Chain reaction

Good morning! In June 2023, the European Union approved a draft law that requires large companies to proactively look for child labour, human rights abuses and environmental damage throughout their supply chains. Apart from European firms, any multinational that earns a certain threshold revenue from Europe will be subject to the law. For India, that means companies moving supply chains (Apple, for instance) here will be required to keep an eye on their local suppliers as well for any violations. At the least, it will increase compliance cost for them. As always, we’ve also curated the best longreads. Enjoy your weekend!

The Signal is now on Telegram! We've launched a group — The Signal Forum — where we share what we’re reading and listening through the day. Join us to be a part of the conversation!

If you enjoy reading us, why not give us a follow at @thesignaldotco on Twitter Instagram and Threads.

The European Union (EU) will soon require thousands of large companies to actively look for and reduce human rights abuses and environmental damage in their supply chains. And although it’s an EU law, it will also cover foreign businesses – including American ones – that have operations in the region.

The European Parliament approved a draft of the new rules in June 2023, and now EU member states and the European Commission will negotiate to finalise the law, which is expected to begin rolling out in phases a few years from now.

We study the impacts of human rights disclosure and due diligence laws on businesses. In the past, governments have generally asked only that companies voluntarily comply with efforts to advance human rights. The EU law would be the biggest attempt yet to legally mandate compliance – with major implications for human rights and businesses around the world.

Human rights and big business

Human rights are those fundamental rights that all individuals hold simply by virtue of being human, such as rights to life and freedom of thought.

Human rights usually inform laws that limit what governments can do – for example, by obliging them to refrain from torturing people. Increasingly, however, they are also informing business regulations, because powerful companies can have serious impacts on individuals’ human rights.

Businesses have a long history of human rights abuses, from the British East India Co.’s pivotal role in the slave trade and IBM’s complicity in the Holocaust to more recent deadly environmental disasters involving oil and mining companies.

More contemporary examples of this are children in the Democratic Republic of Congo mining cobalt destined for cellphones or forced labor being used in the production of cotton in China’s heavily Muslim Xinjiang region.

In 2011, the United Nations Human Rights Council took a step toward policing these abuses by unanimously adopting “guiding principles” on business and human rights. These principles urge governments to compel companies in their jurisdictions to respect human rights wherever they operate. Such an approach stands in contrast to more common voluntary standards, such as supplier codes of conduct, which some observers have suggested have been ineffective.

In 2017, France became the first country to actually mandate that companies police their supply chains for human rights abuses.

The EU’s human rights due diligence law, first drafted in 2022, builds on the French version – but goes a few steps further.

Doing your due diligence

Human rights due diligence is a process by which companies are meant to map out, understand and address all potential human rights abuses that occur throughout their operations.

The term “due diligence” is borrowed from the common business practice of financial due diligence, wherein financial risks are investigated before any large investment. So just as businesses evaluate financial risks, human rights advocates argue companies should put similar effort into investigating the risk that an activity might violate someone’s human rights.

The EU law would mandate that all large companies that operate in the bloc conduct human rights due diligence among their suppliers – by, for example, making sure child or forced labor wasn’t involved – but also on how their products are used by consumers – such as when a piece of technology is used to surveil citizens.

The law would cover most human rights, including labor rights and environmental rights, past or present. In practice, that would mean companies would have to map any harmful impacts that have occurred or could occur and take action to remedy or prevent them.

The rules would also include provisions for enforcement and penalties for noncompliance through fines and other sanctions. And victims of abuse would be able to seek damages.

In its current form, the law would cover EU companies with at least 500 workers and 150 million euros ($162 million) in net revenue, but those thresholds fall to 250 workers and 40 million euros ($44.5 million) in sectors with a higher risk of abuse, such as clothing, footwear and agriculture. Non-European companies must comply if they have EU revenues that meet those thresholds. An estimated 13,000 EU companies and 4,000 based outside of Europe – including household names like Apple, Amazon and Nike – would be subject to the law.

If it works as intended, the EU law could be transformative in protecting human rights, including worker health and safety and workers’ free speech, around the world. According to a recent report by human rights scholars, it could be “particularly valuable in the context of transnational supply chains, where the fragmented nature of production has long presented formidable legal and practical barriers to efforts to secure greater corporate accountability for labor rights violations and poor working conditions.”

Bad for business?

While many companies have already endorsed mandatory due diligence rules, others worry this kind of government mandate would be too onerous.

A full map of risks in a company’s value chain – from raw materials to consumers – is difficult to establish when suppliers are separate companies operating on the other side of the world and global supply chains are frequently large and complex.

Some companies also strongly resist the idea of being held responsible for human rights violations that take place in their supply chains overseas.

Ripe for US rules

For this reason, the U.S. has so far preferred voluntary rules when it comes to pushing companies to respect human rights.

But that’s slowly beginning to change.

In 2012, California implemented the Supply Chain Transparency Act, which requires companies operating in the state to disclose their “efforts to eradicate human trafficking and slavery” in their global supply chains. And in 2021, Congress passed the Uyghur Forced Labor Prevention Act, which bans the importation of goods mined, produced or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China – home of the Uyghur people, who have been subjected to an intense program of state suppression since 2017.

Between these rules there is a clear trend developing of an increasing number of US companies being obligated to implement some form of human rights due diligence. But these rules, unlike the developing European approach, are very narrowly tailored and don’t require companies to routinely undertake due diligence.

As a result, the US companies that would be subject to the EU rules would be at a competitive disadvantage to many of their domestic rivals.

That’s why we believe the time may be ripe for Congress to consider its own more comprehensive human rights due diligence law, which would let the US take the lead on the issue and have more of a say in these global standards. We believe that such a move would also be a major boon to protecting the human rights of marginalised groups across the world.

Rachel Chambers is an Assistant Professor of Business Law, University of Connecticut.

David Birchall is Senior Lecturer in Law, London South Bank University.

This article is republished from https://theconversation.com under a Creative Commons licence. Read the original article at https://theconversation.com/many-global-corporations-will-soon-have-to-police-up-and-down-their-supply-chains-as-eu-human-rights-due-diligence-law-nears-enactment-202706

TECHTONIC SHIFT

Making for tomorrow: Companies the world over are adopting the ‘China Plus One’ strategy. And Malaysia, India, Thailand, Indonesia, and Vietnam (collectively called ‘MITI-V’, pronounced ‘Mighty Five’) are jostling to become the world’s new superfactory. India is leaving no stone unturned in courting everyone from contract manufacturing giants (Foxconn) to EV companies (Tesla). But can it dominate the global supply chain for high-end, precision, and emerging technologies? In episode eight of the TechTonic Shift, Roshni and Rajneil discuss India’s rich (and tragic) history of cutting-edge tech manufacturing, and where we may be headed in the foreseeable future. Available on Spotify, Apple Podcasts, Google Podcasts, Amazon Music, or wherever you get your podcasts.

ICYMI

Puff puff, pass the cash: Say ‘tribal villages’, and most will imagine idyllic hamlets with hardworking people of modest means. These villages in Odisha and Andhra Pradesh are anything but. Every home in these villages of the Sora, Gond, and other tribal communities has a premium bike, an SUV, fancy furniture, and the latest appliances. Their children wear branded sunglasses all day. The source of their opulence? Weed. Tribal communities, previously struggling under crushing poverty, have turned their lives around by cultivating and selling the psychoactive drug. This story in Mint documents the rise of the local marijuana economy. Villagers battle routine police raids and jail time but make so much cash from the trade that their homes are running out of storage space. Marijuana is now hailed as a ‘miracle’ crop that has turned around the fortunes of these people. Now, even local religious leaders are pushing to legalise the drug.

Who killed the Shermans?: Barry and Honey Sherman had it all. They were moneyed, well-connected to the Liberal Party—the party of Canadian Prime Minister Justin Trudeau—and known for their philanthropic leanings. But in late 2017, an estate agent visiting their tony Toronto home stumbled on a grisly sight: the elderly Shermans had been choked with leather belts and tied to a metal railing on the edge of an indoor pool. The double murder is still unsolved. With the help of private documents, extensive interviews with family members, and legal filings, Bloomberg Businessweek takes us through a whodunnit that reveals three suspects: son Jonathon, who stood to inherit his father’s billion-dollar generic pharma business, Apotex; Barry’s embittered cousin Kerry Winter; and Frank D’Angelo, an entrepreneur who used Barry as a cash cow. Also in the mix are sibling rivalries and the story of Apotex itself, which filled one in every five Canadian prescriptions.

Crumblegate: Daily Harvest's vegan products were once all over Instagram. In 2021, the wellness meal kit company became a unicorn after being valued at $1.1 billion. Daily Harvest had celeb backers such as Gwyneth Paltrow and Serena Williams, and relied on influencers to build its brand. Things were going well until 2022, when the company launched a new product, French Lentil + Leek Crumbles. It sent customers to the emergency room; about 40 individuals had to have their gallbladders removed. Today, more than 70 individuals are suing the Daily Harvest. This longread in Bloomberg Businessweek chronicles the rapid rise and swifter fall of an Instagram darling.

Hit rewind: Once upon a time, cyber cafes were everywhere. Back in the days of dial-up, the internet was still in its infancy. The entry of cheap data killed cyber cafes. Two decades later, they have faded into irrelevance. With their heydays behind them, internet cafes have closed shops or diversified into other businesses. Cyber cafes in Mexico City, which is supposedly the most connected city in the world, today double as printing services and daycare centres in working-class neighbourhoods. In Nepal, they are popular among tourists, and among those who need to copy and scan forms (much like in India). Once a mainstay in Lagos, Nigeria, the cyber cafe has virtually disappeared due to constant electricity outages and rising fuel prices. Salta, Argentina, once housed more cafes than fast food restaurants—until an ongoing economic crisis shuttered most of them. This feature and photo essay in Rest Of World pays homage to internet cafes across the world that have stood the test of time.

Masters of the universe: Global credit dispersal has increasingly shifted from banks to bond markets. The global bond market was worth $141 trillion compared to the $183 trillion assets that banks hold, although a large chunk of that is in bonds. Although barely noticeable, the shift did not happen overnight. Individual corners of the bond market were often watered and nurtured by adventurous men who exploited legal loopholes and human greed in equal measure. For instance, Lewis “Lew” Ranieri rocket-strapped the instrument called a securitised bond, which is nothing but a bunch of bundled loans. That rocket eventually exploded in 2008, leading Ranieri to comment to The Wall Street Journal in 2018: “I will never, ever, ever, ever live out that scar that I carry for what happened with something I created.” The shift from loans to bonds has regulatory consequences, too. While banking regulators are more cognisant of macroeconomic risks, the instruments they use, such as interest rates, are increasingly less effective. This Financial Times story charts some key milestones in the evolution of the bond market.

A successful reshoring: Till not too long ago, personal care brand Bath & Body Works used to take three months to put together a $7.95 bottle of hand soap. Why? Because the various ingredients and parts had to travel more than 20,000 km from China, Canada and Virginia to the company’s Ohio distribution centre. In 2008, Bath & Body Works decided to reshore, i.e. bring production closer to its “beauty park” on the outskirts of Columbus. Today, multiple factories located a stone’s throw away from each other are able to produce the soap bottles in just three weeks. This wasn’t an easy transformation. It required a lot of negotiation with suppliers, who would have to spend millions to relocate production and buy new equipment. How did Bath & Body Works manage it? Check out this story in The Wall Street Journal.