Compliance
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Environmental & Human Rights Assume a New Urgency for Boards

by Olivier Jaeggi

The regulatory landscape around these issues is changing, and company leaders need to know.

Board members are at risk of being seen as negligent — and therefore potentially accountable — if they fail to pay adequate attention to environmental and human rights issues.

In 2015, regulators expressed two expectations of which both executive board members and directors should be aware.

First, at the June 2015 G7 Summit in Germany, the leaders of the G7 made a declaration that they “strongly support the UN Guiding Principles on Business and Human Rights” (UN Guiding Principles). They added that they “urge private-sector implementation of human rights due diligence.” It is the responsibility of states to protect human rights, but what is clear is that regulators expect companies to respect human rights.

Second, the G20/OECD Principles of Corporate Governance (the G20/OECD Principles), an important global standard, have recently been updated to incorporate environmental and human rights risks. The G20/OECD Principles were published in September 2015 and endorsed by the G20 on November 11, 2015. They refer explicitly to environmental and human rights issues in the context of disclosure, board responsibilities, and internal controls. For example:

  • “(…) companies are encouraged to disclose policies and performance relating to business ethics, the environment and, where material to the company, social issues, human rights and other public policy commitments.”
  • “Another important board responsibility is to oversee the risk management system and systems designed to ensure that the corporation obeys applicable laws, including tax, competition, labour, environmental, equal opportunity, health and safety laws. (…) In addition, boards are expected to take due regard of, and deal fairly with, other stakeholder interests (…). Observance of environmental and social standards is relevant in this context.”
  • “Companies are also well advised to establish and ensure the effectiveness of internal controls, ethics, and compliance programmes or measures to comply with applicable laws, regulations, and standards (…). Other laws that may be applicable include those relating to taxation, human rights, the environment, fraud, and money laundering.”

The document also makes reference to other relevant standards and instruments, such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles.

Why do these regulatory expectations matter for board members? They matter because it is the responsibility of boards to carefully chart the company’s journey through the ever-evolving risk landscape. Research shows that many board members are not aware of how material soft and hard law requirements pertaining to environmental and human rights issues have become. In 2013, for instance, MIT Sloan Management Review and BCG’s joint Global Executive Study and Research Project stated bluntly that “issues such as human rights… fall to the bottom of the list of social sustainability concerns.” The principles put forth by the G7 and G20 statements make it clear that this must change.

It is important to understand that both actions and omissions are seen as activities. Owing to the importance of environmental and human rights risks today, board members are at risk of being seen as negligent — and therefore potentially accountable — if they fail to act. Therefore, they need to make sure that they take the lead and, at minimum, ensure that their companies comply with the requirements of the G20/OECD Principles, as well as those of the standards to which the Principles refer.

Olivier Jaeggi is founder and managing partner at ECOFACT. He can be reached at olivier.jaeggi@ecofact.com.

Republished with permission from MIT Sloan Management Review. For more, visit sloanreview.mit.edu

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