Authors Sergio Garrido Vallespí and Marc Morros Bo wrote an article titled “Human Rights Due Diligence in the United States and the EU: Differences, Trends, and a Corporate and Dispute Resolution Critique” (“the Article”). The Article has been divided into a series of four blog posts to be published on the blog of the Georgetown Journal of International Law (“GJIL”). This post is the third in the series. The first, second, and fourth posts are accessible on the Georgetown Journal of International Law Blog website.

Critique: A corporate view continued

Sanctions

When analyzing the rise of commercial legislative interventionism, a crucial aspect is its enforcement mechanisms.

To take the EU, we have witnessed there how the CSDDD imposes strong penalties, calling for i) “naming and shaming” sanctions and ii) monetary fines equal to at least 5% of net global turnover. European legislators aimed to create a strong incentive for companies to integrate HRDD into their daily operational fabric. These usually have two purposes in the field of data protection: acting as deterrent instruments as well as punitive measures. Their severity immediately reminds us of current data protection frameworks and raises the question of why such harshness is thought to be required.

In our eyes, for fines to become useful instruments to discourage enterprises from violating human rights, they need to be both proportionate—as they are nowadays—to the business’ size and to the company’s turnover, and effectively enforced—as we will now discuss. 

There exist three dimensions when examining the efficacy of states’ efforts to fulfill their duty to prevent human rights abuses: the legal system’s i) effectiveness in ensuring compliance with its explicit requirements, ii) capacity in implementing changes in corporate conduct, and iii) effectiveness in preventing undesired outcomes. However, research has shown that obtaining evidence of effectiveness is particularly complex because of the need for continuous intentional monitoring and inspection implementation systems. Moreover, every human rights effectiveness assessment must be contextualized within its period. Bearing that in mind, when sanctions as a deterrent measure are concerned, there are four pieces of data that are worth mentioning. 

Research based on the German government’s 2016 National Action Plan (NAP) to implement the UNGP shows that said country sought to avoid HRDD legislation if a sizable portion of enterprises had effectively integrated core HRDD procedures by 2020. One could argue that the sanction for German enterprises would be that were they not to comply, they would be facing a stricter human rights regime in the future. Nevertheless, less than 20% of organizations were able to provide proof of NAP compliance and as a result, the German Federal government introduced the above seen Supply Chains Act in 2021 to address the absence of significant business action.

In 2017, the Corporate Human Rights Benchmark (CHRB) analyzed compliance policies and practices of more than 220 companies from the following four industries: i) apparel, ii) ICT manufacturing, iii) agricultural goods, and iv) extractives. Less than 21% of corporations could demonstrate an effective, solid, and consistent commitment to human rights protection. Although most firms had implemented compliance regulations, most of them were obsolete and not carefully carried out. When this research was published, a group of investors overseeing assets worth over $4 trillion responded to the low scores. They urged for improvement by writing a letter to the 95 companies that received a zero on HRDD indicators in the 2019 CHRB evaluation. Out of these corporations, 16 made progress in their HRDD, while the rest did not take further measures.

Furthermore, in 2020, as a result of a collaboration between Walk Free, WikiRate, and Business and Human Rights Resource Centre, the modern slavery statements of more than 70 asset management companies were identified. This research revealed the bargaining power that investors and shareholders have in terms of requesting more protective human rights measures and stricter DD. However, less than 26 of these firms carried out compliance and HRDD in their activities. Investor proactive engagement on HRDD and complete non-financial reporting is crucial for the effectiveness of regulations and sanctions, but as highlighted in several recent studies like the abovementioned, well-known scholars like Amol Mehra and Sara Blackwell have described shareholders’ engagement in this field as “unreliable and of poor quality.”     

Experts have also tried to investigate how firms have responded to the introduction of HRDD. In 2018, Smit conducted research in which only 37% of firms were actively involved in HRDD and less than 50% implemented DD across the whole value chain process. Furthermore, 34% of them ignored environmental protection measures, non-discrimination procedures, or health, safety, and general labor rights. Although only 2.5% of large companies completely avoided the implementation of DD, the vast majority of them failed to carry out meaningful HRDD in accordance with the UNGP (recall that companies do not have a binding obligation to follow it, but only a non-enforceable responsibility).

Critique: A dispute resolution view

Enforceability issues

The premise that must guide this section 3.2. of the Article is that a binding law is of no relevance to neither of two subjects if it cannot be enforced: neither those to which it creates obligations nor to those it grants rights. Pillar III of the UNGP responds to this note: it calls for access to effective remedies before “business-related human rights abuse” (Principle 25). That, nevertheless, is partially of our interest. As recalled by the title of this Article, our purpose is not to look at human rights protection broadly, but to focus our efforts on HRDD. Accordingly, when looking at HRDD from a dispute resolution perspective, we should only analyze whether the “duty” of States (Pillar I) to make HRDD mandatory (Principle 3) and awaken the “responsibility” of companies (Pillar II) to put in place such HRDD (Principle 15(b)) is obeyed or not, and how to make those entities comply if they do not. Observe that such inquiry is made regardless of whether a human rights violation has occurred: a State may not comply with Pillar I even though businesses in its jurisdiction always respect human rights; and a company may not follow Pillar II, even if it does not cause human rights damage. 

At first glance, the EU seems to secure for itself a clear victory against the United States in terms of the first question (whether Pillar I in relation to Pillar II is complied with or not). An EU Directive requires EU Member States to adopt its content into their national laws as they wish, as long as the final national version achieves the Directive result (Directives are granted with indirect effect). Therefore, there is little room to doubt that once the CSDDD enters into force, all EU Member States will make HRDD mandatory in their territory, and thus awaken the responsibility of companies to put them in place, so that not complying has consequences, given its enforceability effect. On the other side, the United States, as highlighted, seems reluctant to escape from a dispersed and industry-based approach to HRDD. 

Amy Lehr and, again, John Shermann III, may provide an answer to that in their paper Human rights due diligence: is it too risky? There, the two scholars put forward the idea that HRDD could be seen as a process that increases a company’s risk of liability given U.S. regulations on Alien Tort Statute claims, negligence claims, misrepresentation claims, confidentiality, and immunities. That said, they reach a rebutting conclusion at the same time: the company’s exposure to litigation should be reduced in an HRDD context because, by using HRDD, they can spot potential human rights risks and prevent them from happening. We consider this rebuttal appropriate, particularly because the Commentary to Principle 17 of the UNGP establishes that “[c]onducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse,” as if the company followed the In re Caremark International Inc. Derivative Litigation rationale by engaging in legal DD to protect the board from mismanagement claims by shareholders. The United States has, as a result, no excuse to overlook Pillar I of the UNGP.

The second question seems more challenging to answer—that is, how to ensure that States and companies in those States respect Principles 3 and 15(b) of the UNGP if they should, but in fact do not. Under the current scenario, U.S. citizens should be more concerned about the first Principle (how to make the United States comply with Pillar I), as the country still has to start the legislative process from zero to make HRDD mandatory, whereas EU nationals should be rather worried about the second Principle (how to make EU companies comply with Pillar II), as the entering into force of the CSDDD, making HRDD mandatory, is almost complete, only requiring imminent formal procedures. Both collectives’ concerns, we defend, could be addressed appropriately in arbitration.

The role of arbitration: Investor-State arbitration

The arbitration species that would help U.S. nationals is that consisting of a dispute between a State and an investor of another State. Our way of thinking is as follows, presuming the 1966 ICSID Convention applies.

In an era of globalization, every step of the supply chain could be located in a different country. Be that as it may, it could happen that the supplier is a U.S. company, while the distributor is a non-U.S. business operating in the United States. In that case, the U.S. supplier would not have to engage, for example, in HREDD, as the U.S. regulation does not provide for it, as opposed to the EU CSDDD, and would thus not respect the Paris Agreement. The U.S. supplier would be engaging in an environmentally unfriendly practice to provide petroleum to a manufacturer for refinery purposes, say, and the foreign distributor would transport the resulting fuel to U.S. gas stations. Some time afterward, it is not unimaginable that a widespread report could appear overnight saying that the U.S. supplier was not complying with the Paris Agreement, and the result of such news could be a drop in demand from U.S. gas stations that the non-U.S. company provides fuel for, making it lose a great amount of money. Now, supposing that the foreign business has jurisdiction under Article 25, it could start arbitration against the United States. It would claim that had the United States made HREDD mandatory for the supplier, which is an obligation under international law under Principle 3 of the UNGP as discussed in section 2.1. In addition, the non-U.S. business would not have suffered any injury as the U.S. company would have faced the results of its HREDD or would at least have been able to sue the U.S. partner for not complying with U.S. law. One must recall that section 2.1 made clear that the business responsibility to engage in HRDD would only arise as an obligation if the State complied with the current status of international law by making HRDD mandatory for enterprises (the difference between “duty” in Pillar I and “responsibility” in Pillar II).

The non-U.S. company would have to look at one of the standards of treatment inside the investment treaty and claim its violation. To consider the most famous examples, if the treaty provided for expropriation claims, the investor could argue that the fact that the United States did not make HRDD mandatory triggered an indirect expropriation in the terms of Starrett Housing Corporation v. Iran, passing the grotesque deprivation test. Even though the standard is high according to Richard Happ and Noah Rubins, it seems that it could be met if the non-U.S. investor had to file for bankruptcy after the public report. That said, the other standard, the fair and equitable treatment (FET) clause, would only require a lower bar. Even though it is interpreted differently by tribunals since Neer and Neer v. United Mexican States, a predictability head of claim could work if the arbitrations applied CMS Gas Transmission Company v. The Republic of Argentina, disregarding a need for specific commitments. Despite the investor entering the U.S. market knowing that the United States did not have an HRDD obligation in place, it was predictable that it would have it, given the particular international law status of Principle 3 of the UNGP established in section 2.1.

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*LL.M. (International Business and Economic Law), Georgetown University Law Center in progress; LL.M. (International Business Law), ESADE Law School and Freie Universität Berlin (2023); LL.B. and B.A. in Global Governance, Economics and Legal Order, ESADE Law School (2022).

**LL.B., ESADE Law School and Columbia Law School in progress.