EU business and human rights policy: still more ‘invisible hand’ than ‘SMART mix’

January 20, 2020 •

By Claire Methven O’Brien, Strategic Adviser, Danish Institute for Human Rights

The views stated are the author’s and should not be attributed to the Danish Institute for Human Rights.

The terminology of the ‘smart mix’, coined by the UN Guiding Principles on Business and Human Rights (Commentary to UNGP 3), is now a common feature of responsible business policy discussions.

It refers to an idealised regulatory ecosystem that combines traditional forms of business regulation via legislation and judicially-enforced remedies, on one hand, with incentives, information-based and new governance approaches, such as sector-specific multi-stakeholder  initiatives, as well as measures to enhance the role of financial actors in encouraging more sustainable business practices.

The supposed strength of the “smart mix” is that it harnesses corporations’ individual self-steering capacities, the creativity, dynamism, and distributive wisdom of markets, while also correcting for their tendencies to generate externalities antithetical to human rights and environmental sustainability, through the application of democratically-driven mandatory measures.

Famously, the UNGPs, though based on international human rights law, are not in themselves legally enforceable. Making the ‘smart-mix’ vision a reality thus crucially depends on the enactment of binding measures by national – and in the EU’s case, also regional – legislatures, as well as strengthening of scope for remedial action through courts and other adjudicatory bodies.

A vanguard of EU member states is now mobilising to deliver the smart mix’s mandatory dimension. The UK’s introduction of a supply chain reporting requirement via the was quickly followed by the establishment of explicit due diligence requirements under France’s Loi de Vigilance (2017) and the Netherlands’ Child Labour Due Diligence Act (2019). Finland’s new government has committed to enact similar rules.

At EU level, however, responsible business policy measures have until now more emulated the ‘voluntary’ character of the UNGPs themselves than provided the legal reinforcement the ‘smart mix’ calls for.

Two Commission Staff Working Documents (2015 and 2019) report an impressively broad portfolio of initiatives, spanning industry sectors and extending beyond the EU to the wider world.

New laws appear amongst these, such as the Non-financial Reporting Directive (2014) and Conflict Minerals Regulation (2017). Yet the Directive’s requirements are so broadly defined, as regards due diligence, that they can scarcely qualify as compulsory, while the Commission’s non-financial reporting Guidelines likewise remain high-level and non-binding.

How surprising can it then be if reporting under the Directive is inadequate and, as recent research has shown, fails to deliver the quality or extent of information needed to support a systemic redirection of capital towards sustainably operating companies, in line with the purported goals of the EC Action Plan on Financing Sustainable Growth.

And if recent interventions in the areas of data protection, anti-trust and state-aid have revived hopes for a more muscular defence of individual rights and collective over specific commercial interests by the EU regulator, in the responsible business space, its efforts remain conspicuously limp-wristed.

Here public procurement provides a compelling example. Governments are the largest buyers of goods, services and public works, with public procurement accounting for €1000 billion per year globally, approximately 12% of GDP in OECD countries and 14% in EU member states.

Individual governments are amongst the largest single purchasers worldwide, with corresponding potential to influence business practices across sectors including construction, defence and security, healthcare, ICT, pharmaceuticals, food and apparel.

Under the heading of the state-business nexus, UNGP 6 extends the state duty to protect against business-related human rights abuses to procurement activities. At the same time, the UN Sustainable Development Goals highlight government purchasing (Target 12.7) as a condition of the needed transition to sustainable consumption and production, in parallel to the adoption of more sustainable corporate practices (Target 12.6).

Yet investigations by journalists, human rights defenders and a growing swathe of research reveal endemic abuses of the gravest nature in the production of commonplace items of which the state is a mega-consumer, such as rubber gloves, surgical instruments and personal electronic devices, as well as in ‘niche’ markets such as those for naval warships and diplomatic security services.

The EC’s 2011 Communication on Corporate Social Responsibility alluded to public procurement under the banner of ‘enhancing market reward for CSR’. ‘The most socially responsible course of action’, the Communication sagely observed, ‘may not be the most financially beneficial, at least in the short term.’ The EU should, it continued, therefore leverage procurement ‘to strengthen market incentives’ for responsible corporate conduct.

Yet the 2011 CSR Strategy included no positive measures, at all, to advance this end. On the contrary, it clearly reaffirmed that sustainability criteria should never create any ‘additional administrative burdens for contracting authorities or enterprises’, while also remaining subordinate to the ‘due process’ rights of potential suppliers in the public tendering process.

Given this ‘spin’, it was hardly unexpected that the 2014 EU Procurement Directives, in nearly 200 pages of text, should fail to make a single mention the UNGPs. Equally foreseeable, if disheartening, is that EU procurement experts should on this basis decry the operational relevance of even those few limited and heavily qualified mechanisms the 2014 Directives did introduce (such as human rights-based exclusions and scope to rely on ‘social labels’) intended to give public authorities greater latitude to align their buying practices with established human rights principles.

Much public procurement proceeds at municipal level, where budgets and personnel are stretched thin. As a recent survey confirms, buyers at this level often struggle to navigate complex EU tendering rules that are so intent on achieving market integration that, ironically, they deter businesses from bidding for public contracts at all. Simultaneously, they scotch sustainability goals by discouraging any ‘deviation’ by government buyers from price-based criteria, in case this triggers litigation.

This explains why, currently, responsible public buyers, with support from civil society, concentrate their efforts in the ‘post-award’ rather than the ‘pre-award’ phase of procurement. This entails adding clauses to contracts concluded with a bidder, selected on the basis of other criteria, that subject its performance to minimum labour standards, self-reporting or external scrutiny via social audit, for example.

Where this approach is adopted, its influence can be extended where buyers collaborate to increase leverage over suppliers, capture efficiencies and reduce costs, as shown by the examples of Electronics Watch and Sweden’s county councils, for example.

Yet restricting due diligence requirements only to those companies that win government contracts, rather than all those who do or might contemplate competing for them, at minimum dilutes the power of the public purse to shape market behaviour. Furthermore, if governments do not apply human rights criteria in their own sourcing decisions, self-evidently, this undermines their credibility in calling for businesses to do so.

Most troubling of all, however, is that EU procurement rules should in effect be helping to funnel taxpayers’ money directly into businesses and business models predicated on denials of basic human and workers’ rights abroad while undercutting decent jobs at home and neutralising the impact of government ODA spending, an already shrinking pot.

Public procurement is no silver sustainability bullet. In line with the notion of the smart mix, it is rather one piece of the needed broader portfolio, which must surely include mandatory due diligence legislation, stronger human rights reporting requirements, corporate governance reforms and new responsibilities for public and private investors, as well as direct measures to support workers’ individual and collective rights including in the context of new employment practices and forms of work linked to the digital economy.

Defining the details of reforms will be as challenging in the procurement field as in any other just mentioned. But if the new Commission is to honour its parallel promises to increase prosperity, upgrade the European social market economy, uphold respect for common values and the rule of law, finding ways to deliver these together as a coherent package, despite contradictory tendencies in markets and EU law, is a task that is both urgent and essential.

This article first appeared in Perspectives Paper, Business and Human Rights – Towards a Common Agenda for Action, Finland’s Presidency of the Council of the EU, Conference Publications, 2 December 2019