New regulations, most notably in Europe, are raising the bar for the role companies must play in addressing human rights violations. For large multinationals with long and complex supply chains, implementing the requisite transparency and controls will be challenging.

Human rights violations have long been a major business risk. But the intensifying scrutiny increases the responsibility of the CEO and board to protect and strengthen the company’s brand and reputation.

The human rights accountability sits squarely in the C-suite; consequently, companies cannot simply task sustainability leaders or procurement managers to make this happen. Rather, the CEO, with support from the board, must sponsor and ensure an organizational transformation—one that moves beyond compliance and embeds a social lens in supply chain decision making.

Six actions can establish the foundation for the transformation:

• Driving industry collaboration to ensure a level playing field
• Understanding the actual and potential human rights risk in the supply chain, both upstream and downstream
• Articulating a corporate stance on human rights
• Clarifying roles and accountabilities for managing the risk and providing visibility to the board and C-suite
• Investing in upskilling the organization and ecosystem
• Investing in digital tools for managing due diligence and supply chain transparency

With commitment and engagement from the top, procurement leaders will have the necessary resources and authority to the company’s human rights commitment into action—including through the establishment of a comprehensive human rights policy and a clear supplier code of conduct. Ultimately, procurement managers must be empowered to make tough decisions, such as when to end the relationship with an important supplier.

Companies that embrace this transformation will reinforce the organization’s values, protect the company from potential brand damage, and increase the resilience of the supply chain.

A Higher Bar on Human Rights

Several large companies have encountered well-publicized labor and community problems in their supply chains over the last two decades. More recently, company action on human rights has gained momentum, including through industry coalitions. These include the Harkin–Engel Protocol and Tony’s Open Chain initiative, two efforts in the agricultural sector that have shown commitments to eradicating child labor and ensuring fair trade in cocoa farming. Similarly, broad initiatives like the Fair Labor Association, the Responsible Business Alliance, and the Roundtable on Sustainable Palm Oil have signaled a move toward more sustainable and ethical sourcing practices across different sectors.

Despite the progress, however, human rights abuses remain a major and growing global problem. According to the International Labour Organization, Walk Free, and the International Organization for Migration, an estimated 21.3 million people were living under forced labor in 2021, up from nearly 20.1 million in 2016.¹ 1 Because this article focuses on human rights in supply chains, the numbers here exclude the 6.3 million people living under forced commercial sexual exploitation as of 2021 (up from 4.8 million in 2016). Notes: 1 Because this article focuses on human rights in supply chains, the numbers here exclude the 6.3 million people living under forced commercial sexual exploitation as of 2021 (up from 4.8 million in 2016). And more than $460 billion in goods potentially linked to forced labor are imported into G20 nations annually, according to research by Walk Free. Industries such as electronics, garments, palm oil, solar panels, and textiles are particularly at risk to human rights violations.

Meanwhile, efforts to transition to a low carbon economy, if not managed with a close eye on labor practices, could exacerbate the problem. Notably, human rights issues have emerged related to the mining and processing of minerals such as nickel, cobalt, lithium, and mica used in the manufacture of EVs.

But if the issue of human rights violations in supply chains isn’t new, the regulations surrounding them are. Despite facing delays and critiques, the recently passed EU Corporate Sustainability Due Diligence Directive marks a move toward stricter supply chain diligence. Large, EU-based companies that are found to have human rights violations in their supply chains could face fines up to 5% of global revenue, while non-EU companies risk restricted market access.

The broad EU measure comes after due diligence requirements were also established in Germany and Canada. Japan has introduced similar voluntary guidance. Meanwhile, a longstanding US ban on goods produced with forced labor was strengthened in 2016, and a similar ban was recently approved for the EU.

Embedding a Social Lens in Supply Chains

Forward-looking companies are already moving to integrate a human-rights focus into the strategic core of the organization. To achieve this, C-suite leaders and boards should take six key actions:

• Drive industry collaboration to ensure a level playing field. Precompetitive collaboration of buyers and/or investors (in which players address common foundational issues without impacting the way companies directly compete) is far more efficient and effective than acting alone. As outlined above, industry coalitions and alliances have begun to gain traction. But more such efforts are needed wherein companies establish and share new norms, standards, and codes of conduct for their industries.
• Understand actual and potential human rights risk in the supply chain. Companies must collaborate with stakeholders to understand the human rights risk within their full supply chains. This exercise should be conducted as part of a broader assessment of material issues across the supply chain, including the company’s impact on the environment, people, and local economies. Reporting will require disclosure of the material topics, how that list was created, and how existing and potential risks are managed.
• Articulate a stance on human rights. Company leaders in the C-suite, along with the board, should articulate a clear position on human rights. This stance must be more than lofty words; it must be a compass that guides every business decision, from the boardroom to the expectations set for suppliers. Obviously, the starting points for human rights commitments across the full supply chain will differ by company. But companies should set a minimum objective of complying with all laws and regulations.
• Clarify roles and accountabilities within the company. Companies must create clarity on which function has the ultimate responsibility for ensuring that human rights are respected throughout the organization’s operations and value chain—and that function needs to be empowered to do so through a senior-level mandate. In addition, embedding human rights safeguards in organizational policies and processes will require teamwork across functions, and it must be clear who is first, second, or third in the lines of defense.
• Invest in upskilling the organization and ecosystem. The C-suite should establish a budget for educating employees and the ecosystem of vendors on the expectations around human rights and the laws that govern them. This should include training on new regulatory requirements, the company’s risk tolerance and commitment to human rights, and the business case for change. While policing is likely necessary in some form, change originating from within will be more permanent and likely to yield results in the form of less risk and disruption in the supply chain.
• Invest in digital tools for supply chain transparency. AI tools, for example, can be used to map supply chains down to subtiers or raw material sources, facilitating the overall risk assessment of the supply chain and the management and escalation of grievances or violations. These steps ensure that potential risks and actual breaches can be promptly addressed. Digital platforms also can facilitate comprehensive reporting on human rights practices, which is crucial for complying with tightening regulations and maintaining stakeholder trust.

As legislative requirements tighten and consumer and investor expectations rise, companies must integrate a human-rights focus into the core of their organizations. This will enable those companies that are not directly within the scope of the new laws to secure a continued place in supply chains within those regulated markets. And it will allow the companies that must comply directly with the new rules to avoid not only potential fines but also the brand and reputational damage that is typically many multiples of those penalties.

A successful transformation requires engagement and commitment from both the board and C-suite. With strong leadership, companies can move beyond compliance and collaborate with upstream and downstream supply chain partners to drive real transparency.
 
The authors thank Michael Jonas and Ingrid Cornander for their thought partnership and contributions in the development of this article.