European Commission publishes oil and gas sector guide: corporate responsibility to respect human rights

The European Commission has published guidance for companies in the oil and gas sector on meeting the corporate responsibility to respect human rights under the UN Guiding Principles on Business and Human Rights (UNGPs). The guidance sets out the steps required under the UNGPs to "know and show" a respect for human rights and translates this into the particular context of the oil and gas sector.

The guidance is of relevance to all companies globally in the oil and gas sector. The sector guide will be particularly relevant for personnel engaged in corporate governance and ethics and compliance functions, and whose role includes managing business relationships with contractors, suppliers and joint venture partners. It is also intended to be helpful to groups who are interested in promoting respect for human rights in this business sector, including governments, industry associations, NGOs and trade unions. The guidance builds on a draft published for public consultation in December 2012 (see our e-bulletin on the draft guidance here) and focuses on upstream activities, albeit not exclusively.

Background: understanding the framework of human rights protection in business

The corporate responsibility to respect human rights is one of the "three pillars" of the UN "Protect, Respect and Remedy" Framework on business and human rights.

Under the UNGPs, businesses have a responsibility to respect human rights wherever they operate in the world. This means that businesses should have in place policies, procedures and mechanisms to avoid infringing on the human rights of individuals and address negative human rights impacts with which they are involved.

The UNGPs also set out the duty of states to protect against human rights abuses by businesses through policies, legislation, regulations and adjudication and the need for greater access to effective remedy for victims of business-related human rights abuses. International frameworks such as the OECD Guidelines for Multinational Enterprises, ISO 26000 and the Global Reporting Initiative have been updated to reflect the UNGPs.

Although not legally binding, the European Union is committed to the implementation of the UNGPs and the European Commission's guidance for the oil and gas sector is a step towards this.

The European Commission has also published guidance for employment and recruitment agencies, companies engaged in the information and communications technologies (ICT) sector and small and medium-sized enterprises. For further information on the employment and recruitment sector, please refer to our e-bulletin here.

Oil and Gas: risk factors

A wide range of internationally identified human rights are engaged in the oil and gas context due to the nature and location of oil and gas developments. These include rights of staff, supply chain workers and communities living near oil and gas operations. The guidance recognises that the risks to human rights will depend on both the operating context and the practices of a company's business partners, including governments and joint venture partners.

The guidance identifies a number of human rights risk areas in the oil and gas sector. These include:

• operating in an area where there is inadequate regulation and oversight of public security forces;
• working with smaller contractors who may not have sufficient awareness of human rights risks or lack the capacity to address these risks;
• the need to build leverage into joint venture partnerships to manage and address human rights issues that may arise; and
• legacy issues, especially those related to conflict and humanitarian crises.

Addressing the risk: putting business responsibility for human rights into practice

The guidance identifies six core elements of the responsibility to respect human rights under the UNGPs and explains how each applies to the operations of a company in the oil and gas sector. The core elements are:

• having a publicly available human rights policy commitment to respect human rights and having processes for embedding that commitment into the company's culture;
• assessing actual and potential human rights impacts by understanding the operating context, drawing on expertise and consulting with affected stakeholders;
• integrating the findings and acting to prevent or mitigate the impacts;
• tracking how effectively impacts are addressed by developing indicators and incorporating stakeholder perspectives;
• communicating how impacts are addressed; and
• remediating negative impacts the company has identified it has caused or has contributed to, including by establishing or participating in effective operational-level grievance mechanisms.

The guidance explains that assessing, integrating, tracking and communicating (which together are what the UNGPs refer to as “human rights due diligence”) should start at the earliest pre-contract stages of a project's lifecycle and continue through operations, to the project's decommissioning and post-closure stages. It emphasises that human rights due diligence should be on-going and not a one-off impact assessment undertaken at the start of the project or saved for annual reports.

Practical steps for managing human rights risks in business relationships

Under the six core elements, some key practical considerations for companies stand out.

Companies need to commit to, develop and review policies which explain their expectations of staff, business partners and others in its value chain regarding respect for human rights. Companies should therefore review existing policies to ensure that they meet the requirements of the UNGPs and consider implementing further policies and procedures, as necessary to ensure compliance.

The commitment to its human rights policies should be embedded into the company's relationships with its business partners from the outset and should not be seen as a "negotiable extra". As well as integrating the management of human rights risks into new contracts, companies should assess the risks of negative human rights impacts in their existing business relationships with governments, joint venture partners and contractors and suppliers and use leverage to address any human rights impacts identified. The guidance also recommends that human rights risks should be assessed prior to acquiring an asset, licence or a company.

Companies should also engage in meaningful consultation with affected communities, including vulnerable or marginalised individuals, to help identify the potential and actual human rights impacts of operations. Putting in place an effective operational-level grievance mechanism to address complaints from communities is also recommended and could help prevent conflicts escalating.

The guidance also suggests that oil and gas companies would benefit from formally reporting on human rights performance (e.g. in annual reports or investor updates), even if this goes further than the minimum requirements of national state law. There has already been a move by some legislatures to require some companies to report on their human rights policies (see for example, the UK Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, expected to be in force from 1 October 2013). For further information on human rights in narrative reporting please see item 2 of our e-bulletin here.

The future of human rights in business

The European Commission guidance reflects the increasing pressure on companies to address human rights risks linked to their business activities and the growing financial, legal, reputational and operational cost of failing to do so (including the risk of claims being brought by NGOs under the complaints mechanism of the OECD Guidelines for Multinational Enterprises).

The UN, European Union and a number of national governments, including the US and the UK, have committed to the implementation of the UNGPs and the UK national action plan on business and human rights is expected to be published shortly.

Financial institutions providing funding to businesses will put greater emphasis on human rights considerations in the future, as a consequence of aligning their own policies and procedures to meet their responsibilities under the UNGPs. For example, the recently published third version of the Equator Principles expressly refers to human rights in the context of project financing (see our e-bulletin here for further information on this). Shareholders and business partners will also increasingly require companies to demonstrate a respect for human rights as they take steps to limit their exposure to human rights risks.

In summary, it is clear that business and human rights is an evolving area of risk and compliance for companies and that complying with national law may not sufficiently demonstrate a respect for human rights if the laws relating to labour rights, environmental protection and rights of affected communities are absent, weak or unenforced.

The European Commission's sector guide on implementing the UN Guiding Principles on Business and Human Rights can be found here.

For further information, please contact Louise Moore, Partner, Stephane Brabant, Partner, Johanna Hull, Associate, or your usual Herbert Smith Freehills contact.