1. The main features of HRDD

HRDD incorporates human rights at the heart of firms’ management processes. HRDD constitutes “an ongoing management process that a reasonable and prudent enterprise needs to undertake, in the light of its circumstances (including sector, operating context, size and similar factors) to meet its responsibility to respect human rights”. ^{Footnote 14} In addition to the publication of a policy commitment and ensuring remediation, HRDD as described in the UNGPs requires all firms to undertake a human rights impact assessment, integrating its findings in corporate procedures, tracking responses and communicating to the broader public. HRDD defines and allocates precise responsibilities for business entities where they cause, contribute to or are directly linked to adverse human rights impacts in their value chains. In the first two cases, a firm should stop generating adverse impacts and offer remediation to those harmed. The notion of corporate responsibility in the UNGPs is traceable to the emergence of business practices accepting and institutionalising a “duty of care” towards affiliates. ^{Footnote 15} The UNGPs, however, extend such a duty of care from the narrower relation between a parent company and a subsidiary to all human rights impacts stemming from commercial and non-commercial relations that a corporation has with other business entities, employees, customers, and human rights holders affected by operations. Where a firm is directly linked to adverse impacts through a commercial relationship, leverage should be exercised to ensure that the entity to which it is linked ceases and remedies the harm, including in collaboration with other firms and stakeholders, and ultimately disengages if this does not occur. ^{Footnote 16}

Through the key notion of direct link, the UNGPs ask corporations to address via HRDD impacts that are considerably broader than those connected to their immediate actions and operations. Such requirements should apply to all entities in a global value chain, as HRDD responsibility goes beyond direct contractual relations with suppliers, ^{Footnote 17} therefore linking up downstream firms all the way to upstream producers where raw materials are extracted and produced, as well as all intermediary actors. This also is connected to value chain transparency, which is in fact a prerequisite for responsible business conduct as also clarified in relevant international standards. HRDD is intimately connected with value chain management and, generally, self-governance of economic activities. ^{Footnote 18} Through HRDD constructs, firms are required to act as a transnational value chain (self-)regulator/enforcer in the domain of human rights. ^{Footnote 19} Corporations have to design procedures to monitor their human rights impacts and to ensure that human rights are respected throughout their activities and business relations in their value chain. Especially in the two cases of “contribution” and “direct link”, this regulatory function includes the creation of strategies to engage with other entities and leverage them and ultimately “sanction” non-complying suppliers with disengagement.

This sui generis conferral of regulatory functions across value chains is enabled and circumscribed by procedural and process requirements. To meet the UNGPs, corporations have to adopt, design and continuously assess, evaluate and improve risk-based processes that, in the relation with other entities, are engrained in value chain management systems. ^{Footnote 20} HRDD presents typical elements of risk management requiring firms to identify, assess and mitigate risks. ^{Footnote 21} Upon the performance of a human rights impact assessment, HRDD management systems must provide businesses with information on human rights risks, allow them to evaluate the presence of risk, act upon the findings by devising means to reduce risks, integrate the findings into corporate procedures and track responses. In addition, a policy commitment to respect human rights should be adopted by the firm, internal remediation mechanisms must be offered and firms must communicate and report to the public about their social and environmental performance. ^{Footnote 22} Risks covered by HRDD are not financial or reputational risks for the firm concerned, but rather encompass the risk that human rights are negatively impacted by business activities. ^{Footnote 23} HRDD therefore plays a crucial role in the identification, prevention, assessment and cessation of adverse social and environmental impacts. ^{Footnote 24}

The UNGPs also require meaningful consultations with potentially affected groups and other stakeholders in identifying and assessing actual and potential adverse impacts ^{Footnote 25} and remedy mechanisms, thereby offering tools to give regard to the interests of those affected by firms’ activities. ^{Footnote 26} While performing HRDD, firms are required to actively engage vertically and horizontally with other enterprises in order to address general and specific human rights impacts. ^{Footnote 27} HRDD therefore aims to move beyond compliance-based forms of private regulation of global value chains, whose effectiveness has been questioned particularly in the area of working conditions. While not abandoning entirely compliance-based strategies, HRDD is aligned with a commitment-based approach, where firms cooperate to improve practices via joint problem-solving, which has been observed to be more effective for enabling change. ^{Footnote 28}

2. Voluntary sustainability standards and their use by firms

Voluntary standards achieved considerable business uptake in ensuring social and environmental sustainability across value chains. Well-known initiatives such as the Forest Stewardship Council (FSC), the Programme for the Endorsement of Forest Certification (PEFC), the Roundtable on Responsible Palm Oil (RSPO), the Rainforest Alliance (RA)-UTZ, Fairtrade and many others bring to the fore the function of multi-stakeholder and business organisations in coordinating and regulating the sustainability characteristics of global production. Third-party auditing and, increasingly, the use of technologies such as satellite images and remote sensing in the deforestation space contribute to monitoring and enforcing compliance. However, quantifying the effectiveness and impact of VSS remains complex and debated. ^{Footnote 29} There are deeply rooted structural problems that can only be solved with the involvement of all relevant public and private actors, as well as mandatory rules.

Private standards are also not immune to the power imbalances in a value chain, and they reproduce and contribute to further asymmetries in power and resources. ^{Footnote 30} These initiatives are often led by Western economic interests, but are then mostly applied in the Global South, thereby limiting the possibility for the effective representation of affected interests. The governance of VSS organisations rarely includes farm workers, smallholders and indigenous communities effectively in standard-setting and decision-making. ^{Footnote 31} Private regimes also rarely challenge a dominant narrative that trade and market mechanisms can deliver sustainability. ^{Footnote 32} Private regimes have proliferated – a situation that complicates implementation by firms and generates negative implications for trade. ^{Footnote 33} Trade barrier effects of VSS have been denounced for many years by developing countries, ^{Footnote 34} especially at the World Trade Organization (WTO). ^{Footnote 35} VSS requirements are complex and burdensome to implement, especially for small producers. Where requested by lead retailers, VSS can become a de facto necessary condition not just to enter their value chain, but also to market in Western countries. ^{Footnote 36} However, the WTO discipline of private standards remains elusive at best. ^{Footnote 37} VSS organisations are also very different and may represent only industry or attempt to include the interests of affected actors and civil society. ^{Footnote 38} The standards that have emerged therefore vary greatly and offer margins to firms to shop for requirements that better fit their needs or that are simply less demanding.

Both to gain legitimacy from their association with public norms and to increase uptake by firms, VSS requirements are often linked to national and international provisions in the social and environmental domains. ^{Footnote 39} Standards specify the details of responsible working practices in a given sector, country or factory or what activities would result in the sustainable exploitation and management of natural resources. From a functional perspective, VSS’ regulatory activity has the effect of transforming broad environmental and social norms into applicable rules. It is, however, necessary to closely scrutinise the contents of standards in order to appraise their actual alignment with international provisions. Codes and standards ensuring responsible working practices in the garment sector have been observed to include only selected provisions in the relevant International Labour Organization’s (ILO) Conventions, rarely covering subjects such as maximum working hours. ^{Footnote 40} In addition to substantive requirements concerning, for example, working conditions or land conversion, private standards have over time strengthened the provision of procedural requirements for value chain management. As companies need tools to operationalise HRDD in their activities, and also in light of national legislation, VSS aligned their requirements and introduced new ones to operationalise HRDD and thus enhance their potential complementarity to international soft law tools such as the UNGPs and various Organisation for Economic Co-operation and Development (OECD) Guidance documents.

Firms must monitor and regulate commercial relations in a value chain to ensure coordination across functional units throughout the globe. Value chain management systems assess the actual and potential impacts of a firm’s activities on various economic and non-economic risks, including plans to manage and monitor impacts, with regular evaluation of their effectiveness and performance improvement. ^{Footnote 41} Sustainability management tools address and manage sustainability practices and risks not just of the (downstream) firm implementing the system, but also of suppliers and sub-suppliers. ^{Footnote 42} Sustainability value chain management includes monitoring and sanctioning the obligations determining the conditions for entry and exit from a value chain up until the remotest upstream tiers. ^{Footnote 43} It also requires reporting, investigating and remedying (potential) instances of non-compliance – including by the suppliers of a supplier. ^{Footnote 44} From the perspective of firms, VSS are additional tools through which they govern their value chains and manage social and environmental impacts and the associated financial and non-financial risks. ^{Footnote 45} VSS are thus far from being only an instrument for consumers to distinguish sustainable from non-sustainable products or a way for firms to deflect “naming and shaming” campaigns. ^{Footnote 46} They also allow firms to avoid costs, achieve a competitive advantage and manage their value chains through their use and embedding in value chain management, to define the rights and obligations of various entities and to implement due diligence and legality requirements. ^{Footnote 47} VSS processes are thus integrated within firms’ management practices. ^{Footnote 48}

Compliance with VSS is monitored and enforced through third-party auditing. Auditing brings a third party in to assess compliance, but it is exposed to various challenges. Third-party auditing operates under the presumption that auditors can operate independently from the firms paying for their services, but this is hardly the case in the presence of conflicts of interest – since auditors are paid by the firms seeking certification. Auditing is also practically complex to undertake in many of the contexts where VSS operate, and its success depends on the technical capacity of the auditors to identify non-compliance. ^{Footnote 49} Auditors also certify compliance with VSS requirements in situations where this would be dubious. They have been found to routinely certify compliance against ILO requirements, including freedom of association, in countries such as China or Vietnam, where free trade unions are not allowed. ^{Footnote 50} VSS may possibly contain strong standards and criteria, but the shortcomings of auditing could considerably hinder their implementation and effectiveness.

1. Varying levels of human rights coverage at different value chain tiers

As HRDD responsibilities include all possible human rights potentially affected by business operations, ^{Footnote 74} it must be clear – in the first place to firms – that VSS may have a narrower human rights scope. The full range of human rights potentially impacted by a firm is broader, but VSS address a narrower set of social and environmental concerns. For example, FSC does not generally refer to all human rights in its Principles and Criteria but, as its focus lies on forest operations, it covers human rights that can be affected by forest management operations such as workers’, customary, community, and Indigenous Peoples’ rights. ^{Footnote 75} Other schemes, however, fail to include human rights that would be very relevant in the context of forest management. For example, the Sustainable Forestry Initiative (SFI), a North American scheme recognised under PEFC (an industry-driven umbrella organisation of forest certifications), does not require free, prior and informed consent for forest operations affecting Indigenous Peoples’ lands and rights. ^{Footnote 76}

The variety of substantive requirements of private standards is also visible in the environmental criteria underpinning issues such as deforestation. The approach suggested by the EU Parliament is to guarantee protection of all natural forests and natural ecosystems, regardless of the legality of conversion under requirements applicable in the country of origin. Natural forests and ecosystems are not defined in the proposal (the initial draft by the Rapporteur used definitions from the Accountability Framework Initiative), ^{Footnote 77} and neither is a cut-off date separating permissible from impermissible deforestation established. Given their wide differences, it is, however, unlikely that all of the current schemes could meet a future EU definition. For example, PEFC employs the Food and Agriculture Organization’s (FAO) definition of “forest”, which does not refer to the notion of a natural forest or ecosystem and allows for conversion under “justified circumstances”, with a 2011 cut-off date. ^{Footnote 78} The Roundtable on Responsible Soy (RTRS) prohibits legal and illegal conversions of critical biodiversity hotspots after 2009 and conversion of natural forests that occurred after June 2016. ^{Footnote 79} Schemes such as FSC and RSPO refer instead to the concepts of high-conservation-value areas and high-carbon-stock forests. ^{Footnote 80}

Furthermore, it should be clear that most – if not all – of the requirements of VSS apply to the levels of harvest, plantation and unit of production. A comparative study of FSC and PEFC principles and criteria and chain of custody requirements ^{Footnote 81} concluded that the forest management standards applicable to forest units are rather well aligned with the ILO Fundamental Convention, the UNGPs and the OECD Guidelines (although not so much with respect to the chapters on employment, industrial relations and the environment of the OECD Guidelines for multinational enterprises). These requirements are assessed by third-party auditors. However, where certification may require the entire value chain to be certified in various forms of chain of custody certification, intermediary entities in agricultural value chains, such as traders, mills, plants and processing facilities, are rarely subject to requests to comply with requirements concerning environmental impacts and human rights.

For PEFC and FSC, chain of custody requirements include only compliance with the ILO Conventions and are limited to a self-declaration of compliance by firms. ^{Footnote 82} Only a few VSS have broad human rights coverage applicable in their chain of custody certification. FSC recently incorporated core labour standards into the chain of custody audit requirements. ^{Footnote 83} The expansion of human rights considerations in chain of custody requirements allows downstream entities sourcing FSC-certified products to receive assurance in the context of their human rights responsibilities that there is a low risk of at least certain human rights violations in the intermediary value chain tiers. In a similar manner, social and environmental requirements have been introduced in Rainforest Alliance’s 2020 version of its value chain standards. ^{Footnote 84} As it will be seen in the next section, VSS are including human rights and HRDD requirements that apply to all Members. This also affects intermediary entities in the value chain that are certified under chain of custody standards.

Scheme managers consider that the purpose of chain of custody standards is to guarantee the credibility of sustainability claims through provisions on how to handle products. Human rights issues are not considered as necessary because they perceive risk to lie mostly at the farm level. ^{Footnote 85} As hinted at above, divergence in requirements between those applicable to producers and other value chain entities such as mills and processors is not per se problematic for a downstream entity to which HRDD obligations apply or the intermediary entity that has its own HRDD responsibilities – as long they assess and mitigate through their own due diligence possible adverse impacts occurring there. To legislators considering the employment of standards in legislation or their recognition, it should be clear that VSS coverage of risks in the various value chain tiers is often uneven.

Another crucial issue, intimately connected with access to information in risk management, is value chain transparency. As HRDD requires assessing impacts throughout a value chain, it is essential that firms have tools to acquire a clear, full picture of their entire business relations and relevant profiles of social and environmental risks at each value chain tier. The OECD–FAO Guidance – the international standard for responsible agricultural value chains – recommends that all upstream suppliers implement physical segregation and traceability. Downstream enterprises such as retailers and manufacturers are required to be able to identify their upstream suppliers and the sourcing areas of their upstream sub-suppliers. ^{Footnote 86} Complete physical segregation, especially of smallholder crops such as cocoa and palm oil, is very complex if not downright impossible without major changes in how value chains operate aimed at segregating compliant and non-compliant products. Downstream firms are, in fact, hardly in the position to claim that they are sourcing harm-free commodities.

While full segregation and identity-preserved systems are possible – but also much more costly to implement – VSS typically use mass balance requirements. These are procedural and certificate-based systems that allow buyers to purchase certified products from certified producers but then receive products mixed with not-certified produce, albeit from the same country or region. ^{Footnote 87} In light of this system, producers are not in the position to claim that 100% of a product’s content is “sustainable” (eg that the entirety of the cocoa used in a chocolate bar is deforestation and child-labour free). Arguably, the situation would differ if EU legislation were to require certainty about possible connections to value chain harms, or even full value chain traceability.

The European Parliament resolution on deforestation goes in this direction, as it requires full traceability. In addition, and in line with the policy goal of preventing those products connected with harms such as deforestation from find their way into the EU, it also provides that certification schemes can only be used where they grant certification to products with 100% certified content. ^{Footnote 88} These requirements would not only be problematic for VSS mass balance systems, which would have to be turned into full traceability systems with adequate segregation; VSS schemes that grant a certificate to products also containing non-certified material would similarly raise concerns in the context of EU legislation. These certificates allow labelling, for example, of products derived from timber (such as paper or furniture) to be certified as sustainable against the scheme’s criteria even when only a share of their content in fact originates from certified sources. ^{Footnote 89}

2. Certified and non-certified Members of a VSS

A firm’s membership in a VSS does not say much about its human rights impacts and compliance with HRDD requirements. Requirements for non-producing and non-certified VSS members – often downstream retailers and manufacturers – have been considerably lower than those applicable to certified producers in order to attract downstream firms to participate. ^{Footnote 90} At least some VSS introduced stricter membership requirements in order to make applicable certain key aspects of the standards (such as human rights compliance) to all certified and non-certified members. Compliance with these provisions by non-certified Members, where present, is not assessed via third-party auditing. It is the VSS organisation itself that verifies through internal risk management procedures – also triggered by third-party complaints – whether a member is in compliance. Procedures and effectiveness in monitoring and enforcement may thus vary greatly. Membership in a VSS by a firm with future HRDD obligations such as an EU producer should thus not be equated with HRDD compliance, even when a scheme has specific requirements on HRDD policies and processes.

For example, FSC established a Policy for Association that attempts to extend the impact of FSC standards beyond certified members and forests. According to the Policy, any company associated with FSC (either as a certificate holder, certification body, partner or member) can be disassociated if it is proven that it is responsible, either as a company or because of activities of subsidiary companies or subcontractors, for violations of a series of key requirements. These include illegal logging or trade, destruction of high-conservation-value forests, conversion of forests to plantation, genetically modified organism (GMO) use and violations of traditional rights, human rights and breaches of ILO Core Conventions. ^{Footnote 91} Over time, FSC has attempted to move beyond self-declaration by prospective Members, complemented by stakeholder input, ^{Footnote 92} and towards actively performing a formal due diligence evaluation to assess whether its (prospective) members are directly or indirectly involved in the unacceptable activities listed in the Policy for Association. ^{Footnote 93} Disassociation should take place only in the presence of repeated violations, as the organisation prefers to engage and attempt to address violations through cooperation given that dissociation would not produce any positive outcomes for forests. ^{Footnote 94} However, revision and expansion of the Policy for Association and the due diligence procedure have been complex, and an attempt to strengthen its enforcement by FSC, as well as clarifying the cases in which an FSC Member through its operations may breach the key criteria, ^{Footnote 95} produced no results and had to be put on hold. ^{Footnote 96} Another revision started in 2020.

Instead of a Policy for Association, Bonsucro established an internal Code of Conduct. Its Code recognises the human rights responsibility of all members in relation to their suppliers. It introduces a requirement applicable to both certified and non-certified members (in Bonsucro, certified members are not farms or farmers, but sugarcane mills) to commit to continuous improvement, respecting human rights, protecting natural ecosystems in the sugarcane value chain, acting to embed this commitment into their operations and communicating progress. ^{Footnote 97} These requirements are aligned with the UNGPs requirements to embed human rights in business operations, to act upon findings of possible human rights adverse impacts, to exercise leverage and to report to the general public. Consistent with the UNGPs’ concept of a “direct link” to human rights harms that determines the boundaries of companies’ responsibility for respect, the Code also applies to products and services linked by a business relationship to sugarcane production, processing and sourcing. ^{Footnote 98}

Candidate and existing Members are expected to perform a social and environmental risk assessment and to identify actions to bring their production, processing and sourcing into compliance with the Code on the basis of the principle of continuous improvement. In itself, the notion of continuous improvement, which is also present in other schemes, can go against HRDD constructs where it does not result in remediation for possible breaches. Bonsucro’s Code of Conduct is monitored not through auditing but through an enhanced due diligence process conducted by Bonsucro on its members and on the basis of reports verifying whether a firm presents a high level of risk of generating social and environmental harms. Action plans may be requested in case of non-compliance, with the possibility of referring to Bonsucro’s Grievance Mechanism. ^{Footnote 99} The risk assessment process entails online searches, consultations of court records in the country of operation and consultations with other organisations that may possess information about the relevant social and environmental impacts of the perspective Member, as well as online comments by any interested party. ^{Footnote 100} A Committee on Membership then determines the level of risk. Medium or high risk will necessitate corrective actions.

3. Certified and non-certified products and volumes

Rarely, VSS in the agricultural domain certify the entire production of a given farm or producer or take into account all relevant agricultural activities of the entities within a corporate group. Instead, it is normally a part of the production or specific farms that are certified. From the perspective of a downstream firm in a jurisdiction with (future) HRDD legislation, an HRDD assessment must identify, mitigate and remedy risk all the way upstream. Such a downstream firm could be implicated in adverse impacts where a producer from which they source both certified and non-certified products commits human rights violations in the context of non-certified volumes. Harm could also occur in a production unit or farm whose products are instead not traded or marketed by the downstream firms subject to HRDD obligations. In this case, there would be no “direct link” with adverse impacts through business relations. A similar situation would occur where harm is generated by a subsidiary or associated entity of a firm with which the downstream firm does business but with which there is no direct relation. However, from the perspective of the human rights responsibility of that upstream entity, which could also be subject to its own HRDD obligations, it is uncontroversial that there would be an association with human rights harms.

In certain VSS only, producers for whom a part of their operations is certified must also comply with key certification requirements in other non-certified areas or units of production. As we have seen above, FSC does so via its Policy for Association, which is monitored and enforced by the organisation. RSPO introduced similar but auditable requirements in the 2018 revision of its Principles and Criteria. These requirements mandate the certified entity to have a policy for ethical conduct in all of its business operations and transactions, as well as to respect human rights in the entire value chain. ^{Footnote 101} Firms must implement parallel standards relevant to their entire organisation, which cannot be lower than those in RSPO’s criteria. ^{Footnote 102} For intermediary value chain entities such as mills, this approach results in extending certain certification criteria about respecting human rights to the entirety of the sourced volumes, thereby transmitting upstream (ie to the oil palm plantations) a request for certification-compliant (and HRDD-compliant) production.

In addition to these requirements to perform HRDD and engage in continuous improvement monitored by the organisation, Bonsucro is introducing as part of its certification criteria requirements for sugarcane mills and processors on non-certified volumes. Core requirements concerning human rights apply to the entire supply of a mill, including areas that are neither controlled directly nor certified. These areas are often managed by smallholders, whose certification is complex and where environmental and social risks usually lie. ^{Footnote 103} These requirements include enacting sustainability policies to respect human rights, mapping vulnerable stakeholders and assessing risks. These requirements are expected to be implemented in the entire supply area as part of an “active duty involving ongoing due diligence of actual and potential impact”, including the production of engagement plans. Auditing is limited to assessing whether sustainability policies and the other requirements are into place. ^{Footnote 104} These new criteria could expand the reach of human rights standards to non-certified production as part of the HRDD responsibility of the mill. The new standard would thus acknowledge that mills’ responsibilities (as derived from the UNGPs) extend beyond certified production and include all entities to which they are directly linked via their sourcing activities. In addition, this approach would align with the broad HRDD requirements. Provided that monitoring through audit is effective, a firm based in a jurisdiction with HRDD obligations would receive evidence of low risk of human rights impacts during production when purchasing from certified mills products derived from sugarcane processing.

Standards focusing on GMO use such as ProTerra often require mills and processors that employ inputs from farms that are not certified to design and implement value chain control systems to ensure that the relevant core indicators in the domain of GMOs, but also of social and environmental sustainability, are met. ^{Footnote 105} While this requirement aims mainly at avoiding the commingling of GMO and non-GMO materials, where human rights requirements are monitored closely, the standard also potentially covers the entire human rights responsibilities of the mills towards the farms to which they are directly linked. ^{Footnote 106} In this way, as with the other examples discussed in this section, compliance with a VSS by a farm or processor can indicate to a downstream entity evidence of low risk against certain social and environmental criteria for the entirety of their production.