Good Governance and The Future Scope of Human Rights Due Diligence

As we transition into an era of human rights due diligence mandated by regulation, many in the business and human rights community are nervously asking the same question. Will a company’s steps to identify and address actual and potential negative impacts be narrowly tailored to meet regulatory demands, or will human rights teams be given sufficient flexibility to conduct broader inquiries consistent with good and best practice? Those broader steps may include taking action more deeply into value chains, identifying and addressing root causes of negative impacts, or evaluating how the company may be exacerbating tensions and local dynamics that lead to negative impacts consistent with principles of heightened due diligence. Such broader inquiries are certainly contemplated by the UN Guiding Principles on Business and Human Rights (UNGPs); as we wrote with Peter Nestor a few years ago, the UNGPs’ defining concepts of “cause, contribute, and directly linked are not strict categories,” but “are perhaps more accurately considered as guideposts on a multidimensional spectrum of responsible business conduct.” If regulation does not demand such broader inquiries, company support – and resources – to conduct them could become limited.

One substantive issue on the table for the debate among the EU Council, Commission and Parliament over the contours of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) helps bring to the fore this pivotal concept: “good governance.” As the Office of the High Commissioner for Human Rights has stated, “good governance” focuses on how public institutions conduct public affairs and manage the delivery and allocation of public resources in a manner free from abuse or corruption. While there is no specific, internationally-accepted definition of “good governance,” it is closely tied to respecting the rule of law, as well as efforts to combat corruption, undue political influence, tax evasion, and similar areas. Good governance and human rights are seen as mutually reinforcing; good governance is critical to the realization of human rights, and the true test of whether governance is “good” is the extent to which it protects and delivers civil, cultural, economic, political and social rights. By the same token, weak governance has a destructive effect on state institutions and legitimacy, undermines the capacity to protect human rights, and diverts public revenues that should provide healthcare, housing, education, and other essential services. As a result, international human rights institutions, including the Human Rights Council, have paid increasing attention to good governance on the enjoyment of human rights.

With those principles in mind, in Fall 2020, the EU Parliament introduced two major human rights legal initiatives that incorporated, in large part, principles around good governance. One was a resolution related to deforestation. Parliament recognized that weak governance is a root cause of deforestation, and incorporated principles around both deforestation and governance in its resolution. These concepts remained in the Commission’s proposal, issued the following year, and in the proposals from the Council and Parliament from 2022. As adopted, the regulation prohibits making available on the market or exporting covered agricultural commodities unless they are both deforestation-free and were produced consistent with the laws of the country of production – including those related to corruption, tax evasion, and human rights, among other things. The regulation also requires due diligence, information gathering and a risk assessment (that includes evaluating concerns regarding corruption, lack of law enforcement, conflict, human rights, prevalence of data falsification, and similar items). The adopted version of the EU Deforestation Regulation (EUDR) thus emphasizes good governance, both to address the root cause of deforestation and to incentivize host countries to tackle governance challenges.

The good governance trajectory of the CSDDD has taken a different route and remains in flux. As we noted in Fall 2020, Parliament’s Committee on Legal Affairs issued a report, including a draft directive, mandating that covered companies conduct due diligence of three areas – human rights, the environment and “good governance.” Good governance was defined to encompass corruption and bribery, tax evasion, illegal campaign contributions, and improper local political activities. The concept remained in Committee drafts in 2021, and a draft unanimously endorsed by the Parliament. Nearly a year later, however, the Commission’s draft (issued in February 2022), omitted “good governance,” the third leg of the originally- contemplated diligence stool, focusing on only human rights and the environment. At roughly the same time, the Parliament recommended an EU global anti-corruption strategy in light of the impact corruption has on human rights, noting that corruption is a major obstacle to the enjoyment of human rights. Toward the end of 2022, Legal Affairs then proposed reinserting good governance back into the draft, though a few weeks later the Council declined to include it in the Council’s proposal. Finally, Parliament’s June 2023 proposal includes provisions requiring that companies provide information to stakeholders about their actual or potential impacts on good governance, and defines adverse human rights and environmental impacts to include corruption by adding the UN Convention against Corruption to the international instruments listed in the draft’s annex. It also notes that it may be necessary to take corruption into account when carrying out human rights and environmental due diligence, and specifically calls for a further discussion about whether adverse impacts on good governance should be reinserted into the due diligence framework along with human rights and the environment as originally outlined. The trilogue negotiation will reveal whether, and perhaps how, principles of good governance will be included within the CSDDD’s ambit.

Finally, regardless of the CSDDD outcome, the reporting standards adopted to implement the EU’s Corporate Sustainability Reporting Directive (CSRD) contemplates extensive transparency regarding good governance. For example, companies are expected to describe relevant procedures, processes for reporting to the company’s administrative, management and supervisory bodies, and preventive training programs. In addition to qualitative information, the disclosure requirements relating to corruption and bribery also require companies to disclose quantitative data points (e.g., the number of convictions for violations of anti-corruption and anti-bribery laws and the number of fines for these violations). Metrics on political influence and lobbying activities also are within scope. These include, for example, the total monetary value of the company's direct and indirect financial and in-kind political contributions. Thus, regardless of where the CSDDD lands, information gathering and disclosure regarding good governance should be anticipated for many covered companies.

Conclusion

With a regulatory lens, it is difficult to predict the extent to which concepts related to good governance will be integrated into the CSDDD. It seems unlikely that, as originally contemplated for the CSDDD and as included within the EUDR, it will be a distinct area of due diligence. However, we will await the outcome of the trilogue negotiations on that and many other topics.

The remaining question, however, is whether, if the CSDDD does not formally include principles connected to good governance, companies will give personnel latitude to design due diligence approaches to cover them anyway. The close tie between the principles underlying good governance (such as corruption, undue political influence, and tax evasion) and human rights is well accepted and difficult to dispute, whether the CSDDD ultimately says it or not. Perhaps the Commission will, in official guidance, strongly encourage CSDDD due diligence exercises to cover key concepts associated with good governance as part of identifying root causes of adverse human rights and environmental impacts. Almost certainly, we can expect that good governance principles will be included in many of the tools that well-intentioned commentators inevitably will circulate. At a minimum, scores of companies will be conducting due diligence and reporting on their good governance approaches under the EUDR and CSRD anyway, and considering the results from a human rights perspective seems like a good idea. In the end, if the goal is to meet regulatory requirements and prevent negative human rights impacts, then permitting human rights subject matter experts to design due diligence approaches that exceed the rote requirements of the CSDDD and similar laws, covering critically connected issues - such as good governance – should be the clear path forward.