Monday, December 4, 2023

Malaysia shows how the private sector could lead on due diligence

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If the rumors and press leaks are to be believed, the European Commission’s long-awaited proposal on Corporate Sustainable Governance is once again delayed. First expected in June, then December, and now … well, who knows. There are even suggestions – probably mischievous briefing rather than hard reality – that the proposal may be ditched altogether.

That possibility would uncork an intriguing debate across Europe. As the world’s largest single market, the EU has the ability to change behavior in exporting countries. Would the lack of strong Due Diligence regulations for labor rights, dent the EU’s moral authority around the world and set back the cause of global human rights? Or would it be a lucky escape for European businesses who would have suffered under the red tape of the new measures? 

Perhaps, the answer is both. The idea has supporters – and detractors – from across the political spectrum and within many Member State governments. Interestingly, these shifting coalitions are not always in their traditional corners. Many conservatives across Europe wish to see more regulation on labor issues, as a strong message to the Chinese Communist Party that the EU will no longer give a free pass to forced labor in supply chains in and around Xinjiang province. Many NGOs, Greens and civil society advocates favor the same restrictions, but with a stronger moral dimension as the motivation for so doing, rather than the geopolitical or security motivations favoured by many on the center-right.

The primary argument against the Commission’s planned measures is simple. The proposals are expected to add significant cost and bureaucratic burdens to European importers, by requiring due diligence to be conducted to ensure that all labor and human rights standards were adhered to throughout the supply chain. Pandemic-hit European businesses (and those taking an additional hit from growing global protectionism) need these new costs and red tape like they need a hole in the head.

As with many of the current Commission’s plans – the Carbon Border Adjustment Mechanism for instance – the plans would not only install new trade barriers at Europe’s border, they would encourage and validate the cause of global protectionism and economic nationalism more broadly. For a continent that relies on global trade, that could be a costly error of political judgment.

The von der Leyen Commission has been clear, though, that it is committed to these Due Diligence measures, both on environmental issues and on labor & human rights. The delay of the proposal is therefore doubly embarrassing as other countries move further and faster, and the Commission’s role as the self-appointed benevolent global regulator is weakened.

In the U.S., under both Trump and Biden Administrations, human and labor rights regulations have been considered a significant priority. The U.S. Customs & Border Patrol has the broad executive power to block imports if they are considered to be in breach of the U.S.’ labor and human rights standards. In recent years, products ranging from cotton to sheepskin, to rubber gloves, have been the subject of Withhold Released Orders that act as an ad hoc customs barrier for entering the U.S. market.

In exporting countries – who face seeing their products banned from the U.S. (and possibly, in future, the EU) market – self-regulation and reform is advancing at pace. The Malaysian Government has recently committed to ratifying key International Labor Organization (ILO) conventions, and the country’s palm oil association (MPOA) announced last week a new Responsible Employment Charter, committing companies to abide by standards of the ILO and the International Organization for Migration, as well as other international benchmarks.

What is fascinating about this development is the leadership of the country’s private sector -the MPOA is comprised only of private companies and GLCs, no officials or Ministers. The Charter commits to ending the practice of recruitment fees, for example, which are often an indicator of forced labor or human trafficking. Other industries, such as textiles, which also have significant exports to the U.S. and Europe, could learn from this approach rather than waiting for government regulation.

When, or whether, the Commission will publish its Sustainable Corporate Governance proposal remains to be seen. If so, the self-regulation and elevating standards that are emerging in other parts of the world, make a convincing case that the Commission does not need to be too aggressive with its regulations. It may even be an opportunity to learn from others – such as Malaysia’s private sector-led reforms.

Europe has a surfeit of business associations, roundtables, chambers, and other groups that could take the lead on developing private commitments, standards and charters that could match up with those being developed in exporting countries. The vibrancy and innovation of the market would almost certainly make a better tool for the needed reforms, much more so than the unwieldy clunking fist currently employed by the Commission.

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