Human-rights violations in companies’ value chains can damage their reputation and public image. Such offences may soon also become a regulatory violation for both companies and financial institutions.[1,2] Although not the first, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) could be game changing for firms with a global footprint and enforced as early as 2026.
A landmark law with risk of hefty fines
The CSDDD would not only be a reporting requirement, but an obligation to undertake human-rights and environmental due diligence in line with well-established standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Such standards recommend the development of a human-rights policy, impact assessments, stakeholder engagement, mechanisms to track programs’ effectiveness, grievance and remediation processes in companies’ own operations and value chains. On top of these cross-sector requirements, the CSDDD has identified high impact sectors such as mining and agriculture as priority with additional sector-specific due diligence guidelines forthcoming.
The proposed legislation covers EU companies as well as non-EU companies active within the region. Failing to comply with any of these rules could lead to civil liabilities and hefty fines of up to 5% of a company’s total annual turnover. We estimate that the CSDDD may affect as much as 26% of the constituents of the MSCI ACWI Investable Market Index (IMI) (2,309 out of 9,051) and a third of the constituents of the MSCI ACWI Index (931 out of 2,837), as of Aug. 31, 2023.
Companies have a long way to go
Compliance with the CSDDD may prove challenging for companies. Assessing potentially in-scope MSCI ACWI IMI constituents, we found that only half had some grievance mechanisms in place, and only 14% tracked the effectiveness of their human-rights policies and set related human-rights targets. Meanwhile, a quarter of companies covered by the directive had been subject to allegations of human-rights-related violations in the past three years, with 4% of them evaluated as severe or very severe by MSCI ESG Research, with no evidence of remediation responses, as of September 2023.
Companies in scope of the CSDDD: Sector-agnostic evaluation of human-rights performance
Based on our initial mapping, 49 sub-Global Industry Classification Standard (GICS®) industries were included in the high-impact sectors identified by the EU. This represented about a third of the likely in-scope constituents of the MSCI ACWI IMI that we identified (746 issuers out of 2,309).
Among companies in high-risk sectors, only 13% had processes in place to monitor the effectiveness of their human-rights policy. Less than half (45%) had robust sectoral mitigation practices, likely to be requested by the CSDDD, such as providing free, prior and informed consent to indigenous peoples for extractive companies or ensuring greater control and rights to data subjects for social media.
In the interactive chart below, we aggregate MSCI ESG Research issuer-level data to show how high impact sectors stack up on both baseline and sector-specific human-rights practices.
Coupling companies’ performance on both fundamental and sectoral due diligence practices may help investors evaluate alignment with international norms and regulatory requirements and identify companies’ most significant human-rights issues.