As new laws approach, Canadian issuers can boost human rights due diligence practices

Bill S-211 will require companies and issuers to conduct full assessments of their human rights risk exposure. A baseline identifying where firms and sectors currently rank compared to one another and against global benchmarks is a useful starting point in creating lasting due-diligence practices that will be underpinned by law starting January 1, 2024. BMO Global Asset Management (BMO GAM) has determined this baseline in a new report entitled Respect and Protect: The state of human rights due diligence in Corporate Canada. The report was produced by BMO GAM’s Responsible Investment (RI) team. The RI team oversees the firm’s ESG initiatives and supports all investment teams in integrating ESG considerations into the investment process.

More than 1,000 shipments of solar energy components amounting to hundreds of millions of dollars were held up at U.S. ports for months in 2022 in the wake of a new law banning imports from China’s Xinjiang region over concerns about forced labour¹ In December 2021, the U.S. Uyghur Forced Labour Prevention Act came into effect. Between late June and the end of October 2022, U.S. Customs and Border Protection seized the solar imports made by a trio of Chinese manufacturers. The seizures underscore the very real material risk companies face as new laws take hold globally to prevent human rights abuses by companies and their supply-chain and other business partners. Canadian companies would be wise to act now; domestic lawmakers are set to enact new legislation to strengthen human rights due diligence practices as Canadian law plays catch-up to international peers. Bill S-211, the Fighting Against Forced Labour and Child Labour in Supply Chains Act, will come into force on January 1, 2024. The law will require companies to conduct full risk assessments – to map out their value chain, engage with business partners and manage human rights risks in every tier of their production processes. It’s going to require companies, especially those that rely on labour in developing nations with weak rule of law, to understand the new legal implications and how they relate to their business model. Companies not already conducting human rights due diligence will need to raise their awareness through education to understand how best to detect and manage risks and provide remediation when a violation occurs. Becoming familiar with the United Nations Guiding Principles for Business and Human Rights (UNGPs) framework is a basic starting point.

The law will require companies to conduct full risk assessments – to map out their value chain, engage with business partners and manage human rights risks in every tier of their production processes.

Drawing a baseline

To evaluate the performance of Canadian issuers on their respect for human rights, and what responsible investors in these companies can do to help close gaps, we assessed public disclosures of 29 of the largest Canadian companies across six sectors (Apparel, non-Apparel Consumer Goods, Consumer Staples, Oil and Gas, Mining, and Telecommunications) using the methodology of two recognized benchmarks that score how well companies implement due diligence based on the UNGPs.

The UNGPs are an international voluntary framework introduced over 10 years ago to hold states and businesses accountable for protecting and respecting international human rights standards, drawing on the Universal Declaration of Human Rights and the International Labour Organization’s conventions on the rights of workers.
BMO GAM used the KnowTheChain methodology to assess Apparel, Consumer Goods and Consumer Staples sectors, and the World Benchmarking Alliance’s Corporate Human Rights Benchmark to assess Oil and Gas, Mining and Telecommunications companies.

Most of the companies assessed had not been previously scored by these benchmarks. While many data service providers report on whether companies have human rights policies, they don’t report on key performance indicators (KPIs) related to implementation or the effectiveness of their due diligence.BMO GAM pursued that data directly—to capture a snapshot of the human-rights due diligence performance of the country’s biggest issuers and better understand the processes they have in place to manage these risks proactively.

We chose to assess companies anonymously. Our goal is not to name and shame firms that are early in their journey to adopting human rights practices, nor do we want to take on the role of a benchmark or data provider. As an asset manager with long-term and widespread investments in the Canadian economy we have vested interest in seeing all Canadian companies and sectors do well—while influencing positive change.

Scores and report findings

The average benchmark score of the 29 companies analyzed was 30%. The highest individual company score was 92%, from the Mining industry, and the lowest individual company score was zero, from Consumer Staples, Food and Food Distribution companies.

Human rights due diligence sector scorecard

The highest sector average human rights due diligence (HRDD) benchmark score was for Mining at 61%. The lowest sector was for Consumer Discretionary: Automobiles, Auto Parts, and General Retailing at 6%. The Oil and Gas, and Apparel industries tied with average sector benchmark scores of 41%.Historic and recent high-profile human rights controversies in the Mining industry (e.g. the destruction of the Juukan Gorge by Rio Tinto, or the collapse of Vale’s Brumadinho tailings dam that killed 270 people), strong voluntary frameworks, and mounting pressure to secure social licence to extract the minerals required for the energy transition, are all likely contributors to mining issuers’ relatively better performance on HRDD disclosures.

Room for Improvement

Our findings reveal that on the whole Canadian companies have made decent policy commitments to respect human rights. Yet implementation of practices on the ground is still limited. Generally, Canadian companies disclose limited evidence of having robust systems in place to confirm that their policies are being upheld throughout the value chain.

We also observed that over a certain threshold, market capitalization didn’t play a significant role in how well companies perform on human rights due diligence. Scores appear to correlate more with the level of stakeholder scrutiny the sector is under, with Canadian mining issuers achieving the highest scores overall (though there is still room for considerable improvement).

The financial services sector is increasingly under pressure to conduct due diligence on the social and environmental impacts of their lending, investment and other business practices. We intend to use our research to inform our engagements with investee companies to enhance their management of human rights risks, and subsequently, also our own.

Human rights laws rising globally

In recent years, many countries including France, Germany, the Netherlands, the U.S., and the U.K. have passed laws to better address corporate human rights abuses, requiring public issuers (and in certain cases non-public companies) to report on their actions to address forced and child labour. As illustrated by the table below, which provides an overview of existing and emerging corporate human rights regulation around the world, this trend is only increasing.

Source: Respect and Protect: The state of human rights due diligence in Corporate Canada (BMO Global Asset Management, January, 2023).

Three key recommendations

At a high level, our research, analysis and expertise have informed three key recommendations for publicly traded Canadian companies.

1. If not already familiar with the UNGPs, become familiar and commit to adopting them.

   While human rights are complex, these guiding principles provide a simple three-pillar framework for due diligence that is sector and region agnostic given their basis on international standards. The UNGPs also provide companies and investors with a consistent and comparable global framework from which to compare performance on due diligence.

Key elements of the corporate responsibility to respect human rights, as per the UNGPs.

Source: ihrb.org.

1. Conduct a risk assessment and prioritize focus on the most salient, or significant risks.

   This entails a comprehensive understanding of the entire company value chain—which includes internal operations and mapping out relationships with suppliers and business partners all the way down to raw materials suppliers.

   A comprehensive human rights risk assessment is separate from a materiality assessment that aims to prioritize issues that are the most financially material to a company’s bottom line. There is often overlap, but human rights due diligence implies prevention and mitigation of the most salient adverse human rights impacts, regardless of financial implications.

2. Focus on stakeholder and rights-holder engagement

   All management levels should understand there needs to be a formal feedback loop to understand what the risks are. Effective operation-level grievance mechanisms and human rights risk management approaches must be informed by the perspectives of affected stakeholders and rights-holders.

Development of strategies to prevent and mitigate human rights risks is absolutely essential to help ensure robust and resilient business models and supply chains that support long term value creation. Human rights due diligence is good not only for protecting human rights all along the value chain, but also essential for ensuring long term value creation for issuers and their investors.

To read the full report, click here.