Due diligence law: A must for Nepal

With the country set to graduate from the group of least developed countries in 2026, it is an imperative for Nepal to be able to attract foreign investments. The nation, in order to turn itself into a lower middle-income country with a clear pathway ahead for further economic growth, is compelled to diversify its economy, overcoming its dependency on foreign remittances.

Tourism and hydropower are showing high potential and, in recent years, some efforts have been made at making the national economy more attractive for global companies looking for new markets to produce and sell their products. With its low manpower costs, Nepal could become an important destination for global investments.

Yet, it is equally important that the country creates conducive conditions to boost its national GDP without jeopardizing local communities and while safeguarding its unique biodiversity and intangible customs and traditions that are often at risk of being disrupted by business interests.

That’s why the agenda of Business and Human Rights becomes so relevant not just to ensure, in a tokenistic fashion, some nice optics on the way Nepal is pursuing its national growth. Rather, it should become an essential, indispensable core component of any national strategy aimed at laying the ground for a successful graduation from the grouping of least developed countries.

When we talk about Business and Human Rights, we refer to a niche area of human rights laws and practices at a crossroads with many other legislations and regulations. Businesses intersect with and impact a multifold array of sectors and areas, from labor to customer protection, to customary and indigenous rights to gender and environmental related legislations and regulations.

There are many cases of business and human rights infringements.

Cases of labor exploitation, lack of consultations with local communities before breaking ground, denial in giving proper compensation when private lands are expropriated, exploitative working conditions and illegal but silently tolerated disruptions of the local environment are some of them. So, it is essential to ensure that business houses, especially those reaching a certain turnover, are operating not only by upholding the law but also by adhering to the highest standards stemming from international law and practices.

This is particularly essential in a country like Nepal.

Here we normally witness a weak rule of law characterized by a political class often marred in controversies with the private sector, a slow judiciary often accused of lacking transparency and integrity and a generally feeble enforcement of rules and regulations. As I write, the 13th United Nations Forum on Business and Human Rights is unfolding at the United Nations in Genève.

The gathering is the most important venue to discuss challenges and best practices related to business and human rights and it is normally preceded by regional forums around the world. 

For example, back in 2023, Nepal hosted, for the first time, the fourth edition of the South Asia Forum on Business and Human Rights. At the beginning of 2024, with a lot of delays, the government officially launched its first ever National Action Plan on Business and Human Rights. This represents an important milestone for Nepal but there is a high probability that such a plan will only remain a lifeless document, unread and forgotten, a plan that, like many others, will never be brought to action because of lack of enforcement.

But the document is not only at risk of being ignored. The plan is also problematic because of its nature and way it was designed. Because the area of business and human rights is very vast, the Action Plan covers a multitude of issues that are extremely complex on their own. 

How could we, for example, downplay the plague of child labor, for example? What about the necessity of creating awareness-raising programs on the rights of the consumers, who are so often deceived by the private sector? What about the need for developing industrial waste processing mechanisms or the formulation and revision of the law relating to import, sale, distribution and justified use of pesticides?

These are all essential items of policymaking included in the Action Plan that, if put into practice through effective legislation and regulations, could make a real difference for the lives of millions of citizens. 

Yet the whole plan is missing the point. Rather than being a checklist of disparate and unrelated actions to be undertaken by the legislator and executive, the plan should have focused on key essential items. At the foremost should have been the Corporate Sustainability and Human Rights Due Diligence legislation.

This is basically a regulation that would force corporations to uphold mandatory standards and behaviors by demanding them to report and explain how their business practices respect human rights across their value chain. This provision is entirely missing from the plan whose first activity, just to give the reader an idea, is to “formulate national policy on business and human rights” that is supposed to be implemented in the third year of implementation.

The contents of such a policy, its purpose and its key features are still a mystery. Nepal, like many other nations, needs a binding Due Diligence legislation. Designing such legislation won’t be easy. It is a complex task that would require a continuous engagement with stakeholders, starting from the business sector that would probably push back against it.

Yet, it is essential to compel the private sector to undertake binding rather than voluntary commitments. This is the major lesson learned over the years while trying to implement the UN Guiding Principles on Business and Human Rights. 

This is a voluntary framework that provides corporations with the key expected behaviors and important principles like the right of the people that are affected by alleged and presumed abuses by the private sector to have multiple pathways toward a remedy.

Such an approach did not work.

That’s why many developed states have enacted mandatory Due Diligence regulations, including the EU with the most ambitious legislation, the ‘EU Corporate Sustainability Due Diligence Directive’ that entered into force for all its members on 25 July 2024. It is a regulation that will be fully implemented in the coming years on the basis of a gradual, step by step timeline by giving enough time for corporations to be ready for its compliance by identifying, addressing and providing remedy for their negative impacts.

It is a legislation that attracted a lot of resistance and it is still being fiercely criticized but is setting the standards. Developing or emerging nations should not just wait and watch for developed nations to take the lead. For a country like Nepal, there is an opportunity to lead in its own way with a less complex but solid legal framework that would ensure highest practices on the part of the corporate sector.

If corporate houses take a long view, they will realize that, ultimately, that it is in their own interest to embrace this road. Better business practices, more attentiveness toward the rights of the citizens, will bring stronger financial returns even though due diligence legislations will force them to change many aspects of their business models.

Shortcuts won’t be tolerated any more. For example, Environmental Impact Assessments or the so-called Free Prior Informed Consent that gives special rights to indigenous people when dealing with land inhabited by them, are both often not taken seriously and taken too much for granted. There is no doubt that this type of legislation will only work if the state is serious about implementing them and at creating the conditions for these regulations to do their job.

The ongoing forum in Genève is focused on the so-called “smart mix”, a combination of voluntary and mandatory regulations at local and national levels. In the case of a nation with a strong rule of law culture, such an approach could make sense even though the mandatory, binding components of any Business and Human Rights legislations should be stronger and more prevalent than the voluntary ones.

Perhaps, a country like Nepal would need a gradual approach based on a strong core of mandatory provisions to be accompanied by voluntary ones. In matters of Business and Human Rights, it is now proved that it is better to have a strong stick and few carrots to make sure corporations can thrive while championing human rights.