Corporate social responsibility calls for both legislation and voluntary action

Which is more effective, the carrot or the stick? In complex situations, both are needed. The implementation of corporate social responsibility calls for both legislation and voluntary action, Doctoral Researcher Juho Saloranta from the University of Eastern Finland estimates.

Saloranta is writing his doctoral dissertation in corporate social responsibility law, having become familiar with the topic at the heart of the EU’s decision-making, in Brussels. The fundamental question of corporate social responsibility law, i.e., how companies take human rights, environmental issues and social responsibility into consideration in their production and manufacturing, dates back centuries, all the way to the history of colonialism.  Steps are now being taken to implement corporate social responsibility through legislation.

“Corporate social responsibility has its roots in voluntary social responsibility, where companies are acting for the greater good by, for example, donating money to charities. There are also many voluntary standards companies can comply with in order to be increasingly responsible. Indeed, responsibility has gained more footing, but not as much as companies’ role in our society. For instance, Google and Facebook already exercise more power than small nations. This is why corporate social responsibility needs to be brought under binding legislation, to be supplemented by various voluntary corporate social responsibility guidelines, reporting standards and sector-specific tools. This change is inevitable, and hopefully fast enough,” Saloranta says.

Enacting laws relating to corporate social responsibility is a much-discussed topic both nationally and internationally. In Finland, the objective of enacting a corporate social responsibility act is recorded in the Government Programme, and corporate social responsibility legislation is also promoted on EU level. In Europe, France already has a corporate social responsibility act, and the German government is committed to regulating corporate social responsibility.

“The introduction of EU-level corporate social responsibility legislation would be a game changer.  Globally, the European Union is a powerful regulator: If a company wishes to enter the EU market, it also needs to comply with EU regulations,” Saloranta points out.

Consumer decisions matter, politicians should make decisions

Corporate social responsibility regulation is based on the UN Guiding Principles on Business and Human Rights. According to these principles, states have the duty to protect human rights, companies are responsible for respecting human rights, and victims of human rights violations must have access to remedy, such as protection and compensation for damages.

There is great variation between different countries in how well the principles are upheld: In Finland, human rights are well protected, but in Bangladesh they’re not. There is also variation in the level of legislation that governs corporate social responsibility.

“Companies’ responsibility for respecting human rights can be interpreted to mean that companies should at least refrain from violating them. If, however, a company causes harm, it should guarantee access to remedy, such as paying victims for damages.”

However, fear of sanctions can raise companies’ threshold to exploring the responsibility of their supply chains.

“Companies should have reasonable opportunities to uphold human rights. There has been talk about ‘a safe harbour’ that would protect companies against too severe consequences, were they to take sufficient action to promote human rights at the sources of their supply chains.”

Nowadays, companies seek to identify weaknesses in their corporate social responsibility through sustainability reporting. Saloranta would like to see an increasingly active approach to these reports.

“Companies aren’t always too keen to look into how responsible and sustainable they are. If they are aware of risks and yet speak to the contrary, they’re doing greenwashing. Risks should be assessed systematically instead of merely copying standardised code of conducts and committing to them on a general level.”

The majority of Finnish companies are generally committed to respecting human rights, but there is great variation in the level of that commitment, according to the final report of the SIHTI project, which examined how Finnish companies are fulfilling their human rights responsibilities in relation to expectations set out in the UN Guiding Principles on Business and Human Rights.

“There are few companies that take human rights into consideration on a large scale, and there are plenty of companies that talk about respecting human rights without really doing anything about them.”

Issues relating to responsibility span the entire supply chain from manufacturing to consumers, for instance from a factory in Asia to a Finnish store, with all the logistics also involved. But what would having a corporate social responsibility act mean for Finnish consumers?

“Consumers would have access to an increasing number of responsible, sustainably manufactured products. The most responsibly and sustainably manufactured products would also be the cheapest ones, because failure to comply with legislation would be reflected on price. In addition, consumers wouldn’t have to find out about what different certificates awarded to products mean. For instance, the majority of chocolate manufacturers continue to use child labour, but this isn’t necessarily communicated to consumers via product certificates.”

Consumer behaviour plays an important role in changing companies’ social responsibility, but Saloranta would like to see more attention being directed at politicians and legislators.

“Politicians should take action first.”

The pandemic has revealed problems in supply chains

One consequence of the coronavirus pandemic is that it has raised headlines about corporate social responsibility. The pandemic has disrupted many global supply chains and their management. The European Commission began addressing the matter last spring by drafting a proposal on EU-level due diligence legislation. The proposal is ambitious and would involve the observance of human rights and environmental issues throughout supply chains, and also outside the borders of the European Union.

“The pandemic has highlighted human rights issues where supply chains start, and crammed factories are good breeding ground for infectious diseases. If companies paid attention to their employees’ working conditions, they could increase their productivity and profitability.

The responsibility of multinational companies’ supply chains has an effect on national security of supply. The University of Eastern Finland participates, under the lead of Mikko Rajavuori, in the Academy of Finland’s LEXSECURE consortium, which studies the legal foundations of global supply chains and what could be done to ensure secure supply of critical goods in times of global crises.  Saloranta participates in the consortium’s work.

“The project seeks to map exceptions in global supply chains and find ways to prepare for them. Responsibility increases the transparency of transnational supply chains and prevents states from trying to benefit from crises.”

A recent report by Oxfam shows that low-income workers and poor people have been hit hardest by the pandemic.  According to Saloranta, responsibility should also be taken into consideration when states implement their recovery measures on a wider scale.

“With the economic recovery amounting to billions of euros in Finland alone, it is important that this financial support be used to build a socially and environmentally sustainable future, and to create jobs for decades to come.”

Human rights lawyer’s career path leads him to Brussels and into doctoral research

Corporate social responsibility law is an interface where altruistic goals and companies’ seeking of profits meets. How can these two sides be brought together?

“When a lawyer represents a human rights organisation or a transnational company, there are different interests involved. On the other hand, responsible investments, for example, generate more profits, and the stock prices of companies seeking to solve climate change related challenges have gone up.”

Saloranta wrote his Master’s thesis on issues relating to corporate social responsibility at the University of Turku in 2014. After graduation, he worked as a human rights lawyer. He has also worked as an aide for MEP Heidi Hautala in Brussels, where he took part in the work of the European Parliament Subcommittee for Human Rights. It was also in Brussels where he started to write his doctoral dissertation in corporate social responsibility law.

“My doctoral dissertation examines how companies take human rights into consideration with regard to corporate social responsibility legislation, what constitutes remedy, and what kind of consequences violations can have.”

In the constitutive meeting of the Finnish Corporate Responsibility Law Association held last autumn, Saloranta was elected as the association’s chair.

“When legalization enters corporate social responsibility, it also becomes more than the sum of its parts. The association seeks to develop and make this new field of law increasingly systematic. Several people from all sectors of society have already joined as members. Having everyone around the same table to think about the future of corporate social responsibility brings unity to discourse.”