Introduction

There has been a significant shift in how corporate stakeholders view responsible business conduct, with legal concerns becoming increasingly important for investors. New laws in Europe require large businesses to conduct human rights and environmental due diligence (HREDD) throughout their supply chains. This investor guidance aims to explain the role of contracts in supporting HREDD processes, recommending that investors engage with portfolio companies to ensure their supply contracts support effective HREDD. It emphasises moving away from traditional one-sided contracting towards a more collaborative and dynamic model.

Background on the why and the what of responsible contracting

What is human rights and environmental due diligence (HREDD)?

HREDD is a dynamic process where companies identify, prevent, mitigate, and remedy adverse human rights impacts in their supply chain. Its primary objective is prevention, focusing on proactive measures to manage human rights and environmental (HRE) risks.

Why are contracts important for promoting human rights in global supply chains?

Contracts are crucial for managing supply chain risks, including human rights and environmental risks. They make commitments legally binding and enforceable. However, traditional contracts often misuse this power by shifting risks onto suppliers, leading to negative consequences for workers and communities.

What are responsible contracts?

Responsible contracts, as outlined in the Responsible Contracting Project (RCP) Toolkit, translate shared-responsibility principles into contractual obligations. They focus on responsible allocation of risks, responsible purchasing practices, and prioritising remediation over contract termination. Core Principles of responsible contracts are:

• Responsible allocation of risks and responsibilities,
• Responsible purchasing practices,
• Remediation first and responsible exit.

How is contracting relevant to HREDD?

Contracts allocate risks, rights, and obligations between the buyer and the supplier. The negotiation, terms, and performance of these contracts significantly impact the protection of workers’ human rights and the environmental safety of their communities. HREDD-aligned contracts emphasise cooperation, prevention, and remediation.

Why should investors care about contracts?

Investors should care about responsible contracting due to its impact on company compliance, responsible procurement, and investor obligations. It can improve financial and HRE performance, align with evolving legislation, and contribute to long-term risk management.

Why is HREDD-alignment so important? The turn toward mandatory HREDD legislation.

HREDD alignment is crucial due to the increasing number of laws mandating it. Examples include the German Supply Chain Due Diligence Act and the EU Corporate Sustainability Reporting Directive. These laws require companies to report on sustainability matters and can impact share prices.

Investor tools: Engagement questions and engagement letters

This section provides investors with tools for company engagement, including questions to assess the integration of responsible contracting principles, template letters for corporate engagement and shareholder proposals, and responses to anticipated pushback from companies. These tools can help investors initiate dialogues with portfolio companies and advocate for responsible contracting practices.