Renewable energy supply chains and the case for leverage over divestment

Andy Symington 

The importance of human rights due diligence as a means of detecting the risk of negative impacts on rights in corporate supply chains is increasingly being recognised by companies. This is particularly relevant to supply chains for renewable energy technology. However, the corporate instinct to divest from problematic suppliers does not serve to eliminate or mitigate the human rights impacts and may worsen them; using leverage, where possible, to improve the situation is a better strategy. 

In the ten years that have passed since the launch of the UN Guiding Principles on Business and Human Rights (UNGPs) in 2011, much of the global dialogue on the subject of companies and their impacts on rights has coalesced around them. One of their key components, human rights due diligence (HRDD), has gathered increasing momentum around the world as a consequence. 

Nature of human rights due diligence 

HRDD operationalises the UNGPs’ requirement for businesses to respect human rights by focusing on the risk of harm to people – rather than on the risk of harm to business that is the focus of normal due diligence – in companies’ operations and supply chains. This type of due diligence has, in recent years, been mandated by law in certain jurisdictions, and promoted by other pieces of legislation imposing reporting requirements – Australia’s Modern Slavery Act 2018 (Cth) is an example of the latter. It is also increasingly being employed by companies as they seek to gain understanding of actual and potential human rights impacts caused or contributed to by their activities or those of their suppliers. As well as for compliance with legislation, due diligence may be conducted in the context of public reporting on sustainability or environmental, social and corporate governance (ESG), for example, or to fulfil requirements imposed by customers, lenders, investors or stock markets. 

HRDD typically involves detailed mapping of company supply chains in order to better comprehend where risk to people might lie. So far, so good for the influence of the UNGPs. But what happens when a company detects human rights risk, or negative rights impacts that are already occurring, in its supply chain? 

The impacts of divestment following HRDD 

Many businesses now realise that negative human rights impacts in their supply chains can result in significant reputational damage for the company. Risk to people often thus directly translates to risk for business. While this is an important validation of the UNGPs’ position, it also means that the first instinct of many companies on detecting the risk of harm is to change supplier or divest from investments. 

This strategy may be effective in eliminating that risk to people from a company´s supply chain but it is unlikely that the victims of the rights impact will feel the benefit; it may, in fact, worsen the situation for rights-holders. This point was strongly made by representatives of Bangladeshi garment workers in the wake of the Rana Plaza disaster in 2013: for European and United States (US) companies to boycott Bangladeshi-made clothes in order to cleanse their supply chains of labour rights risks would leave workers without their livelihoods and at the mercy of less scrupulous companies. In general, the garment industry heeded the workers and, rather than disengaging, got involved in order to improve conditions on the ground. 

However, in the context of the sustainable energy transition, some of these lessons appear to have been forgotten. Recently, some electric vehicle companies have been working to remove Congolese cobalt from their lithium-ion battery supply chains and kickstarting ‘sustainable’ European lithium projects to guarantee supply free of the association with harmful environmental and Indigenous rights impacts associated with some North and South American producers. It is understandable that companies dealing in renewable technology have a need to be seen by the public as sustainable. However, affected rights-holders would be better served not by divestment but by vehicle and battery manufacturers engaging with mining companies and the communities themselves in order to find a common strategy to mitigate negative rights impacts and promote positive ones. 

Leverage and the requirements of the UNGPs 

The UNGPs are actually quite clear on the matter of divestment in Principle 19, only countenancing disengagement as something to consider when efforts to engage with the supplier have not changed the situation, or in situations where no leverage exists. Yet in the case of most minerals in renewable technology supply chains – such as the examples of lithium and cobalt given above – leverage most certainly exists. In fact, there are some existing multistakeholder projects underway involving mining companies, communities and customers downstream in the supply chain; these initiatives seek to guarantee a more sustainable supply without abandoning rights-holders by divesting. 

However, the requirement of the UNGPs that companies first attempt to use their leverage to improve rights outcomes in their supply chains is often ignored. This is not helped by the fact that reputational damage is rarely the result of a nuanced analysis by the public. As consumers we are easily persuaded by media coverage to believe that all Congolese cobalt is mined by children or that all South American lithium projects cause desertification. These are simplifications that derive in part from the difficulty of penetrating complex supply chains and in part from the desire to take a broad-brush approach to risk. However, they are simplifications that do not serve the rights-holders who are, after all, the reason for the whole HRDD enterprise. 

That the UNGPs have had notable success in disseminating an awareness for the need for HRDD to increase transparency of corporate supply chains is evident. Yet, if we are to achieve a ‘just transition’ to a sustainable energy future, it is important that companies whose technology is driving that transition acknowledge that the risk to rights-holders does not disappear when they are removed from a supply chain. Adhering to the UNGPs’ requirement for companies to engage with suppliers on these issues and use their leverage – along with genuine engagement and partnership with the rights-holders themselves – is the best way to guarantee those rights. A transition that delivers environmental benefits without realising social ones cannot be considered just.  

Andy Symington is a business and human rights consultant with KPMG Banarra and a PhD candidate at UNSW Law & Justice, investigating human rights dynamics in renewable energy extraction and supply chains.