What is HRDD and how does it work in practice?

HRDD is a framework developed in the UN Guiding Principles on Business and Human Rights and is not a mandatory law. Rather, it provides a guideline to help companies implement a management system that will reduce negative social impact. In practice, HRDD requires companies to do six primary activities: 

1. Embed HRDD within the company’s policies and management systems
2. Identify and assess actual or potential adverse impacts on people
3. Stop any negative impacts and prevent potential ones from occurring
4. Track actions taken to ensure they are effective
5. Communicate publicly how negative impacts are addressed
6. Where actual negative impacts are identified, provide remedy to impacted people.

Currently, there are a few laws and regulations that require companies to conduct HRDD, such as the Norwegian Transparency Act and the EU Taxonomy. Largely, these do not set a minimum standard for compliance. Rather, they ask companies to conduct “adequate” HRDD.

What is adequate HRDD?

Two key concepts within HRDD are proportionality and reasonableness. These concepts mean that in order to understand whether a company is conducting adequate HRDD, you should examine if its management of human rights is proportional and reasonable to the company’s size and context. For example, a solar panel company that does not identify forced labour as a potential risk within its supply chain is unlikely to be conducting adequate human rights due diligence and will have to improve its processes. This is why a key step in HRDD is conducting a high-level human rights risk (saliency) assessment of a company’s own operations and supply chain. This assessment will provide a roadmap for developing adequate HRDD. In addition, continuous improvement and staying informed about emerging trends are key in ensuring effective and adequate practices.

Why should companies conduct HRDD?

HRDD is the best methodology for reducing risks of negative impact on people. The framework  helps companies comply with legal obligations, manage risks, fulfil ethical responsibilities and protect their reputation and brand, which in turn facilitates competitive advantage. By identifying and addressing human rights risks in daily operations and supply chains, companies can prevent harm and promote positive social outcomes, ultimately ensuring long-term sustainability and success.

What types of companies should conduct HRDD?

Ideally, all companies should aim to conduct adequate HRDD. However, those who are covered by laws and regulations that now mandate HRDD are obligated to conduct it, while companies in particularly high-risk industries should prioritise implementing the framework. High-risk industries include extractive industries, manufacturing and textiles, agriculture, electronics and construction. 

In addition, it is likely that SMEs will be affected by increased requirements, due to larger companies implementing HRDD to comply with laws and regulations. This means that no matter the size of the company, it is likely that implementing HRDD will be necessary.

Where should you start?

To conduct HRDD, companies should start by demonstrating leadership commitment and establishing a human rights policy. They should then conduct a high-level human rights risk (saliency) assessment across their operations and supply chains, engaging with stakeholders to gain insights and perspectives. This will allow companies to prioritise managing the human rights risks that are most relevant to them, and put them on the best footing to further develop their HRDD processes.

What are the biggest challenges?

Conducting HRDD can present significant challenges for companies, with the most common one being understanding exactly what “adequate” means. As this varies from company to company, there is no one-size fits all approach. This is why companies should focus on doing the best they can and constantly seek to improve their processes. Beyond this, understanding complex and evolving supply chains, limited data and transparency are all big challenges in properly conducting HRDD. To address these challenges, companies should prioritise proper stakeholder engagement, build supplier relationships, seek out collaborations and partnerships, and leverage data to inform decision-making.

How can data be used to manage human rights issues?

Data can play a vital role in managing human rights issues by supporting risk identification and assessment, supply chain transparency, impact measurement and monitoring, reporting and transparency. Utilising data effectively allows for evidence-based decision-making, proactive risk management, and accountability, leading to improved human rights practices and outcomes.

How can companies identify supplier-level risks in practice?

To identify supplier-level risks, companies should first take the time to understand their supply chain and the risks associated with the products and materials that they use. To do this, it is essential to take a systematic approach, with a saliency assessment as the foundation. Once high-level risks are identified, the next step is to identify the suppliers that are associated with those risks and engage with them. Finding out information about how they manage risk is key, in addition to offering opportunities for training and assessments if needed. If possible, companies should also ask their suppliers to provide details from their own suppliers so that the risk can be traced back to the main source. This way, appropriate mitigation measures can be put in place along the whole supply chain. In addition to this, a general identification mechanism can be implemented, such as evaluation criteria, requirements for audits and ensuring supply chain workers have access to the company’s own grievance/whistleblowing mechanism.

How does HRDD integrate into the work with CSRD?

Integration between due diligence and the Corporate Sustainability Reporting Directive (CSRD) occurs through the requirements of the European Sustainability Reporting Standards (ESRS), which detail the disclosure requirements of the CSRD. The ESRS clearly state that companies should use due diligence to inform their materiality assessments. The ESRS also confirm that the due diligence process is taken from the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. This means that implementing HRDD is key in ensuring proper CSRD compliance. In addition to this, the ESRS have disclosure requirements that relate to each of the six steps of HRDD. By integrating due diligence into their CSRD work, companies establish a comprehensive and transparent approach to sustainability, meeting stakeholder expectations and fostering responsible business practices.

What is the relation between the EU Taxonomy and HRDD?

HRDD is a key element of the EU Taxonomy Regulation, since it forms one of the minimum safeguards that companies must meet to align with the Taxonomy. This means that if companies do not conduct adequate HRDD, they will not be considered Taxonomy-aligned, no matter how much they contribute to the environmental objectives within the Taxonomy.

What are the best practices for HRDD?

Although adequate HRDD varies depending on company and context, best practice can be described as acting in good faith and always trying to do better. Perfection is not required and it is simply a case of getting going and adapting processes as more information becomes available. What is key to HRDD, however, is properly integrating it within the organisation, by gaining a top-level commitment, training employees and integrating HRDD within the company’s overall sustainability strategy. In addition, it is vital that companies engage with impacted or potentially impacted stakeholders regularly, not only when an impact is identified. This will ensure that HRDD processes are aligned with what is best for these stakeholders, ensuring that it remains adequate. By following these best practices, companies can strengthen their HRDD processes, promote responsible business conduct, and contribute to positive human rights outcomes.