The requirement for companies to conduct human rights diligence (“HRDD“) is increasingly being implemented by legislators across the globe.  For example, the EU is expected to adopt its draft corporate sustainability and due diligence directive in 2023. Importantly, the Directive will apply to Japanese companies and their subsidiaries if they meet certain criteria (for further information on the applicability of the directive to Japanese companies, read our earlier blog post here). Japanese companies are, therefore, being required to strengthen their HRDD processes as a result of the legislation of foreign jurisdictions (including the EU).

On 13 September 2022, the Japanese Government published its Guidelines on Respecting Human Rights in Responsible Supply Chains (the “Guidelines“), which recommend that all enterprises engaging in business activities in Japan respect human rights in their supply chains and carry out HRDD.

What is HRDD?

As set out in the United Nations Guiding Principles on Business and Human Rights, HRDD “is a way for enterprises to proactively manage potential and actual adverse human rights impacts with which they are involved” that involves “four core components“, namely:

  • Identifying and assessing actual or potential adverse human rights impacts that the enterprise may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships;
  • Integrating findings from impact assessments across relevant company processes and taking appropriate action according to its involvement in the impact;
  • Tracking the effectiveness of measures and processes to address adverse human rights impacts in order to know if they are working; and
  • Communicating on how impacts are being addressed and showing stakeholders – in particular affected stakeholders – that there are adequate policies and processes in place.

Background to the Guidelines

In October 2020, the Japanese Government published its National Action Plan on Business and Human Rights (the “NAP“), with the aim of enhancing Japanese companies’ understanding and awareness of the increasing international attention to business and human rights, whilst also encouraging Japanese companies to contribute to the protection of human rights. One of the ‘priority areas’ identified by the NAP was the promotion of HRDD.

As part of the follow-up to the NAP, in September 2021, the Japanese Ministry of Economy, Trade and Industry (“METI“) and Ministry of Foreign Affairs jointly conducted a survey on the status of corporate initiatives on business and human rights in supply chains. The survey – which received 760 responses from companies listed in the first and second sections of the Tokyo Stock Exchange – highlighted that only approximately half of respondent companies had implemented any HRDD measures. The survey also revealed that many companies did not know how to implement specific HRDD measures. In addition, research conducted by the World Benchmarking Alliance, published in January 2022, found “a clear gap” between Japanese companies’ “on-paper” commitments to addressing human rights issues and actual actions taken to address such commitments.

In response to these findings, METI hosted a study group on Guidelines for Human Rights in Supply Chains, with the aim of compiling cross-industry guidelines on HRDD. The Japanese Government published the Guidelines on 13 September 2022, having received over 700 public comments from 131 organisations, businesses and individuals.

Content of the Guidelines

The Guidelines recommend that Japanese companies : (1) establish a human rights policy; (2) conduct HRDD; and (3) establish a grievance mechanism to enable individuals to identify concerns and seek remedies for adverse impacts caused by the company. In terms of conducting HRDD, the Guidelines recommend that Japanese companies do so in accordance with the below process:

  • Identification of areas with material risks: companies should identify and assess any actual or potential human rights-related risks at a sector, product/service, geographic and enterprise-level;
  • Prevention and mitigation of adverse impacts: if companies are causing or contributing to adverse human rights-related impacts, they should take preventative or mitigatory measures to address them. If companies are not causing or contributing to adverse human rights-related impacts, they should seek to prevent or mitigate adverse impacts that are directly linked to their operations, products or services through their business relationships;
  • Assessment of the effectiveness of preventative and mitigatory measures: companies should evaluate the effectiveness of their implemented preventative and mitigatory measures in a number of different ways, including by conducting audits of suppliers; and
  • Information disclosure: companies should disclose information annually to stakeholders on how they intend to address adverse human rights-related impacts.

The Guidelines recommend that the above HRDD process should be conducted by Japanese companies: (1) periodically; (2) prior to engaging in new business activities or business relationships; (3) prior to taking any major decisions or changes to their business operations; and (4) in response to, or anticipation of, changes in the company’s operating environment.

An important difference between the Guidelines and the proposed EU Directive is that whereas the EU Directive will implement requirements in respect of both environmental due diligence and HRDD, the Guidelines focus only on HRDD.

Looking to the future

Although the Guidelines do not impose mandatory obligations on Japanese companies, METI has stated that it will promote the Guidelines in order to make businesses aware of them and to encourage their use. That said, given the uptake of mandatory HRDD obligations by legislators across the globe, it is by no means fanciful to suggest that the Guidelines are likely to lay the foundations for the uptake of mandatory HRDD obligations by the Japanese Government in the near future, especially given the fact the Guidelines have been criticised by key civil society organisations. In any event, larger Japanese companies are likely to be subject to the legislation of EU Member States (see above), and will be under pressure from a range of stakeholders to conform to emerging international norms in the area of business and human rights. 

Best-in-class Japanese companies may, therefore, wish to have regard to the Guidelines and similar guidance elsewhere, and take the following steps:

  • Integrate human rights into group policies and strategic planning processes;
  • Disclose how human rights considerations are integrated into strategies, policies and procedures;
  • Carry out a human rights-related impact assessment, which should include steps such as analysing business operations, supply chains and value chains to assess existing and future human rights-related risks;
  • Take proportionate counter-measures, as well as communicate internally and externally on what measures have been taken;
  • Review and reinforce complaints mechanisms and whistleblowing programmes;
  • Ensure the business is well equipped to deal with human rights-related ‘crises’;
  • Review the extent to which the board is equipped to address supply chain risks; and
  • Review the role, resources and expertise of the legal and compliance functions, which should play a key part in addressing these new challenges.

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