ESG risk and the tech and automotive sectors: why Tesla's proposed "solution" to the supply chain pinch may not be for everyone

Human rights risk in the mining sector is very well-known and established. In essence, mining operations in developing countries attract situations in which human rights abuses may occur.  International mining companies operating in these jurisdictions will generally have committed to adhere to internationally recognised human rights principles including the UN Guiding Principles ("UNGPs"), the OECD Guidelines for Multinational Enterprises ("OECD Guidelines") and the Voluntary Principles on Security and Human Rights ("Voluntary Principles").  By committing to adhere to these principles, international mining companies will be obliged to (i) avoid causing or contributing to adverse human rights impacts through their activities and (ii) seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations.

Practically, however, it can be very difficult to manage on-the-ground factors which result in human rights impacts when the international entity is far removed (both physically and commercially) from those operating the mine. The EU is seeking, not for the first time, to address exactly this problem via legislation which would require extensive due diligence into the supply chain, as a condition of doing significant business in the EU (see further information below on the draft Corporate Sustainability Due Diligence Directive).

The Conflict Minerals Regulation, enacted in the EU in 2017 but effective only in 2021, was a limited precursor to the recent proposal on sustainability due diligence. It focuses specifically on supply chains for certain metals (gold, tantalum, tin and tungsten) originating in conflict-affected and high risk areas ("CAHRA"), where armed groups often use forced labour to mine the metals or minerals to fund further conflicts. Entities importing covered metals or minerals containing them into the EU must understand the supply chain and ensure that they did not inadvertently fund human rights abuses through their purchases. The EU's list of CAHRAs is indicative, non-exhaustive and regularly updated, so businesses reliant on these metals, where sourced from Africa or South America in particular, should bear in mind the associated risks. See our 2020 briefing for a summary of the Regulation's key requirements.

In addition to forced labour, other types of adverse human rights impacts that are typically seen in mining operations include physical conflicts between security personnel and local workers, conflicts relating to land use, harm to indigenous communities, child labour and modern slavery. Environmental risks are obviously also key. International mining companies will need to have robust strategies in place, consistent with recognised human rights principles, to minimise and mitigate the adverse impacts from their operations, including specialist corporate policies and associated procedures.

The reality is, while international mining companies may have collections of policies and procedures to address the human rights impacts of their operations, allegations of adverse human rights impacts in and around mining operations are very common. While the impacts may be local in nature, the international scope of many mining companies means that alleged victims of human rights abuses are increasingly seeking compensation in the jurisdictions in which the international mining companies are headquartered, e.g. England. 

This type of transnational tort claim is commonly referred to in England as either (i) parent company liability or (ii) value chain liability. In recent years the English Supreme Court has allowed ambitious transnational claims to overcome early procedural hurdles and gain traction in this jurisdiction.  None of these claims have yet reached trial, and there is still a great deal of uncertainty in this area.  However for sectors where UK-domiciled businesses have foreign operations with either human rights risk or environmental risk, attention should be given to this developing area of the law.  For more information on these two types of claims, see figure 1. 

In addition to the development of transnational tort claims, UK businesses with EU operations should be aware of the European Commission's proposal for a directive on Corporate Sustainability Due Diligence ("CSDD") measures. Under the proposal, entities would be required to identify and prevent, end or mitigate potential and actual environmental and human rights impacts in their supply chain. EU entities with more than 500 employees and a net worldwide turnover of more than EUR 150 million are in scope, though for entities active in high risk sectors (which includes mining), those thresholds are reduced to 250 employees and EUR 40 million (provided at least 50% of turnover is generated in the high risk sector). Non-EU entities are also covered, where they have EUR 150 million of turnover generated in the EU, or EUR 40 million in the EU for those active in high risk sectors (where 50% of net worldwide turnover Is generated in the high risk sector). See our briefing for further details. Tesla may find benefits in retaining tight control of its supply chain via extreme vertical integration when it comes to identifying and reporting on impacts under this directive.

Businesses, both based inside and outside the EU, will need to report environmental, social and governance impacts of their activities, including those identified under the CSDD, under a related proposal – the Corporate Sustainability Reporting Directive ("CSRD"). Reporting will be based on standards currently under development which, according to exposure drafts consulted on earlier this year, could be quite burdensome. See our briefing for the further details.

While soft law human rights frameworks such as the UNGPs, the OECD Guidelines and the Voluntary Principles are relatively well established and have been adopted by many businesses in the mining sector, there is increasing focus on whether corporate activities are actually compliant with those frameworks. If they are not, businesses should expect to come under intense reputational pressure and face regulatory intervention and/or litigation. Tech companies and automobile companies that are trying to do the "right" thing by addressing climate change (e.g. via the introduction of electric vehicles) and attesting to their sustainability credentials, need to be wary that they may be making themselves easy targets if they make commitments that they fail to live up to. 

Putting ever-increasing amounts of ESG-related information about their businesses and value chains into the public domain will inevitably lead to attempts to hold entities accountable from a number of angles and actors – not just regulators. The volume of corporate ESG-related disclosures has increased substantially over recent years, with notable drivers being TCFD reporting, the EU SFDR and Taxonomy Regulation and the Modern Slavery Act.  With the introduction of the CSDD and the CSRD, this will increase yet further.  Both in the UK and globally we are seeing activist litigants leveraging both these disclosure laws/regulations and reputational risk in order to pressure high-profile businesses to push their agenda. Organisations should avoid at all costs viewing ESG disclosures as "soft" statements and approaching them as if they were corporate marketing/PR. These very statements may be used against them in ESG-related litigation, such as parent company liability and value chain liability claims, as well as "greenwashing" actions.  It may be a particularly challenging exercise for a business to balance highly prescribed mining-related disclosures alongside the ESG expectations of consumers purchasing electric vehicles. 

Irrespective of the sector in which a business operates, one important means of managing ESG-related risk well is through robust and holistic ESG governance, compliance and monitoring systems, and legislation such as CSDD will eventually make it a legal duty to operate in accordance with such a system. The nature of these will differ from business to business, but it is clear that organisations in all sectors need to give thought to how they identify and implement their ESG objectives, and how they manage associated risk. Businesses need to be aware that centralised management of ESG risk across a corporate group may attract allegations of liability at the centre for alleged ESG-related harms, even where those alleged harms are connected to the activities of subsidiaries or even third parties in a commercial value chain. Businesses should consciously assess how they want to balance this risk with their ESG governance and compliance objectives.

For more on key ESG risks and trends, see our recent article in the Dispute Resolution Yearbook 2022.