Europe, how is that relevant to Australia? What we’re seeing is that these types of regulations are filtering down to companies outside Europe either because they’re operating in Europe, or because they’re supplying companies who are operating in Europe. And what these types of laws are asking is to basically say to companies ‘you need to be able to understand where your supplies are coming from. You need to be able to track your supply chain well beyond your first tier’. And then ‘you need to be able to show us that you are conducting what they’re calling human rights due diligence on that to ascertain that there’s no abuses of human, and in many cases environmental rights, in the supply chain’. So the attention is on the CSDDD, but the EU for the last couple of years has brought in a number of directives which have sort of focused on reporting on environmental rights or due diligence. At the end of 2024, we’ll see the EU Deforestation Regulation come in, and while people are focused on the specific products that supply into like, you know, cocoa, and coffee and timber, it talks about deforestation and environmental rights, but it also talks about potential social abuses that you have to look at. So due diligence around social issues like forced labour, is already built in to laws that, you know, beyond the CSDDD. There’s the Battery Regulation that notes that due diligence can be used as defence. So what we’re starting to see is this concept of due diligence both relevant to human rights and environmental rights really starting to filter out through laws within the EU, and also we already know it’s in at least three countries’ national laws already.

Phoebe: Yeah it’s interesting that that hope that the CSDDD will create some sort of consistency across Europe as opposed to the current patchwork of regulation that exists and is making it very difficult for people to understand exactly where they’re falling into what and with whom.

Justine: I think that’s right because you’ve got different laws in France, Germany, and Norway. The problem with Germany at the moment being that, you know, at the stricter end, ironically, you know we’re trying to water down the CSDDD.

Phoebe: Yeah, so we’re seeing the trickle-down effect of the German Supply Chain Act on businesses in Australia.

Justine: Yeah, I mean I think what we’re seeing is that there is going to be a ripple effect. You know, maybe you don’t come within the direct reach of the law, but I think what we’re seeing is that this concept of increased reporting and human rights and environmental due diligence are concepts that are here to stay. They were sort of born in guidelines, they’re hardening in law and the better companies that I was talking about, like Veja, are already putting them into practice and basically integrating them into how they do business.

Phoebe: So getting ahead of the game for businesses that are wanting to be prepared for these types of regulations, are implementing the UN Guiding Principles, due diligence practices, getting best practice application of the UNGPs, is that the way to go?

Justine: Yeah. And I think it’s trying to sort of move from the big picture to understand what that means for your business, because the concept of due diligence, you know, most lawyers and companies understand. But what human rights due diligence asks you to do is not think about the risk to your company but think about the risk your company poses to others, and then very specifically, look at the context in which you’re operating. So a company can’t, you know, create an environment where there’s zero risk. And this shouldn’t be just about compliance. It has to look at their impact and sort of say, you know, where are we sort of, you know, operating in an area where there is highest risk. Let’s understand that. How do we potentially develop a relationship with suppliers, that there’s an element of trust that they’ll bring bad news to us, that it’s less about policing and more about partnership and trying to, in some cases, you know, refine your supply chain so you’ll have better traceability and sort of oversight of it. So there are all sorts of steps that companies have to, and many companies are starting to, take. But I think it’s important to contextualise it from the grand language of the UN Guiding Principles to look at how does it operate within my sector and industry and company.

Phoebe: Yeah, in practice. There is some talk in the review of the Modern Slavery Act here in Australia of a requirement to implement a due diligence system, whatever that kind of looks like. Do you think that that’s likely to go ahead? I know we haven’t had the Government’s response to the review yet.

Justine: Yeah, so we do expect the Government’s response this year, and hopefully sooner, rather than later. It’s been nearly a year since Professor McMillan published his report on the independent review of the Modern Slavery Act. And one of the recommendations was to introduce this concept of due diligence into the way that Australian companies operate. You know, I think we’ll see other changes perhaps quicker, sanctions brought in for non-reporting, we know that the anti-slavery commissioner will be established, they were both recommendations as well, but we also need to understand that sort of tweaking at the edges, you know, we’ve got to be proactive not just reactive, and so I think that the idea of human rights due diligence is that it is both preventative and remedial and so the companies that are, you know, looking to get ahead of what’s going to be brought down in a year or two years from now, would be actively thinking about this, or you know, it’s going to come within what they do in terms of overseas suppliers.

Phoebe: Thanks. The other thing that I wanted to pick your brain on was the research that you’ve been doing on strategic litigation. I think when we’re talking about the due diligence requirements and whether that actually prepares or helps organisations protect against strategic litigation, but I wonder if you could talk about some of the findings of your report. You know, maybe first talk about what makes litigation strategic. What does that actually look like? And what are the outcomes? What are we seeing the impacts of that, and how can businesses respond?

Justine: Yeah, this was a report that we did for the Freedom Fund and it was done with co-researchers Ebony Birchall and Surya Deva, and the idea of this was to try and understand how strategic human rights litigation is influencing corporate behaviour which is very hard to do because there’s often not a direct causation relationship with that. But what we classified as strategic human rights litigation in this field was that litigation that is brought for a broader purpose than sort of just settling a claim. You know, it might be as you say, trying to sort of influence changes, shape law, shape corporate behaviour, but often beyond the immediate outcome of that case so it’s litigation that’s bought, you know, sort of with a strategic purpose. And we’ve been seeing that type of litigation emerge in the business and human rights field since at least the mid-1980s. And the focus originally, a lot was on America with the Alien Tort Statute Act, and now that focus has moved beyond that to jurisdictions like Canada, the United Kingdom, the Netherlands, South Africa, where we’re starting to see these lawsuits appear. And the purpose of this research was to try and, you know, develop what we called an impact framework which was if you’re categorising how you think about litigation and how it impacts corporate behaviour, what are some of the things that you might look at for the purpose of it. So we said there were a number of, you know, sort of issues that we focused on. One was the purpose of litigation in terms of raising awareness around issues. Another one was changing corporate culture, so looking at how litigation often impacts firms within the company. Shaping laws and policies, and this might be at a national, regional, or international level where we’ve seen litigation have a direct effect on new laws. To remedy harm, I mean that’s often the primary purpose of litigation, to seek remedy for the rights holders. And then we also looked at not only the positive side, but sometimes there’s negative effects, sometimes where a regressive precedent might be set, or firms turn inward and stop reporting, or they seek to, you know, bring a lawsuit against the plaintiff, so-called ‘slap lawsuits’ etc. So all of these, taken together, were part of this sort of how litigation shapes what we called the corporate ecosystem.

Phoebe: Justine, that’s all so interesting and it’s a great report. I recommend everybody go to the Australian Human Rights Institute website and download it. It’s a very, very interesting read. So that litigation as a driver for change, we’ve really been talking about lots of those drivers, the regulation, the internal drivers of business transformation. I wonder if you think they’re all equally important, and whether there are any new drivers on the horizon or whether we’re just moving in that direction, and whether you have any recommendations for Australian business.

Justine: I think they all play a role in driving change and, you know, generally in this field there’s not one lever alone that will do it. You know, regulation or law alone won’t drive, you know, where you want to get to. You do need to see that change in corporate behaviour and sometimes that’s driven internally from a company, through purpose. Sometimes it’s driven by investors demanding change. And sometimes it might be regulation or litigation. So I think there’s a mix of positive and negative, but they all have a role to play. I think in terms of recommendations, the interesting companies that we’re looking at are not afraid to sort of open themselves up to get new ideas, to get critiques, to experiment. And I think when companies sort of get too worried and get very compliance driven, then, you know, that’s when you tend to lose all innovation and a chance for a really transformational change. One recent company we’ve been looking at is a really interesting company in Botswana, Botswana HB Antwerp, which is a diamond company. And something they said recently was that ESG reporting is not a compliance exercise, it’s a driver for transformation. And I think too many companies probably forget that.

Phoebe: I think that’s a really great place to finish. Thank you very much for joining us.

Justine: Thanks for having me, Phoebe.