Human rights related risks can be the most complex area for C-suite executives to manage in sustainability reporting. Growing challenges and increased recognition for lack of in-house expertise in this area have emerged from our latest C-suite barometer. Indications suggest organisations and their leaders could fall short of essential responsibilities if their public commitment isn’t matched by appropriate investment and effective performance.  

Having co-authored the leading guidance on human rights reporting, supported by the UN, Partner Richard Karmel shares his expert insight on the sustainability challenges leaders currently face, the misconceptions of legal requirements vs. stakeholder expectations, and solutions to deliver on public commitments.  

Sustainability responsibilities are rising as the business community continues to expand around the globe and regulation becomes increasingly complex. C-suite executives appear committed to meeting this challenge and previously less prioritised areas of reporting are now gaining attention. 

Based on the latest findings in our 2024 C-suite barometer, we know companies are making progress on managing human rights issues; 92% of leaders confirm this is the area in sustainability they believe the most progress has been made by their organisation. Overall, we also have seven in ten organisations now producing a sustainability report, so the outlook is positive. Although there’s still a long way to go and it’s encouraging to see leaders recognising this.  

External trends and increasing risks 

Economic factors, including inflation and cost of living, continue to be the top external trend leaders around the world expect to have the biggest impact on their businesses over the next year. 95% also believe that a generous salary is the most important factor to attracting talent. Yet, data indicates there could be risk of complacency as less than half (41%) have budgeted costs for human rights-focused strategies and reporting.  

With 76% of leaders making public commitments on this crucial and complex area of sustainability, there’s an increasing risk of declaring unrealistic goals given the low levels of allocated budgets.  

In fact, we’re already seeing evidence of this with the World Benchmarking Alliance confirming the majority of top global organisations already falling short on human rights and ethical standards. The solutions can be straightforward, but they require focus, prioritisation and monitoring to address improved performance. 

The reality and renewed accountability 

When it comes to human rights risks, leaders are accountable for the impacts of their activities. Not only for their own organisation, but also for their supply chain – an area they may not currently recognise as their responsibility.  

Most C-suite executives have not been trained on human rights and didn’t necessarily study it, so it’s encouraging to see growing acknowledgement from 27% of leaders in 2023 to 37% of leaders this year confirming they lack in-house expertise on these issues. However, I believe the reality is much higher. It’s one of the most complex areas to address because it requires a change in focus in the way business risks have previously been identified. Instead of starting by looking at risk to the business, the first step is to consider the risk to people. Those that are most severe and most likely have the potential to pose the greatest risk to the business.  

Legislation is a starting point, not a baseline 

Addressing human rights in business is an ongoing iterative process, not the start stop exercise that boards like. Large international organisations trying to address the challenges of paying a living wage is a good example of the complexities. Many companies state that they align with the Universal Declaration of Human Rights and the UN Guiding Principles on Business and Human Rights, but they fail to have ongoing processes in place to pay ‘a living wage’. In most jurisdictions, a living wage is not the same as the legal minimum wage, which is the level to which most organisations align. This is where the role of governments has to be questioned as they are essentially encouraging ‘in work poverty’ – an area which is a separate debate entirely.  

The move from the legal minimum wage to a voluntary living wage is complex. It is unlikely that most businesses will be able to move from paying the minimum wage one year to the living wage the next, because in most jurisdictions the gap is too large. It is an incremental and iterative process that can be achieved over time. A further complexity is how an organisation influences the behaviour of its suppliers when their other customers may not want to change. How do they know what suppliers are actually paying their workers? How do they know what the local living wage is?  How are they able to monitor progress? These are just some of the conundrums that businesses are being asked to address. 

Meaningful, not compliance led, reporting is required 

A problem with much reporting today is that organisations are reluctant to disclose the challenges they are facing in addressing actual or potential harms to people in their own organisations and in their value chain.  There are many reasons for this: Some companies don’t want to appear as having any weaknesses; others are advised not to report any negative impacts because of the potential for legal liability; whilst others view any form of reporting as marketing and therefore believe they always have to show the organisation in the most positive light.  

There are, however, some inspiring examples where companies are being transparent about wrongdoings to which they have either caused or contributed. Some well-known brands have had cases of sexual abuse, use of harmful chemicals or child labour breaches in their supply chain. They didn’t bury the issue; they said they identified the issue, that it doesn’t represent what they stand for, and reported what they’re going to do to make it better and prevent it from happening again. These newsworthy items were barely in the news for a week as the organisations admitted the issues and knew how to handle them.  There are many other examples where organisations try to deny responsibility and/or didn’t know how to react with the result that the issues remained in the news with gradual erosion of brand value.  

Making a clear statement of intent with policies on how an organisation operates and the conditions in which it expects those they work with to operate, is a good starting point. Ensuring a process is in place to support this intention is essential to mitigating any future risk of severe negative impacts and being confident in managing the risk of an impact if it were to arise.  

Engagement for transparent commitments 

The survey indicates that only 35% of leaders recognise human rights as an area where they have challenges with data capture. The reality is this percentage is likely to be higher; but we are in a place where leaders don’t know what they don’t know.  Measuring human rights impacts, is more complex than putting a meter in the ground and taking a reading. Greater in-house specialist expertise is required in companies to understand the best way their human rights objectives and public commitments can be met. 

One such area where organisations need to upskill is that of stakeholder engagement. Engagement with rightsholders and other affected stakeholders is necessary to fully understand the impacts. Most stakeholders will come with their own personal perspectives; it is the role of companies to listen to those perspectives to best understand the realities and to work out how they can best address any potential harms.  

Patagonia is a great example of this and has an increasing reputation for positively managing their potential human rights risks. As a growing $500m company, it sources from around 14 countries including Vietnam, Thailand, China, Sri Lanka, India and Bangladesh. Not only does it commit to achieving a ‘fair’, ‘living wage’ in factories, the company has established its own Fair Trade Certified™ program and it claims a four-fold approach to pre-screening the factories and mills it works with. Every new and existing supplier must meet their standards and requirements for business, quality, environmental and social standards. The company has even pushed back recently on other organisations in its own HQ country on claims of counterfeit goods sold.  

Reporting drives improved performance 

Mandatory sustainability reporting needs to be used as a tool for driving more positive performance. If organisations understand the risks, have policies and processes in place to address them, they can be transparent in their reporting with regulators needing to up their game to call out ‘greenwashing’. The absence of reported impacts or issues by organisations tells a story in itself and with incoming regulation the shiny side of reporting will become harder and harder. Organisations that identify, address and transparently disclose impacts need to be recognised for good reporting and performance. 

The reality is that most organisations are already addressing several human rights risks, they just haven’t recognised these issues as being human rights related. A good example of this is health and safety related risks, which most organisations already deal with and which fall within the human rights wrapper.   

Looking ahead, organisations will need to better understand their human rights related risks to meet their reporting obligations. It is essential to identify the specific circumstances and nuances of all local markets they operate in and establish processes for addressing negative impacts. Achieving this will not only transform an organisation’s culture for the better, it will also create valuable influence in their supply chain with less harms caused to people resulting in them becoming more resilient institutions for the future.