Conflict Minerals and Mandatory Disclosure, Part II

Guiding PrinciplesIn Part I of this post, I wrote about the momentum toward mandatory human rights disclosure in the US, as relates specifically to conflict minerals.  But the US is not acting alone.  Countries around the world are adopting their own disclosure regimes.

One day after the conflict minerals decision came down in Washington DC, a similar battle in the European Union (EU) ended in favor of disclosure.  After months of negotiations, the European Parliament adopted a reform Directive calling for mandatory non-financial disclosures, sending a strong message to businesses that the EU is responding to consumer and investor demand for corporate accountability and transparency.  The new Directive recognizes that non-financial reporting on business-related environmental, social, and human rights impacts is “vital” for sustainable economic growth. The language, which will be incorporated into an existing EU Directive on annual financial reporting, requires select large companies to disclose on their human rights policies, risks, and outcomes.

As with many other EU laws, the Directive only sets out minimum legal requirements and puts the onus on the Member States to implement.  Member States are free, for example, to require disclosure from companies other than those covered in the Directive, or to require that information in the reports be verified by an independent auditor.  Member States must also create their own compliance regimes, which must be available to all persons with a “legitimate interest” in ensuring compliance.

However, as with almost anything, there is much room for improvement.  Some of the language was watered down from an earlier iteration of the Directive.  Member States can exempt companies from disclosure in certain situations. Supply chain impacts only have to be disclosed when “relevant and proportionate.”  And there is no requirement to report existing abuses, only the risk of potential impacts.  More debates lay ahead as individual Member States move to implement the Directive in their own national contexts and address these shortcomings.

But even with these challenges, action in the EU is still indicative of the global trend. From Argentina to Ghana, more than twenty States have human rights reporting regimes.  India’s stock exchange requires its top 100 companies to file a mandatory “Business Responsibility Report,” which includes human rights impacts.  Brazil recommends that its listed companies publish sustainability reports, and the Brazilian stock exchange publishes an annual list of all the companies that report.

good businessFurthermore, governments are not acting alone in setting up disclosure regimes.  Socially responsible investors are calling for greater transparency with their investments and are publicly applauding even the qualified victories, including the US DC District Court’s decision.  They know that human rights impacts materially affect the bottom line and they are using their voting power to compel companies to report on their due diligence practice and procedures.

As both decisions last month have shown, crafting a perfect disclosure regime is difficult, and it is impossible to predict exactly how States will continue to implement their duty to protect people within their borders from business-related human rights abuses.  But if last month’s decisions are any indication, businesses need to get used to the idea that human rights matter.

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