[ PRI response to METI's invitation for public comment on Draft Guidelines on Respect for Human Rights in Responsible Supply Chains ] August 2022

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The PRI welcomes the opportunity to provide comment to this consultation on the Draft Guidelines on Respect for Human Rights in Responsible Supply Chains issued by METI, and supports the Draft Guidelines’ aims to help companies better manage sustainability-related matters in their own operations and value chains as regards human rights and social issues.

The world is experiencing many systemic issues impacting or arising from environmental, social, and financial systems – e.g. climate change, human rights issues, and widening inequality. Japanese political and private-sector leaders have responded to these global challenges through long-term commitments to social and environmental outcomes that better enable Japan to meet the needs of all whilst keeping within planetary boundaries. Chief among these are net-zero commitments pursuant to the Paris Agreement and commitments to deliver on the Sustainable Development Goals (SDGs).

Issues such as human rights harm and intersectionality with other issues such as climate change have relevance both in terms of the financial interests of shareholders and the expectations and rights of other stakeholders. In addition to understanding potential financial risks and opportunities, a focus on social, environmental, governance risks and impacts allows both companies and their underlying investors to:

- Identify opportunities, such as through changes to business models, across value chains and through new products and services; - Prepare for and respond to legal and regulatory developments;

- Protect their reputation and licence-to-operate particularly in the event of negative outcomes from operations;

- Meet institutional commitments to global goals such as the Sustainable Development Goals (SDGs), and communicate progress towards meeting those objectives; and - Minimise negative impacts and increase the positive impacts of products, services and operations.

As a result, a substantial growing number of investor PRI signatories are now seeking to understand how companies consider these issues, and encourage a more holistic approach for the maximisation of social, environmental, as well as economic/financial performance. In this respect, investors are increasingly seeking to understand and manage the sustainability outcomes of their investment decisions, as outlined in the report A Legal Framework for Impact. That includes key ESG topics, such as human rights.

Expectations around human rights and social issues have been driven not only by growing visibility and urgency around many human rights issues, but also by a better understanding of investors’ role in shaping real-world outcomes, and of their responsibility to do so – across all their investment activities. We support the Draft Guidelines’ strong alignment with international guidelines such as the UN Guiding Principles on Business and Human Rights (UNGPs) as well as the OECD Guidelines for Multinational Enterprises (OECD Guidelines) which set out companies’ responsibility to conduct due diligence to identify, prevent and mitigate, account for and remedy harm in relation to human rights, environmental issues, and anti-corruption.

The Draft Guidelines accurately target all businesses regardless of sector or size, and it is encouraging that they recognise the systemic nature of human rights issues and expectations for business enterprises to address them, which is useful for investors in considering real-world outcomes. It is also positively noted that the Draft Guidelines include reference to and mention of human rights issues in conflict-affected areas and the recommendations outlined by the UNGPs in such a context.

The focus of the Draft Guidelines on harm reduction including continuous consultation and engagement with stakeholders, will support investor’s sustainability assessments, enhance risk analysis and processes for impact mitigation, and provide greater understanding of company operations, throughout the value chain. It will enable responsible investors to conduct better-informed engagement with investees, to respect human rights and give due consideration to environmental issues.

However, to ensure a positive impact and enable investors to better manage their own exposure to sustainability issues, we recommend improvements for these Draft Guidelines.

- Definition and framing of ‘Human Rights’. “Human rights” is a complex and highly intersectional issue. In recognition of this, the definition and scope of “human rights” should be explored in greater detail and depth to adequately set the foundation for the following sections. The Draft Guidelines could benefit from a clearer definition of adverse human rights impacts, in line with the UNGPs and OECD Guidelines, outlining the concept of severity to include reviewing the scale of the outcome, the scope, and the irremediable character. Embedding the concept of severity into the introductory sections of the Draft Guidelines would be helpful to assist companies in determining appropriate actions throughout the due diligence process. Additionally, it should consider exploring the interconnectedness and relationship between human rights and other issues such as widening disparities, poverty, climate change and other environmental problems.

- Coherency and alignment with existing national and international instruments. The Draft Guidelines could be made more user-friendly by providing coherence and alignment with existing national and international instruments. The Draft Guidelines do not mention or explain their relationship with other existing instruments that are relevant to human rights due diligence such as Japan’s Corporate Governance Code, Sustainability Linked Loan Guidelines and Social Bond Guidelines, and we would recommend that these be referenced. Doing so would ensure better usability of the Draft Guidelines for companies operating in Japan that interact with these other policy frameworks. We recommend that the METI Draft Guidelines build on international standards and movements toward mandatory legal requirements to ensure alignment with existing laws internationally such as the French “Duty of Vigilance” law and Norway’s Transparency Act, as well as regimes such as the EU’s approach to Corporate Social Responsibility, the minimum safeguards of the EU Environmental Taxonomy and the Regulation on Sustainability-Related Disclosures in the Financial Services Sector. This coherence is also underlined by the G7 Communique Ensuring Respect for Human Rights and Labour and Environmental Standards in Corporate Operations and Value Chains.

- Scope of the Draft Guidelines. The Draft Guidelines rightly state that all business enterprises engaging in business activities in Japan should comply with the Draft Guidelines regardless of their company size, sector, etc. However, the current scope of the Draft Guidelines is limited to only business enterprises. To ensure comprehensive coverage and align with global best practice, the due diligence duty should also explicitly cover the financial sector (including financial loans). Financial sector entities are bound by the same international standards as has been clarified by both the UN Office of the High Commissioner on Human Rights and the OECD. The PRI supports this understanding as well. The Draft Guidelines should therefore provide greater clarity on how they are relevant to investors and how they can be applied in their context.

- Due diligence. Conducting human rights due diligence is a crucial process to identify, assess, mitigate and prevent negative human rights impacts. We have observed that lack of decisionuseful information is a common challenge faced by businesses and investors in incorporating human rights considerations in their business and investment activities. Exercising due diligence will make more data on adverse human rights impacts available, thereby enhancing their ability to carry out their activities more responsibly. Furthermore, human rights issues will manifest themselves differently across sectors and geographies, which will be more evident through rigorous human rights due diligence. The Draft Guidelines would benefit from the inclusion of additional guidance for Japanese companies on due diligence processes. This should be based on existing international standards such as the OECD sectoral due diligence guidance for multinational enterprises around agriculture, apparel and mineral supply chains. We also suggest the Draft Guidelines include examples of how companies and investors in and outside Japan are carrying out human rights due diligence. Case studies of how human rights due diligence has been carried out by investors across different asset classes can be found in PRI’s Human Rights Case Study database. The database includes Nomura Asset Management, a Japanese investment manager.

- Enforcement of the Guidelines. Currently, the Guidelines are not legally binding. We recommend that METI establish a legal duty for companies and investors to undertake human rights due diligence. At an international level, beyond Japan, we observe several examples of human rights due diligence responsibilities being converted into domestic law, and we would recommend the Draft Guidelines to not only build on international standards but also ensure alignment with these existing laws. A clear legal due diligence requirement would provide clarity to Japanese companies, investors and other stakeholders and foster a level playing field within the country as well as across jurisdictions. At the very least, we recommend that METI commit to reviewing the implementation of the Guidelines within three years’ time, with the intention of considering whether a binding legal requirement should be introduced.

More detailed answers and recommendations below are in response to selected sections from the consultation that draw on specific expertise and evidence from the PRI’s work.

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