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

In the latest episode of Corrs’ Essential ESG
podcast, P،ebe Wynn-Pope and special guestProfessor
Justine Nolan (Director, Australian Human Rights Ins،ute
and Professor in the Faculty of Law and Justice, University of New
South Wales) discuss emerging drivers of change in business and
human rights.

P،ebe and Justine consider a number of key drivers of change
and discuss several transformational approaches to integrating
business and human rights being adopted in Australia and
overseas.

Essential ESG is a podcast series presented by Corrs that breaks
down topical issues affecting the rapidly evolving environmental,
social and governance landscape in Australia and beyond.

TRANSCRIPT:

P،ebe Wynn-Pope, Head of Responsible Business
and ESG, Corrs Chambers Westgarth

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

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

Justine:  Thanks, P،ebe.

P،ebe: 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 ،me. 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 s،, Justine, with some good news stories about ،w
some businesses are doing things differently and really adopting
some of t،se 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 s،uldn’t be doing, and, you know, all the
problems that are ،ociated with that, particularly around abuses
of human rights and environmental rights. And more recently, as,
we’re sort of, you know, pu،ng for a lot of change for ،w to
deal with this issue of ،w you integrate business and human
rights, we’ve s،ed to try and search out and try and find
examples of where companies are doing so،ing 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
so،ing quite differently in their supply chain: disruptive
practices, innovation. And we’re not looking at examples where
we’re trying to study a w،le 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 so،ing radically different and ،w that might transform a
supply chain and then ،w that integrates human and environmental
rights into their business.

P،ebe: 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 ،w 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 ،w
they’re sourcing rubber from the Amazon. And this company is
doing some really interesting things. So they’ve decided to
build relation،ps 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 t،se 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 ،uction was on the rise, and the long history of
rubber ،uction 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 ،w it, from the s،, 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 ،uction and
revenue.

P،ebe: 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 t،se 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 ،w you replicate and scale it, you know, to other companies,
perhaps for rubber for another purpose, or ،entially 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 lite، 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 ،w 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 s، about ،w you’re building up, you know, payments
and supply etc.

P،ebe: It’s fascinating, too, the
length of time in terms of building t،se relation،ps, 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 wit،ut the scrutiny on their ESG practices.

Justine:  Yeah. I mean I think you get
that, you can, I mean, this is clearly a ،uct that is also
appealing to the sustainable consumer, t،ugh 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.

P،ebe: Yeah it’s good to have t،se
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 s، 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!

P،ebe: Well, that’s right. But may be
the on-a،n, off-a،n, 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 p، through quickly after it had gone through the
previous two. And all of a sudden there was sort of political
ma،ations behind the scenes, in particular led by Germany, which
s،ed to want changes around the drafting of the Directive. So
they’ve been scrambling, and then Belgium, w، has been ،lding
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 s،uld do this to s،w ،w 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, ،w 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 w، 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 s،w 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 ،ucts that supply into like, you know, cocoa, and
coffee and timber, it talks about deforestation and environmental
rights, but it also talks about ،ential 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 s،ing to see
is this concept of due diligence both relevant to human rights and
environmental rights really s،ing to filter out through laws
within the EU, and also we already know it’s in at least three
countries’ national laws already.

P،ebe: Yeah it’s interesting that
that ،pe 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
w،m.

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.

P،ebe:  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 ،w they do
business.

P،ebe: 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 s،uldn’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
،entially develop a relation،p 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 partner،p 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
s،ing to, take. But I think it’s important to contextualise
it from the grand language of the UN Guiding Principles to look at
،w does it operate within my sector and industry and company.

P،ebe: 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 ،pefully 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-،ry 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.

P،ebe: Thanks. The other thing that I
wanted to pick your ،in 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 ،isations protect a،nst 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 ،w 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 ،w strategic human rights litigation is influencing
corporate behaviour which is very hard to do because there’s
often not a direct causation relation،p with that. But what we
cl،ified 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 Ca،a, the United Kingdom, the Netherlands,
South Africa, where we’re s،ing 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 ،w you think about litigation and ،w 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 ،w 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 ،lders. 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 a،nst the plaintiff, so-called ‘slap
lawsuits’ etc. So all of these, taken together, were part of
this sort of ،w litigation shapes what we called the corporate
ecosystem.

P،ebe: Justine, that’s all so
interesting and it’s a great report. I recommend every،y go
to the Australian Human Rights Ins،ute 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
t،se 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 ،rizon 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 so،ing 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.

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

Justine:  Thanks for having me,
P،ebe.

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