An exploration of “collaboration” under HRDD laws

The raw materials supply chains of industries across sectors including electronics, agriculture and garments relies on the labour of workers who are often subject to inadequate working conditions and are at a considerable risk of being adversely affected by business-related harms. These stem in part due to weak protections of their living and working conditions, and occupational health and safety concerns. In recent years however, the human rights due diligence movement has sought to bring a systems-based change in supply chains geared towards respect for both human and environmental rights. From the endorsement of the United Nations Guiding Principles on Business and Human Rights (UNGPs) in 2011 by the United Nations Human Rights Council, to the enactment of France’s Corporate Duty of Vigilance Law; Germany’s Supply Chain Due Diligence Act (SCDDA); and European Union’s much anticipated Corporate Sustainability Due Diligence Directive (CSDDD); the imperative to promote responsible business conduct and subsequently address the adverse impacts of business activity on the environment and human rights has strengthened. This blog focuses on the German SCDDA, and its requirement for companies in scope to seek support and collaborate with their suppliers based in and outside of Europe to meet their obligations under the law. The blog will also delve into an analysis of congruent regulatory obligations under the CSDDD.  

The German SCDDA passed in 2021 is one of the first laws passed aiming to hold businesses responsible for respecting human rights in their supply chains and seeks to protect the rights of those who produce goods for the German market. The law imposes due diligence obligations on companies in scope in relation to risk analysis, preventative measures, remedial measures, and complaints procedures. Companies covered must review and act on violations both in their own operations and in those of their business partners. The SCDDA requires companies in scope to collaborate with their suppliers to fulfill their due diligence obligations. What is interesting to note is that collaboration under the law does not mean the extension of the scope of the act and in fact, the transfer of obligations to suppliers is not permitted. Considering this requirement, there is an opportunity for companies to develop collaborative approaches together with their suppliers that not only meet their obligations but also promote better working conditions for workers in their supply chains.  

A shared responsibility approach between companies in scope and suppliers which encourages open communication on risks and cooperation on the development of risk mitigation systems would enable companies to achieve the systems-based changes envisaged by the legislation. One such collaborative approach that companies can take while developing preventative measures is paying due attention to the correlation between the issue of gender-based violence and harassment (GBVH) in garment factories and their purchasing practices. The linkages between unrealistic production timelines placed by companies on suppliers which lead to long working hours, mandatory overtime work and increased incidences of violence and harassment against women are well documented. Companies seeking to put in place early risk identification and mitigation systems in their supply chains should undertake meaningful stakeholder engagement with both suppliers and rightsholders to obtain a nuanced understanding of the effects of purchasing practices on them. This will not only promote dialogue but also transparency on the adverse impacts and risks faced by stakeholders. Companies can then adjust their purchasing practices based on these consultations, considering key factors such as reasonable expectations and feasibility of production to reduce and prevent the risk of GBVH.  

Further, companies cannot replace their risk analysis with standardized contractual assurances from suppliers which state that their operations are free from risks and adverse impacts. Instead, companies must consider the results of their risk analysis when they request information from their suppliers, and modify requests based on the results of the risk analysis. If a company’s risk analysis indicates that their supply chain comprises of foreign migrant workers, they would be well placed to seek information from suppliers on whether these workers were charged recruitment fees. Further, if they become aware of the payment of recruitment fees by workers, they should seek to determine whether other indicators of forced labour are present. Remediation measures too must be tailored to each supplier and the risk profiles presented by them in the companies’ risk analysis.  

Companies are mandated to ensure the implementation of trainings and further education to support suppliers with recognizing and addressing human rights risks at an early stage. Companies could utilise this mandate by building capacities of their suppliers on effective grievance mechanisms to support the identification and mitigation of adverse impacts. Companies could go a step further and set up trainings for workers and trade unions in their supply chains on their rights at work and grievance mechanisms to ensure workers trust and understand grievance mechanisms and report adverse effects adequately for their timely resolution.  

Under the act, companies are required to implement independent complaints procedure and cannot merely rely on the complaints procedure of a supplier. Companies must design the complaints procedure in a way that enables workers in their supply chains to notify them of risks and violations of human rights caused by the activities of a supplier. The garment industry in Bangladesh, for example has multiple parallel grievance mechanisms which workers can use to report grievances. However, this lends to making the process of seeking remedy rather complicated as workers have little understanding of which mechanism is most suitable for the resolution of their grievances. Companies should engage with diverse stakeholders i.e., suppliers, rightsholders, and worker representatives to avoid overwhelming workers with different grievance mechanisms and building their knowledge on which grievance mechanism to approach.  

Companies should further take into account the capacities of their supplier when assessing the effectiveness of measures, whether preventative or remedial. The capacities of a supplier depend on the suppliers’ resources, size, sector, and position in the supply chain. Companies would benefit by engaging with rightsholders in their supply chains to understand their vulnerabilities to risk. Both the Dindigul and Lesotho Agreements are examples of legally binding agreements created for addressing and preventing GBVH and is a result of shared responsibility between brands and suppliers leading to better outcomes for workers. Lastly, the SCDDA also cautions companies that information sought from suppliers, should not be too demanding and must be measured. If these demands placed by companies in scope require supporting suppliers with financial resources for developing risk identification systems, companies in scope must extend the same.  

In a similar vein, the CSDDD mandates companies in scope to undertake substantial changes in their operations and will become the driving force in influencing their behavior over the coming years. As a result, suppliers based in producing countries too, particularly beyond Europe, will be impacted heavily. Stringent reporting requirements on companies in scope will see the latter seeking greater transparency from their suppliers on how they identify, address, and mitigate actual and potential risks. Despite not being legally bound by the legislation, suppliers of companies in scope will have to develop risk identification and management systems, and grievance mechanisms to enable the latter to comply with the CSDDD.  

The CSDDD, like the SCDDA also clearly states that companies in scope should not pass the compliance burden to suppliers. The law elucidates different ways in which this can be achieved by mandating companies to provide targeted and proportionate financial support to small and medium enterprises. Further, companies are required to make modifications and improvements in their business operations including purchasing practices, design and distribution practices.  Lastly, companies seeking contractual assurances from suppliers should ensure that these are not too burdensome. Companies in scope can thus promote responsible business conduct by developing purchasing practices that not only meaningfully contribute to living wages for workers in producing countries, but also ensure that the cost of implementation of the CSDDD is shared. Further, working in collaboration with suppliers will enable companies in scope to better understand the challenges of their suppliers and develop sustainable solutions together.  

These HRDD obligations highlight how while suppliers do not fall within the scope of the laws, the nature of responsibilities imposed on companies result obligations flowing from companies in scope to suppliers and to sub-suppliers thus having far-reaching effects in producing countries. For these reasons, there is a need for enhanced verification and due diligence by companies both upstream and downstream in their supply chains. Audit fatigue and the mounting regulatory requirements both underscore the need for companies to undertake collaborative approaches developed collectively with their business partners to support them and thus meet their obligations.  

Welcoming the passage of the SCDDA in 2021 the German Labour and Social Affairs Minister, commented “we cannot build our prosperity permanently on the exploitation of people.” The success of both these laws and their ambition relies largely on how well they will be implemented across the various jurisdictions where suppliers are based. Although suppliers are not legally liable for effecting changes in their operations pursuant to this legislation, their support and collaboration is crucial for companies in scope to comply with the requirements of the law. For this reason, companies in scope should extend support to suppliers, and one such form of support can be the adjustment of purchasing practices including prices which will no doubt have a knock-on effect on consumers. The true success of HRDD laws will rely on a better engaged and informed consumer base, brands that are open to being more supportive and collaborative of suppliers, and suppliers who are empowered to do more and do better.