Clifford Chance

The due diligence guidelines aim to assist companies operating in Japan to identify and prevent human rights-related abuses in their global supply chains.

On 13 September 2022, the Japanese government published a set of non-binding guidelines on "respect for human rights" in responsible supply chains (the Guidelines) that are intended to provide practical guidance on the steps that Japanese companies should take to respect human rights.

Background

The Guidelines are based on international standards relating to respect for human rights, including the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. The Guidelines are subject to future review and revision as international standards develop.

The Ministry of Economy, Trade and Industry (METI) published the draft Guidelines in August 2022. The public comments on the draft and the government's answers thereto can be found here (Japanese only).

The Guidelines build on points raised in Japan's 2020 National Action Plan on Business and Human Rights (NAP) – which stated that the government expects all Japanese enterprises to adopt human rights due diligence (HRDD) processes that are aligned with international standards – by offering practical guidance on the steps that companies should take to give effect to those standards. Read more about the NAP in our briefing here.

The Guidelines also respond to growing calls by Japanese enterprises for practical guidance on HRDD, reflected in a Questionnaire Survey on the Status of Human Rights Initiatives in the Supply Chains of Japan Companies published jointly by METI and the Ministry of Foreign Affairs last year.

In addition to noting the importance of the corporate respect for human rights, the Guidelines expressly acknowledge the opportunities and risks associated with human rights for individual companies and the positive impacts that increased corporate respect for human rights could have on competitiveness and corporate value within Japan. For example, the Guidelines explain that efforts to respect human rights can mitigate certain management risks, such as the boycott of products, and bolster a company's overall image and reputation as a business partner, investment and employer.

What enterprises do the Guidelines target and what steps do the Guidelines recommend?

The Guidelines target all companies (including self-employed proprietors), wherever incorporated and regardless of size, that carry out business activities in Japan. They also apply to companies that have a "supply chain" in Japan, whether "upstream" (related to the procurement and securing of raw materials and resources for a company's products and services) or "downstream" (related to the sale and consumption of the company's products and services).

Companies are recommended to formulate a human rights policy that meets the objectives set out in Section 3 of the Guidelines, which includes ensuring that the policy is approved by management, including the heads of the company; that it clearly states the company's expectations for the respect for human rights of its employees, business partners, and other stakeholders that are directly involved in the company's business, products or services; and that the policy is open to the public and known to all employees, business partners and related parties.

Companies are also encouraged to consider the specific human rights that might be adversely impacted by their activities before formulating a tailor-made policy to identify, mitigate and remedy such impacts. The policy should then be disseminated throughout the company.

The Guidelines recommend that companies carry out HRDD. The starting point is to identify and assess the adverse impacts on human rights in relation to which companies are or may be involved. "Adverse impacts" are those that a company's activities directly or indirectly cause or contribute to, or to which a company is linked through its business relationships. The HRDD should also take account of the business areas where risk is significant, including sector risks, regional risks, risks associated with products and services (including those involving raw materials) and risks inherent in companies (such as those that have previously engaged in poor governance). HRDD will need to be updated continuously, particularly as new business activities or relationships arise.

Companies should take steps to prevent and mitigate any adverse impacts identified through HRDD (including ceasing activities that cause or contribute to negative effects or, if difficult to do so for legal or contractual reasons, preparing a timetable that sets out the suspension of that activity in stages). Where a company's business activities do not cause or facilitate an adverse impact, but an impact is directly related to its business, products or services, the company should exercise influence over the company creating those impacts to take the necessary mitigation measures. It may be appropriate to suspend a business relationship with a supplier entirely, if it becomes clear that there is no reasonable prospect of that supplier improving its activities so as to prevent or mitigate its adverse human rights impacts. However, suspension of business should be used as a last resort.

Finally, companies should establish grievance mechanisms that meet the requirements in Section 5.1 of the Guidelines. This includes establishing a mechanism that is open to all stakeholders, is transparent and focuses on dialogue with stakeholders as a means of addressing and resolving complaints.

Commentary

While not legally binding, the Guidelines are an important step in both promoting the benefits of adopting an HRDD framework and providing helpful guidance on the practical measures that enterprises operating in Japan should take to be aligned with international frameworks.

As demonstrated by its NAP, the Japanese government is increasingly focused on the management of corporate related human rights impacts. This could mean that the HRDD principles set out in the Guidelines might be enshrined in legislation at some point in the future. Mandatory HRDD regimes are emerging in other countries and regions (see, for example, our blog on the EU's proposed Directive on Corporate Sustainability and our briefing on mandatory HRDD regimes across the globe). Organisations such as the Principles for Responsible Investment are recommending such action in Japan.

Businesses operating in Japan that start to implement the steps proposed in the guidance now should find themselves well prepared if and when such legislative changes take place.