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One of the major themes in compliance in recent years has been the rise of Human Rights Due Diligence (HRDD) legislation in Europe and the US. Now, this trend appears to be expanding into the Asia-Pacific region after a recent initiative by the Japanese government. In this blog, we look at the latest developments in HRDD and ESG assessments and explain how companies can expand their due diligence program to capture these emerging risks. We also explain how Nexis® Solutions can help firms to improve their approach to compliance and due diligence.
While HRDD has become a standard requirement for companies in Europe and the US, it is not yet mandatory in any countries in the Asia-Pacific region. That could be about to change after recent initiatives from the Japanese government to promote HRDD, which launched earlier this year. Japan’s government has previously issued guidelines urging companies to monitor human right abuses in their supply chains and disclose any findings. Now, its Ministry of Economy, Trade, and Industry has published a list of risks in different sectors, products, and regions which companies should monitor for. This includes:
The new guidelines urge businesses not only to monitor risks within their third parties and suppliers, but to rank them by urgency. This requires companies to thoroughly understand both the ESG and human rights risks within their operations and activities, and those presented by their third parties and suppliers.
Screening for human rights and ESG impacts is not just about risk management, but companies in Japan that understand their risk exposure can also benefit from new opportunities. For example, the Japanese government announced in May 2023 that only companies who carry out HRDD will be eligible to bid for public projects. This offers a significant incentive because some of these projects are of considerable value. Furthermore, many American and European companies require Japanese companies to demonstrate their HRDD as a condition of doing business together. As a result, one electronics firm in Japan is going beyond regulatory requirements to adhere to the UN’s principles on business and human rights, according to Nikkei.
MORE: 9 steps for better third-party compliance and anti-bribery due diligence
In the last five years, HRDD has become mandatory in a growing number of countries and regions, including:
There is further evidence that ESG due diligence requirements could become the norm in the Asia-Pacific region. For example:
MORE: Due diligence checklist
These latest regulatory developments will mean a significant change for many companies operating in Japan. A 2021 survey found that only 52% of public companies in the country carry out HRDD. Too many still take a traditional approach to compliance which focuses on financial and legal risks, rather than reputational, human rights or environmental risks. The regulatory developments described above, as well as growing societal pressure on companies to have a positive impact on the world, demonstrate that this is no longer sufficient. An effective, modern due diligence process should now cover human rights and other ESG risks.
How can companies gain an understanding of the ESG record of suppliers and third parties? The best approach is to ensure they have access to reliable data covering a wide range of sources, including:
In today’s data-driven world with ever-growing volumes of information available, it is not easy to surface data which is most relevant for assessing a supplier’s human rights and environmental impact. The best compliance operations leverage technologies which instantly screen multiple entities against high volumes of authoritative data in all the areas outlined above. Given regulators’ expectations that companies carry out ongoing monitoring, these systems should also flag any changes to a risk assessment of an entity when new information arises. That is where Nexis Solutions comes in.
MORE: The changing roles of risk managers in the age of data, technology, and AI
In response to growing regulatory interventions, companies must make it a priority to mitigate the financial, legal, reputational and strategic risks of a compliance failure around illicit financing. The best way to do that is to leverage data and technology to strengthen your due diligence process.
Nexis Solutions helps firms to implement a more efficient and effective due diligence process to identify and mitigate human rights and ESG risk by providing companies with authoritative data from the most relevant sources, including:
We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example: