One of the major themes in compliance in recent years has been the rise of Human Rights Due Diligence (HRDD) legislation in Europe and the US. Now, this trend appears to be expanding into the Asia-Pacific region after a recent initiative by the Japanese government. In this blog, we look at the latest developments in HRDD and ESG assessments, and explain how companies can expand their due diligence programme to capture these emerging risks. We also explain how Nexis® Solutions can help firms to improve their approach to compliance and due diligence.
Japan leading the way in Asia on HRDD expectations
While HRDD has become a standard requirement for companies in Europe and the US, it is not yet mandatory in any countries in the Asia-Pacific region. That could be about to change after recent initiatives from the Japanese government to promote HRDD, which launched earlier this year. Japan’s government has previously issued guidelines urging companies to monitor human right abuses in their supply chains and disclose any findings. Now, its Ministry of Economy, Trade and Industry has published a list of risks in different sectors, products and regions which companies should monitor for. This includes:
- Forced and child labour.
- Gender and religion-based discrimination.
- Unfair labour practices such as unpaid wages.
The new guidelines urge businesses not only to monitor risks within their third parties and suppliers, but to rank them by urgency. This requires companies to thoroughly understand both the ESG and human rights risks within their operations and activities, and those presented by their third parties and suppliers.
Screening for human rights and ESG impacts is not just about risk management, but companies in Japan that understand their risk exposure can also benefit from new opportunities. For example, the Japanese government announced in May 2023 that only companies who carry out HRDD will be eligible to bid for public projects. This offers a significant incentive because some of these projects are of considerable value. Furthermore, many American and European companies require Japanese companies to demonstrate their HRDD as a condition of doing business together. As a result, one electronics firm in Japan is going beyond regulatory requirements to adhere to the UN’s principles on business and human rights, according to Nikkei.
The global move towards mandatory HRDD continues at pace
In the last five years, HRDD has become mandatory in a growing number of countries and regions, including:
- Germany: The Supply Chain Due Diligence Act, which came into force at the start of 2023, requires large companies operating in Germany to carry out human rights and environmental due diligence on their business and its suppliers. They must screen third parties against risks including forced labour and child labour; environmental impact; discrimination or unethical employment; and unsafe working conditions. The Act’s scope will widen in January 2024 to include even more companies.
- United States: The Slave-Free Business Certification Act, which has been proposed in the US Senate, would require businesses earning above a certain revenue to carry out annual audits to detect any use of forced labour in their supply chain.
- Netherlands: The Child Labour Due Diligence Act of 2019 mandates companies selling or supplying to Dutch consumers to investigate whether child labour was involved in production.
- France: The Duty of Vigilance Law of 2017 requires large French companies to identify risk related to human rights and the environment.
- All EU member states: Every EU country will have to adapt to or adopt laws like Germany’s when the Corporate Sustainability Due Diligence Directive comes into force. It was approved by the European Parliament in June.
There is further evidence that ESG due diligence requirements could become the norm in the Asia-Pacific region. For example:
- Hong Kong: There have been recent discussions of introducing mandatory climate reporting for financial institutions and listed companies by 2025, with a Steering Group of the Hong Kong Monetary Authority tasked with improving climate and environmental disclosures by companies.
- Australia: The 2018 Modern Slavery Act requires companies to describe their approach to due diligence, and a report tabled by the government in May 2023 proposed making it mandatory for companies to implement human rights due diligence.
Retool your due diligence with data and technology to surface human rights risks
These latest regulatory developments will mean a significant change for many companies operating in Japan. A 2021 survey found that only 52% of public companies in the country carry out HRDD. Too many still take a traditional approach to compliance which focuses on financial and legal risks, rather than reputational, human rights or environmental risks. The regulatory developments described above, as well as growing societal pressure on companies to have a positive impact on the world, demonstrate that this is no longer sufficient. An effective, modern due diligence process should now cover human rights and other ESG risks.
How can companies gain an understanding of the ESG record of suppliers and third parties? The best approach is to ensure they have access to reliable data covering a wide range of sources, including:
- ESG data, which indicates a company’s impact on the environment, its reputation for social issues, and any failures in governance.
- Legal data including court cases involving a company, and any mention of them on sanctions lists, PEP lists and other watch lists.
- News data, which can flag risks around a company that might never reach a courtroom. An archive going back decades is preferable because a company’s reputation can still suffer for human rights and environmental violations which happened in the past.
In today’s data-driven world with ever-growing volumes of information available, it is not easy to surface data which is most relevant for assessing a supplier’s human rights and environmental impact. The best compliance operations leverage technologies which instantly screen multiple entities against high volumes of authoritative data in all the areas outlined above. Given regulators’ expectations that companies carry out ongoing monitoring, these systems should also flag any changes to a risk assessment of an entity when new information arises. That is where Nexis Solutions comes in.
Address the risks of ESG – and utilize its opportunities – with help from Nexis Solutions
In response to growing regulatory interventions, companies must make it a priority to mitigate the financial, legal, reputational and strategic risks of a compliance failure around money laundering or terrorist financing. The best way to do that is to leverage data and technology to strengthen your due diligence process. This will help you to better detect suspected AML transactions or activities within your business or by a customer, supplier or other third party.
Nexis Solutions helps firms to implement a more efficient and effective due diligence process to identify and mitigate human rights and ESG risk by providing companies with authoritative data from the most relevant sources, including:
- News data to identify reputational risk of third parties.
- ESG data to assess third parties’ compliance with growing expectations from regulators and the public around human rights and environmental due diligence.
- PEPs and sanctions data to identify third parties which may require enhanced due diligence.
- Company data to help to build a picture of a company’s structure, directors and beneficial owners.
We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example:
- Nexis Diligence+™ supports an effective due diligence process with our extensive archives and news searches going back more than 40 years.
- Nexis® Data as a Service delivers an unrivalled collection of licensed and web content, deep archives and data, through our flexible data APIs.