Business and Human Rights: meaningful stakeholder engagement in due diligence

Companies have a substantial impact on human rights when carrying out their business activities. The United Nations Guiding Principles on Business and Human Rights set the expectation that companies conduct human rights and environmental due diligence (“HREDD“) with respect to their business activities, which includes assessing and responding to actual and potential human rights issues.

The expectation for companies to conduct HREDD is increasingly becoming mandated by legislators across the globe. For example, in Germany the Supply Chain Due Diligence Act will enter into force on 1 January 2023. It is arguably the most comprehensive law in this area to date, since in-scope companies will have to comprehensively analyse their global supply chains, assess the risks within their supply chains and act accordingly. Further, in the European Union an equivalent directive is upcoming. The European Commission’s draft corporate sustainability and due diligence directive (the “Draft Directive“) – which is anticipated to be adopted in 2023 – sets out a proposed HREDD standard, under which companies will be obliged to identify actual and potential adverse human rights and environmental issues arising from their operations or those of their subsidiaries and, where related to their value chains, from their “established business relationships” (for more information on the Draft Directive, read our earlier blog posts here and here). Involving and engaging stakeholders in a meaningful way will be critical for in-scope companies to successfully implement HREDD processes and ensure compliance with these obligations.

To help companies engage with stakeholders, the UN Global Compact Network Germany (“GCNG“) – an organisation created to assist companies in meeting their human rights-related responsibilities – has recently published its “What makes stakeholder engagement meaningful? 5 insights from practice” report (the “GCNG Report“). The GCNG Report highlights five “selected success factors” that companies can adopt to help ensure their engagement with stakeholders is effective and meaningful.

What is meaningful stakeholder engagement?

Stakeholder engagement is a cross-cutting issue in the UN Guiding Principles and other key human rights-based frameworks, such as the OECD Due Diligence Guidance for Responsible Business Conduct. The latter defines a company’s stakeholders as “persons or groups who have interests that are or could be impacted by an enterprise’s activities”.

According to the Danish Institute for Human Rights’ “Cross Cutting: Stakeholder Engagement” report, the ways in which companies can engage with their stakeholders can broadly be categorised into five phases:

• Planning and Scoping: identifying stakeholders that should be engaged in the HREDD process;
• Data Collection and Baseline Development: conducting research on the human rights enjoyment of workers, whilst also interviewing community members and other relevant rights-holders;
• Analysing Impacts: analysing the data that has been collected during scoping and data collection in order to identify any business-related impacts and assess their severity;
• Impact Mitigation and Management: bringing together the company and its stakeholders to design and implement actions that effectively prevent, mitigate and remediate adverse impacts, as well as in monitoring their implementation; and
• Reporting and Evaluation: communicating the results to stakeholders in an accessible way.

For such engagement to be effective when conducting HREDD, companies must ensure the meaningful participation of stakeholders. Meaningful stakeholder engagement requires systematically integrating the engagement into HREDD processes so that companies can detect potentially negative impacts early and develop collaborative grievance mechanisms, which in turn can help companies ensure compliance with their HREDD obligations.

Why is meaningful stakeholder engagement important?

In addition to ensuring compliance with companies’ HREDD obligations, meaningful stakeholder engagement can help companies build and maintain positive relationships with stakeholders. Unhealthy stakeholder relationships are likely to lead to dissatisfaction and frustration amongst key stakeholders, and future grievances can lead to lengthy and costly disputes. Conversely, strong stakeholder relationships can help ensure that companies decisions are made from a  considerate approach, which in turn reduces the likelihood and scale of potential negative fallout. It is, therefore, important that stakeholders understand that their opinions are respected amongst their corporate counterparts, and that companies devote both time and resources towards maintaining this relationship.

The recommendations of the GCNG Report

The GCNG Report contains five “selected success factors” for companies seeking to meaningfully engage with stakeholders, namely that stakeholder engagement should be designed in a way that is (1) based on trust, (2) fit for purpose, and (3) rights-based, whilst also being informed by a mind-set that is (4) characterised by co-ownership and (5) sensitive to context. Related recommendations in the GCNG Report include the following: 

• Ensuring all engagement and interaction with stakeholders is underpinned by transparency of both process and available outcomes;
• Clearly linking stakeholder engagement to the company’s HREDD approaches and strategies, which themselves should be developed through engagement with relevant stakeholders;
• Leading stakeholder engagement through applying the European Network of National Human Rights Institutions’ PANEL Principles of participation, accountability, non-discrimination and equality, empowerment, and legality;
• Focusing on process before outcomes, allowing for a joint development and articulation of aspirations and targets, as well as an open feedback culture throughout engagement; and
• Involving the ‘right people’ based on a proper stakeholder analysis that considers all those who may be impacted, with a particular focus on the most vulnerable. It is important that companies understand localised imbalances or injustices that might marginalise vulnerable stakeholders.

The obligations required by laws such as the German Supply Chain Due Diligence Act and the Draft Directive, go hand-in-hand with these principles. Although there is no ‘one size fits all’ approach to meaningful engagement with stakeholders – given the diverse contexts and issues to address – if companies adopt the principles behind these “selected success factors” as part of their risk assessment when engaging with stakeholders, they will be better placed to comply with their increasing HREDD obligations.

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