Ten Years After: From the UN Guiding Principles to Multi-Fiduciary Obligations

John Ruggie is the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard University Kennedy School of Government, and Caroline Rees and Rachel Davis are Senior Fellows at the Kennedy School Corporate Responsibility Initiative, and are President and Vice President of Shift, a nonprofit focused on the UN Guiding Principles on Business and Human Rights. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

While American commentators continue to debate whether the “repurposing” of the corporation is virtue signaling or more fundamental, and whether ESG investing is real, a bubble, or an artifact of bad measurement, Europe is launching a regulatory revolution that, if seen through successfully, will fundamentally reshape the social construct of the large corporation.

The European Union’s Sustainable Finance Disclosure Regulation (SFDR) is now being phased in. It imposes two requirements on all “financial market participants,” including advisors. First, they must identify and publish how they account for “sustainability risks” in their investment advising and decision-making. Second, financial market participants are required to publish on their websites how they do their ESG due diligence to identify those risks. Additional requirements apply where financial products are marketed as “ESG” or “sustainable.” Specific enforcement mechanisms are still to be determined but will include administrative measures and fines. The assumption is that the SFDR in some manner will apply to any financial market participant that operates within the single market – which includes U.S.-based firms and their subsidiaries. Details on how this will be implemented are still being worked out. The Commission has also just published a revised Corporate Sustainability Reporting Directive that confirms the expectation that covered companies will report on their ‘principal adverse impacts’ on people and planet, informed by international human rights standards.

The European Commission is drafting another directive or regulation, expected to be published in July. This is likely to require companies to conduct human rights, environmental and governance due diligence across their global value chains. The European Parliament has already recommended a draft law to this effect, which is not binding on the Commission. But as it was adopted by the overwhelming majority of 504-79 it sends a strong signal. It covers companies’ entire value chains; includes a liability provision; and requires companies to establish grievance mechanisms accessible by stakeholders.

The EU links these regulatory initiatives to the European Green Deal or closely related EU sustainable finance commitments. Both initiatives invoke not only the concept but also the specific steps first outlined in the human rights due diligence provisions of the UN Guiding Principles for Business and Human Rights, adopted unanimously by the UN Human Rights Council in 2011. The UN Guiding Principles have served as the global “soft law” law standard for the past decade. By the mid-2010s several countries began incorporating these provisions into reporting legislation combatting modern slavery (UK, Australia). In 2017 France adopted a more comprehensive Loi de Vigilance inspired by the Guiding Principles; in 2019, the Netherlands adopted a law requiring due diligence on child labor risks and in 2020, the government committed to expand it to a comprehensive due diligence obligation. The German cabinet in February 2021 adopted a draft mandatory human rights and environmental due diligence law that was sent to parliament for its consideration before the end of June. While the EU requirements will cover the entire single market, national governments will need to contribute to their enforcement.

U.S.-based corporate law firms have begun to pay attention to these development on behalf of their clients. But neither the EU initiatives nor, even less so, their origin in the human rights due diligence construct introduced in the UN Guiding Principles, are widely known in the United States. Our paper aims to fill the gap. It is divided into five parts.

The first recaps the debate regarding the purpose of the corporation, which in essence centers on whether and how stakeholder governance should and could supersede shareholder primacy. The second provides a brief backstory on shareholder primacy vs. stakeholder governance. The third introduces the elements of human rights due diligence and demonstrates that even in its soft law form it has brought stakeholder concerns and corporate practice into closer alignment. Section four describes how the experience with this soft law is informing national and supranational hard law requirements in a growing number of jurisdictions, with significant knock-on effects for corporate governance. The conclusion draws some lessons from how, a mere decade after their UN endorsement, the Guiding Principles have helped turn the idea that companies are responsible for preventing and addressing adverse impacts of their business on people’s basic dignity and equality into a mainstream proposition—thereby helping to provide a path beyond shareholder primacy toward multi-fiduciary obligations.

The complete paper is available for download here.

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