Over the last few years, Brussels has discovered a new policy mantra: simplify, simplify, simplify.
Simplification as an EU political priority is understandable. Businesses face a growing body of legislation, reporting requirements and regulatory frameworks that can potentially overlap. Removing unnecessary duplication, clarifying obligations and making rules easier to comply with can strengthen the Single Market and make European companies more competitive.
But the starting assumption of these debates is that responsible business conduct legislation is inherently costly, and that weakening EU legislation and prohibiting more ambitious member state laws will reduce those costs. This assumption is oversimplified, and the problem is partly one of accounting. Ultimately, the “savings” and deregulation the EU calls simplification are costs that will be borne by workers and communities in Europe and across the world.
The costs and benefits of doing due diligence
The price tag of building a human rights due diligence system is easy to see: there is a sustainability team on the payroll, consultants are hired, suppliers have to be assessed, procedures for addressing impacts have to be established, workers and communities have to be consulted, data has to be collected and managed and so on. These costs are concentrated, with the compliance team for example, and require up-front investments and the continuous costs of running it.
But these costs are overemphasized, relative to the benefits which are dispersed across a company, and often manifest in the future and risks, whether related to forced labor or climate, that tend to cost less if they are dealt with promptly.
The price of inaction and, conversely, the benefits of robust due diligence are much harder to measure. A well-designed and robust human rights due diligence system can prevent litigation, or at least reduce the risk of it. It can help a company’s reputation by identifying a problematic supplier before a media exposé exposes labor rights abuses. It can expose environmental risks before they become liabilities. It can improve companies’ relationships with workers and communities by taking measures to prevent forced labour or environmental pollution. It can make supply chains more resilient and avoid enforcement under forced labor bans that are increasingly finding their way into the statute books.
In other words, while the compliance department pays for the risk assessment and for appropriate actions to be taken, procurement benefits from a more resilient supplier base, the legal department benefits when litigation is avoided. Central operations benefit when disruption is prevented, and investors benefit from greater visibility and predictability. It can even affect the cost of capital. As capital becomes more scarce, sustainable finance becomes increasingly integrated into investment decisions. Companies that can demonstrate credible management of environmental and social risks can have access to (better) financing than competitors. For example, Dutch grid manager Stedin made the business case that the cost of an expanded corporate responsibility team would pay for itself through better interest rates given its alignment with EU green finance rules (the so-called Taxonomy).
However, none of these benefits necessarily appears under the heading “return on investment from human rights due diligence.” And we are not even mentioning the positive impacts beyond a company which an accounting department could not capture even if it wanted to, such as fewer workers in forced labour in globalized supply chains.
This is precisely why the EU’s debate or simplification risks getting the economics backwards.
Simplification should not be a cover for deregulation
There is a legitimate case to ask for simple sustainability rules and interoperable systems. Companies should not have to duplicate information instruments and national and EU regulators should ensure these frameworks work together. John Ruggie, the former UN Special Representative on business and human rights, pointed out that the point of human rights due diligence is not to create a new bureaucratic industry around human rights. It is to embed the identification and management of human rights risks into ordinary business decision-making.
However, in Europe, simplification became deregulation wearing a more respectable suit. The EU slashed its rulebook, dramatically reducing the number of companies that need to comply. While Europe is telling companies that they must become more resilient, manage geopolitical risk, secure critical supply chains, protect their reputation and prepare for a more volatile global economy, it also reduced the very systems designed to identify those risks under the guise of cutting red tape.
That is not competitiveness. It is short-term and visionless cost-cutting. And everybody, ranging from workers in forced labor, to communities next to a polluted lake, to the companies that are less prepared to operate in a volatile and uncertain world, are paying the bill.
Ben Vanpeperstraete is senior EU adviser at Anti-Slavery International, the world’s oldest human rights organization campaigning for freedom for everyone, everywhere, always.