Due diligence in a nutshell
Written by Claire van Beuningen
In previous blogs we have written about human rights and the protection thereof. Many guidelines and regulations - for example the OECD Guidelines and the Guiding Principles on Business and Human Rights - incorporate human rights due diligence. Human rights due diligence is a means of achieving the goal of protecting human rights. But what does it entail?
Corporate due diligence
The concept ‘due diligence’ is well known in the corporate world. Due diligence as a business process is normally understood to refer to a process of investigation conducted by a business to identify and manage commercial, legal, technological and people risks. The main purpose of corporate due diligence is to confirm facts, data and representations in a commercial transaction, in order to determine the value, price and risk of such transactions including the risk of future litigation. One example is in the area of mergers and acquisitions where the purpose of due diligence is to enable a purchaser to find out all potential risks and benefits beforehand in order to be able to make a balanced decision. Business due diligence processes are not specific to mergers and acquisitions, as the term is used to refer to any set of processes undertaken by a business to identify and manage risks. We can conclude in short that the basic understanding of due diligence in a business context is a procedural practice to assess risks in other companies.
Human rights due diligence
There is also a due diligence process regarding human rights. Human rights due diligence focuses on the risks that the company itself creates in areas such as the environment or human rights. In line with the Guiding Principles on Business and Human Rights, the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (ILO MNE Declaration) states that: “Enterprises, including multinational enterprises, should carry out due diligence to identify, prevent, mitigate and account for how they address their actual and potential adverse impacts that relate to internationally recognized human rights, understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning fundamental rights set out in the ILO Declaration on Fundamental Principles and Rights at Work. In short, human rights due diligence is a management tool that allows enterprises to uphold their responsibility to respect human rights. Article 17 of the Guiding Principles on Business and Human rights names the four elements that constitute human rights due diligence: (a) assessing actual and potential human rights impacts, (b) integrating and acting upon the findings, (c) tracking responses, and (d) communicating how impacts are addressed.
However, the distinction between corporate and human rights due diligence does not mean that there is no link between the approaches, as Harvard professor John Ruggie stated: ‘Businesses routinely employ due diligence to assess exposure to risks beyond their control and develop mitigation strategies for them, such as changes in government policy, shifts in consumer preferences, and even weather patterns. Controllable or not, human rights challenges arising from the business context, its impacts and its relationships can pose material risks to the company and its stakeholders, and generate outright abuses that may be linked to the company in perception or reality. Therefore, they merit a similar level of due diligence as any other risk’.
Purpose of (human rights) due diligence
The purpose of embedding a human rights due diligence obligation is to ensure that as many companies as possible do socially responsible business and to establish a minimum limit that ensures that companies comply with the international standards regarding human rights, fundamental labour rights and environment as set forth in various CSR documents such as the OECD guidelines. Because of the fact that due diligence is such a powerful tool to bring companies closer to respecting fundamental rights, the European Corporate Sustainability Due Diligence Directive makes human rights due diligence mandatory for large companies.