Responsible business conduct: developments to watch in 2021

An extended version of this article was originally published by the Law Society Journal around the NSW Government Youth Justice Reforms. 

There is one key takeaway for organisations considering human rights in 2021: be prepared for increased scrutiny – from international and domestic trading partners and governments, regulatory agencies, investors, civil society, consumers and shareholders. 

In this article, we outline six important human rights and responsible business conduct developments for organisations to watch in 2021.

1. More scrutiny of supply chains for organisations sourcing directly or indirectly from Xinjiang and China more broadly.
   
   
2. Greater expectations to undertake human rights and environmental due diligence as the European Union inches closer to making this mandatory – while the European law will likely span the full range of human rights and environmental issues, one important aspect will be an ability to demonstrate adherence to the principle of ‘know your customer / supplier'.
   
   
3. An emphasis on human rights governance and disclosure, as has been the case for disclosure in relation to climate change risks.
   
   
4. The convergence of human rights and climate change issues to achieve a just transition, increasing climate-focused engagement, activism and litigation.
   
   
5. Higher compliance expectations from local anti-bribery and corruption reform.  
   
   
6. Growing pressure for demonstrable responsible business conduct in conflict areas.

1. Scrutiny of Xinjiang and Chinese supply chains

In 2021, organisations can expect increased pressure from their business partners, consumers, investors and governments to clarify their links with Chinese labour, and to minimise potential adverse human rights impacts. Organisations will likely see more shareholder activism through activist campaigns and shareholder requisitioned resolutions directed to supply chain transparency in the 2021 reporting season.

This pressure will grow as international concern about the treatment of ethnic minorities in China’s Xinjiang region gains momentum. The US has already called the mass detention of Uyghurs and other Turkic peoples in Xinjiang genocide and first-hand accounts of systemic rape, abuse and torture of women in detention have been reported in international and Australian media. These allegations are leading to powerful responses by governments around the world.

In January, the US banned imports of products containing cotton or tomatoes from Xinjiang, while the UK and Canada have also banned certain Xinjiang imports. In Australia, the Commonwealth Government reported to be considering bans on imports from Xinjiang, while also contemplating amendments to the Modern Slavery Act 2018 (Cth) (Modern Slavery Act) to specifically address the issue. Senator Rex Patrick has introduced a private senator’s bill which would prohibit imports from Xinjiang.

These developments follow the Australian Strategic Policy Institute's March 2020 report, which described alleged forced Uyghur labour in the supply chains of over 80 companies, many of whose products can be found in retail stores around Australia.

2. Mandatory human rights due diligence

In 2021, efforts to introduce mandatory human rights and environmental due diligence (mHREDD) are likely to come to fruition, with the EU expected to legislate mandatory human rights due diligence.

In January 2021, the EU Parliament’s Legal Affairs Committee approved a report recommending a legally binding human rights due diligence obligation for EU companies. Regulated entities will owe a ‘legal standard of care’ obliging them to do whatever is objectively reasonable to address human rights risks in their particular circumstances. Companies may be liable if they fail to establish they undertook reasonable due diligence.

Organisations with a presence in the EU or who trade with EU-based entities should ready themselves for increased scrutiny from their trading partners of their environmental and human rights due diligence processes beyond just modern slavery risks. One important aspect will be an ability to demonstrate adherence to the principle of know your customer / supplier.

3. Governance and disclosure to remain a focus for boards

In 2021, leading companies will take the opportunity to demonstrate real commitment to building a sustainable future.

While the AFR reports that Australia is leading the world in linking executive remuneration to ESG performance, 2021 is likely to see redoubled focus on this area. Investors will keep the pressure on entities to adopt a sustainability reporting framework. This can be seen in BlackRock’s 2021 Stewardship Expectations and its announcement that it would require investee companies to make disclosures in line with the Sustainability Accounting Standards Board and the Taskforce on Climate-Related Financial Disclosures, including by use of its proxy vote.

It is also likely that 2021 will bring stronger governance and disclosure of a range material ESG risks, including corporate culture and human capital. For banks, implementation of the Banking Executive Accountability Regime will see greater scrutiny following APRA's review released in December last year, and with the Financial Accountability Regime still set to be introduced during 2021, all APRA regulated entities will need to grapple with this regime.

4. Increasing climate-focused engagement, activism and litigation

2021 will see continued growth in shareholder activism and litigation related to climate change. Activist shareholder group, the Australasian Centre for Corporate Responsibility criticised Australian financial institutions for too quietly divesting from fossil fuels (protecting investment risk but not reducing real world emissions) in its report Cutting Carbon: What the rush to divest fossil fuel means for emissions reduction and engagement. We may see investors making greater public demands on corporate Australia to decarbonise or risk divestment.

Shareholder activism will also continue to keep climate change on the agenda of major Australian companies. In 2020, Australia grabbed global headlines with the case of McVeigh v REST, in which a fund member sued his superannuation fund for not taking adequate account of the risks climate change poses to the long-term value of his superannuation. The case settled, with REST acknowledging climate change as a real and financial risk and agreeing to take active steps to manage climate change risks.

As economies shift to sustainable production to mitigate climate change and protect biodiversity, in 2021 expect increased focus on ensuring protection of human rights in order to achieve a just transition.

Organisations that contribute to greenhouse gas emissions and other causes of climate change – directly, by failing to decarbonise or by contributing to deforestation, or indirectly by financing projects that do so – can expect mounting pressure to decarbonise or encourage others to decarbonise in order to prevent adverse human rights impacts on vulnerable groups, such as residents of Pacific Islands whose land is at risk of becoming inhabitable.

5. Reform of anti-bribery and corruption regimes

Given the well-established links between global governance, business integrity and human rights, anti-bribery and corruption reform in 2021 will be an area of real importance for business and human rights.

In Australia, Parliament is expected to debate the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 which includes the proposed new corporate offence of ‘failure to prevent bribery’ requiring organisations to implement adequate procedures (i.e. an effective compliance program) to avoid liability. A similar offence already exists in the UK, and proposals to extend the ‘failure to prevent’ offence model are also being proposed for other transnational economic crimes and serious human rights abuses following publication of the Australian Law Reform Commission’s report ‘Corporate Criminal Responsibility’ in August last year. 

Internationally, the US Corporate Transparency Act requires the registration of ultimate beneficial owners of any corporate entity with US operations, including existing entities. Anti-corruption looks to be a major theme of the Biden administration, with the potential for new and innovative approaches to tackling bribery and corruption across the globe.

As such, it seems likely that in 2021 US enforcement agencies will be more active in pursuing a broad range of financial crimes and corporate misconduct more generally.

These developments highlight the importance of strong and effective fraud, corruption and integrity compliance frameworks as well as robust human rights due diligence in order to identify and prevent adverse human rights impacts caused by illegal or improper conduct.

6. Responsible business in conflict 

2021 will see ongoing and increased calls for responsible business in conflict areas following the UN Working Group on Business and Human Rights issuing 17 main recommendations for businesses, states and the UN itself in its report on business and human rights in conflict-affected regions.

Myanmar has emerged as a conflict-affected area of considerable significance for organisations globally in 2021 and experts are calling for strong business action in light of the military coup. The coup poses obvious risks to business continuity and supply chain integrity in that country, and this requires organisations to proactively consider their responsibility to respect human rights if they continue doing business with any entities with operations in Myanmar. Civil society groups have also called on business to use their leverage in Myanmar to ensure the respect of the human rights of all persons in Myanmar, with particular emphasis on the Rohingya population, and to exert pressure to restore democratic government to the country.

2021 will also see renewed focus on conflict minerals. On 1 January 2021, Conflict Minerals Regulation came into force in the EU. The regulation obliges businesses dealing with gold, tin, tungsten and tantalum to import these metals from responsible and conflict-free sources. Notably, the regulation is expected to affect non-EU trading partners of EU importers as EU importers seek to ensure their supply chains are entirely free from metals whose ultimate source is in conflict-affected areas.

To help navigate responsibilities of business in conflict the Red Cross has released a Practical Guidance Document: Doing Responsible Business in Armed Conflict along with Seven Indicators of Corporate Best Practice in International Humanitarian Law.

Thank you to the graduates in the Corrs Responsible Business Group for their contributions to this article.