Comment: UK companies expected to report on their human rights impacts

Changes to the UK Companies Act 2006 which came into force in October 2013 require larger UK companies to report on their human rights impacts.

The main change to the Act is to introduce the requirement on Directors to prepare a strategic report as part of their annual report.

Within that strategic report, Directors are required to report to the extent necessary for an understanding of the development, performance or position of the entity's business, information about social, community and human rights issues.

As recently as June 2014, the Financial Reporting Council (FRC) published guidance on the strategic report. In this guidance, in addressing the requirement to report human rights issues where relevant, the FRC suggests inclusion of the following items:

(a) the entity's policy in respect of the matter, together with a description of any measures taken to embed the commitment within the organisation;

(b) any process of due diligence through which the entity:
(i) assesses the actual or potential impacts arising from its own activities and through its business relationships;
(ii) integrates the findings from these assessments and takes action to prevent or mitigate adverse impacts;
(iii) tracks the effectiveness of its efforts; and
(iv) communicates its efforts externally, inparticular to affected stakeholders ;and

(c) the entity's participation in any processes intended to remediate any adverse effects that it has caused or to which it has contributed.

And so the FRC has brought the expectations on larger UK businesses in line with the UK's National Action Plan on the implementation of the UN Guiding Principles on business and human rights, and with the Guiding Principles themselves.

Of course the wiggle room is in whether the Directors consider human rights issues to be relevant and material, and there is some way to go in making the bridge between commercial materiality and human rights saliency. To date, at best most Boards would recognise a degree of potential reputational costs if out of align with significant stakeholders – but few understand the shift in perspective brought by the UN Guiding Principles to the significance of impacts on affected groups. But a substantial step forward nevertheless.

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