Expert ESG Attorneys: How Corporate Sustainability Creates Legal Risk – CorpGov
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Expert ESG Attorneys: How Corporate Sustainability Creates Legal Risk
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Expert ESG Attorneys: How Corporate Sustainability Creates Legal Risk

Photo: Amnesty International

By Yousuf Aftab, Enodo Rights & Atelier Aftab and Jonathan Drimmer, Paul Hastings

On 15 December 2019, a group of Congolese plaintiffs filed a class action under the U.S. Trafficking Victim Protection Reauthorization Act (“TVPRA”), seeking damages from multiple technology and automotive companies, for allegedly “knowingly benefiting” from forced child labor in their cobalt supply chains. The case vividly underscores the rapid growth of corporate legal exposure for alleged human rights abuses across global value chains. Perhaps more significantly, the case highlights a widening rift between legal and voluntary standards related to global human rights risk management. The implications of this interplay for effective corporate strategy are significant. This article provides an overview of the emerging tensions and suggests some practical steps companies can take to tame them.

Overview of the TVPRA and Cognate Legal Developments

The TVPRA criminalizes human trafficking, including sex trafficking and forced labor, and offers civil remedies to victims. Under the law, a corporation can be liable if it knows or should have known that it benefitted (financially or otherwise) “from participation in a venture which has engaged in the providing or obtaining of” trafficked labor. Liability can arise, at least in certain cases, even if the trafficking occurs outside the United States by independent third parties. The Congolese filing relies on these elements in seeking damages from the defendants for purchasing cobalt from a supply chain that, the plaintiffs allege, the companies knew or should have known included the fruits of forced child labor.

The TVPRA reflects an accelerating global trend of home states regulating corporate human rights impacts abroad. These regulations broadly falls into three categories: disclosure requirements, such as the UK and Australian Modern Slavery Acts and California’s Transparency in Supply Chains Act; mandatory due diligence, such as the French Duty of Vigilance Law and the Dutch Child Labor Due Diligence Act; and criminal liability and sanctions, such as the TVPRA and the U.S. Global Magnitsky Act. Substantively, forced labor is often the object of those measures, but broader human rights due diligence and disclosure expectations are shaping developments across Europe. In parallel to legislation, litigation alleging parent company liability for extraterritorial human rights impacts continues to proliferate across the globe. These cases rely on different theories and factors to promote the same general notion: that parent companies may be liable in their home jurisdictions for injuries most directly connected to the actions or omissions of foreign subsidiaries or entities in their value chains.

The Emerging Tension between Legal and Voluntary Standards

These legal developments share several broad features with leading voluntary standards. First, they reflect the common perspective that corporate human rights responsibility extends extraterritorially. Second, that responsibility may cut through the corporate form, covering corporate affiliates and third parties who may cause or contribute to abuses. Third, that responsibility may extend over and above local law. While those developments are helpful in many respects, allowing for an integrated approach in instituting human rights programs, the similarities have certain limitations. Rather than being a natural evolution of or close counterpart to voluntary norms, emerging law is in critical ways at odds with those standards.

The fault lines lie in the ways that the risk-management and disclosure measures encouraged by voluntary standards may be turned against unwary companies in legal settings. The leading standards on corporate management of social risk—the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises—take a governance-based approach to corporate respect for human rights that prizes good faith commitments; rigorous due diligence; transparent reporting on challenges; and, context-sensitive remediation.

But recent legal developments suggest that, absent careful management, these very acts may create or inspire novel liability before courts and regulators. Plaintiffs increasingly rely on public corporate commitments to argue for parent companies’ voluntary assumption of responsibility over subsidiaries and suppliers. Due diligence may be used to support claims that the company knew or ought to have known of the specific risk at issue. Regulators may rely on voluntary disclosure to impose sanctions and seize imports based on the reasonable belief that they were made with forced labor. And even good faith remediation efforts may be deployed to allege legal corporate liability for endemic human rights abuses deep in companies’ supply chains.

The cobalt litigation under the TVPRA exemplifies these tensions. Without commenting on the legal or factual merits of the claim, the plaintiffs’ approach reflects the conflicting implications of voluntary and legal corporate human rights standards. Similar conflicts animate a suite of legal developments across jurisdictions. From the perspective of corporate human rights strategy, the dissonance between voluntary standards and putative litigation (and regulatory sanction) is built on three core concepts: appropriate commitments; reasonable knowledge; and, effective response.

Appropriate Commitments

Voluntary standards, as well as the bevy of corporate sustainability benchmarks, encourage expansive corporate human rights commitments at the highest level of the organization. Those commitments may extend in scope to human rights impacts many tiers deep in a supply chain. Under emerging law, however, these voluntary commitments can play a material role in shaping legal liability. Plaintiffs in several transnational tort cases in the UK and Canada have relied on corporate human rights policies and public representations, such as commitments to the Guiding Principles or the Voluntary Principles on Security and Human Rights, to argue that the parent companies voluntarily assumed responsibility for the acts and omissions of foreign subsidiaries that led to the alleged injuries. Such arguments have had some measure of preliminary success, including before the UK Supreme Court.

Reasonable Knowledge

A cornerstone of voluntary corporate human rights standards is that due diligence should be ongoing and extend throughout a business’s value chain. Such due diligence is incentivized by holding corporate responsibility for human rights constant independently of knowledge. (See this entry for more detail.) By contrast, the TVPRA and cognate law treat knowledge—actual and reasonably imputed—as an element of potential corporate liability. That implicates due diligence and disclosure. On the one hand, companies under both voluntary standards and law cannot seek succor in ignorance; due diligence is critical to risk management. On the other hand, companies now need to be conscious that knowing more about risks throughout the supply chain than reasonable peers may expose them to greater liability than those peers. The more a company knows, the greater the legal responsibility it may undertake. The law thus perversely incentivizes knowing just enough, but not too much.

Effective Response

The pursuit of meaningful relief for victims of human rights injury is central to both voluntary standards and law. But the nature of what is an effective response differs materially. Under the Guiding Principles and OECD Guidelines, for instance, the appropriate response in cases of vicarious wrong through benefit (i.e., direct linkage) is to exercise or seek “leverage” over the wrongdoer to mitigate or prevent future harms. The aim is to better the lot of victims to the best of a company’s ability. Leverage is accordingly sensitive to operating context and reasonable business imperatives. Disengaging with the wrongdoer is seen as a last resort because it is unlikely to change the wrongdoer’s actions and can itself cause adverse human rights consequences.

The TVPRA and kindred legislation such as Section 307 of the US Tariff Act of 1930 (prohibiting the import of goods produced with forced labor) are less nuanced. Good faith engagement with entities in a company’s supply chain may be the most effective way to reduce and eventually eliminate negative human rights impacts; but, unless change is immediate, a company runs the risk of liability for knowingly benefitting from those abuses. Indeed, in the cobalt litigation itself, the plaintiffs rely on the defendants’ commitments to engage with suppliers regarding forced labor as evidence of the companies’ knowledge of the alleged abuses. Disengagement is offered as the only way to avoid legal liability if prevention is impossible—no matter how concentrated the global cobalt market.

How to Navigate the Conflicts

The tensions between voluntary corporate human rights standards and law have significant and unpredictable consequences for effective risk governance. The Guiding Principles and the OECD Guidelines are critical frameworks for a range of corporate stakeholders, notably investors, governments, and activists. Implementing them diligently can help a business manage an array of material risks, including those to vulnerable stakeholders. Still, reasonable companies should be conscious of the legal risks they might inspire when adopting voluntary standards—particularly since the resulting legal liability may undermine the financial, operational, and reputational benefits of implementing voluntary standards in the first place.

We suggest three practical steps to navigate the complex interplay of voluntary standards and law.

  1. Calibrate Representations: Corporate human rights commitments need to demonstrate good faith while ensuring that the company does not overpromise impact that cannot be guaranteed or take undue operational responsibility over subsidiaries, partners, and suppliers. When making human rights commitments, companies should always ask themselves what they can reasonably achieve, and which legal entity is best placed to deliver. They also should consider how the commitments can best be communicated to avoid unanticipated and undesirable legal risks.

 

  1. Privileged Diligence: It is a fundamental tenet of sound business practice, as well as the Guiding Principles and the OECD Guidelines, that businesses should understand their risks—to stakeholders and themselves. Indeed, seeking to remain ignorant to potentially substantial human rights risks is itself the source of increasing business risk. Ignorance thus generally increases the overall mix of legal, operational and reputational exposures. That said, to provide companies with maximum flexibility in addressing challenges, and in determining how and when to best discuss them publicly, diligence exercises should be conducted under legal privilege, particularly in light of potential litigation in disclosure-friendly jurisdictions.

 

  1. Consider Remedy Early: Voluntary and legal expectations on responding to red flags may differ significantly, depending on the specific human rights risk. In the case of forced labor in a company’s supply chain, for instance, voluntary standards encourage a practical, leverage-based approach to constructive engagement with the wrongdoing business. Laws such as the TVPRA and the Tariff Act of 1930 may not be so patient, imposing potentially significant liability for remaining involved in the venture. In developing an appropriate and tailored response to an identified human rights risk, a company should therefore carefully consider the imperatives of relevant legislation and litigation, as well as international human rights norms. That understanding should ideally shape the overall structure of risk governance, including due diligence priorities and contract terms, from the outset to enable rapid and efficient action if necessary.

None of this is to say that companies should retreat from making good faith human rights commitments and striving to implement best-in-class risk governance. To the contrary, the operational, reputational, financial, and legal imperatives to do so gain force by the day. Our caution here is narrow: when designing an effective human rights strategy, ethical companies must pay heed to the interplay of voluntary standards and law to ensure that compliance with one does not undermine the other—and that corporate human rights programs do not themselves invite speculative litigation by creative plaintiffs.

MORE from Messrs. Aftab and Drimmer: ESG and Mission-Critical Issues for Director & Officer Liability

Yousuf Aftab of Atelier Aftab is an ESG lawyer and strategist with extensive experience helping Fortune 100 companies navigate social risks and crises across the globe. He is a leading authority on business and human rights and the co-author of Business & Human Rights as Law (LexisNexis 2019).

Jonathan Drimmer is a partner in the investigations and white collar defense practice at Paul Hastings, where he focuses on issues related to anti-corruption, complex multi-jurisdictional investigations, and environmental, social, and governance risks and disputes. He is a recognized international expert on anti-corruption and business and human rights, and is a frequent speaker, author and commentator on issues related to both topics.

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