Around 9,000 Norwegian enterprises will meet new requirements when the new act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions (the “Transparency Act”) enters into force on 1 July 2022. In this newsletter, we will provide guidance as to how enterprises may prepare for the new requirements and thereby reduce business risk.

The Transparency Act was enacted by the Norwegian Parliament on 10 June 2021 and establishes legal requirements for larger enterprises’ duty to report on the work they do to ensure compliance with fundamental human rights and decent working conditions in the enterprises themselves, in their supply chains and with their business partners.

The Transparency Act’s aim is to promote enterprises’ respect for fundamental human rights and decent working conditions and ensuring that consumers, organizations, trade unions, journalists and the general public have access to information. The Transparency Act is a Norwegian initiative, but we see similar initiatives in other European countries as well as at EU level.

In this newsletter we will briefly present what larger enterprises ought to do to be one step ahead of the requirements set by the Transparency Act.

Which enterprises are required to report in accordance with the Transparency Act?

The Transparency Act will apply to “larger enterprises” that are resident in Norway and offer goods or services in or outside Norway. In addition, the Transparency Act will apply to foreign “larger enterprises” that offer goods or services in Norway and are tax resident in Norway. The term “larger enterprises” is defined in the Transparency Act as enterprises covered by Section 1-5 of the Accounting Act, or enterprises which on the date of their financial statements meet two of the following three conditions:

• Sales revenues above MNOK 70
• Balance sheet total of more than MNOK 35
• Average number of employees in the financial year more than 50 FTEs

When assessing whether an enterprise exceeds these thresholds, group companies shall be considered as one unit. This means that the income, balance sheet and employees of both parent and subsidiaries shall be included in the calculation, provided that the parent company is located in Norway. According to the preparatory works of the Transparency Act, subsidiaries shall be included in the assessment regardless of whether these are registered in or outside Norway.

The types of enterprises that are covered by the Transparency Act – in addition to those mentioned in Section 1-5 of the Accounting Act – are not listed in the wording of the Transparency Act. In the preparatory works, however, it is suggested that the enterprises that are required to submit annual accounts in accordance with Section 1-2 of the Accounting Act shall form the basis of the subjects comprised of the Transparency Act. Accordingly, the first step is to assess whether the enterprise is covered by Section 1-2 of the Accounting Act, and then whether the enterprise exceeds two of the three thresholds mentioned.

The Transparency Act does not distinguish between the type of service or product to be covered by the Transparency Act. Hence, services and products in a broad sense are covered.

Duty to carry out due diligences

According to the Transparency Act, larger enterprises are required to carry out due diligence of fundamental human rights and decent working conditions. The Transparency Act is based on the UN’s Guiding Principles on Business and Human Rights (UNGP) and the OECD’s guidelines for multinational companies. The Norwegian authorities already expect Norwegian enterprises to be aware of and comply with these guidelines. This expectation means that even smaller enterprises are expected to know and comply with the UNGP and OECD guidelines. It also means that the enterprises covered by the Transparency Act are expected to focus on areas that go beyond the statutory scope of the Transparency Act, such as environmental matters and anti-corruption.

The due diligence assessments to be carried out consist of six steps, which are well known to enterprises that already have established internal control systems and work systematically with, for example, HSE, compliance and anti-corruption and anti-money laundering.

The six steps of the due diligence assessment

1. Ensure accountability in policies and management systems
2. Monitor and assess negative impact/risk based inthe enterprise itself, supply chains and business patners
3. Stop, prevent or reduce negative impact/risk
4. Supervise implementation and results
5. Communicate with direct parties concerned and rights holders on how the impact is handled
6. Ensure or collaborate on remedies where necessary

The due diligence assessments shall cover the enterprise itself, its supply chains and business partners.

What does the ‘enterprise itself’ mean?

The enterprise itself is the legal entity covered by the Transparency Act. For corporate groups, it appears from the preparatory works that a parent company`s business also includes the activity of the subsidiaries, irrespective of where the subsidiaries are registered. A parent company’s duties will, however, need to be adapted to national legislation and whether the subsidiaries are wholly or partly owned.

What does ‘supply chain’ mean?

The enterprise itself is the legal entity covered by the Transparency Act. For corporate groups, it appears from the preparatory works that a parent company`s business also includes the activity of the subsidiaries, irrespective of where the subsidiaries are registered. A parent company’s duties will, however, need to be adapted to national legislation and whether the subsidiaries are wholly or partly owned.

What does ‘business partner’ mean?

‘Business partner’ means anyone who delivers goods and services directly to the enterprise but is not comprised by the definition of a ‘supply chain’. This includes anyone who is in a direct contractual relationship with the enterprise, but which does not deliver goods and services that are a part of the enterprise’s production. Examples are suppliers of office equipment and advertising agencies.

Risk-based approach and proportionality

The due diligence assessments must be performed on a regular basis, have a risk-based approach and be proportionate.

What does risk-based approach entail?

Risk-based approach means that the measures an enterprise introduces in the due diligence assessment should correspond with the degree of severity of any negative impact and the probability that the negative impact will occur. When the probability and degree of severity both are high, the requirements to the enterprise will be correspondingly higher.

What does proportionality entail?

Proportionality means that the requirements to the enterprise’s due diligence assessment will vary based on circumstances related to the enterprise, for example the size and nature of the enterprise and the maturity of the trade and market.

Duty to report on the due diligence assessment

The enterprises must prepare a report with information that the enterprise has compiled through the due diligence assessment. The Transparency Act sets minimum requirements for the contents of the report, but apart from these, the entities have flexibility regarding the content and form of the report.

Minimum requirements for the report.

The report must at least contain:

• A general description of
  • the enterprise’s organization and area of operation;
  • guidelines and routines for handling actual and potential negative consequences for fundamental human rights and decent working conditions: and
  • how work with the due diligence assessment is organised.
• Specific information on
  • Actual negative consequences and substantial risk for negative consequences which enterprises have identified through their due diligence assessments and measures the enterprises have taken or plan to take to stop actual negative consequences or to limit substantial risk.]

The report shall be updated and published no later than 30 June each year and otherwise in case of significant changes to the enterprise’s risk assessments. Since the Transparency Act does not enter into force until 1 July 2022, the deadline to publish the first report is expected to be 1 July 2023. The report shall be published on the enterprise’s website and may also be included in the enterprise’s annual report or sustainability report. As the report must be signed by the board and the general manager, the Transparency Act is expected to gain much attention from management and boards in the enterprises.

Duty to provide information

In addition to the duty to report, the Transparency Act provides the general public with a right to information regarding how the enterprises handle actual and potential negative consequences revealed in the due diligence assessment. Such requests for information can be submitted by anyone, for example consumers, journalists, interest organisations and unions. This includes both general information and information related to a specific goods or service the enterprise offers.

The information must be provided by the enterprise to the person submitting the request in writing within reasonable time, and at the latest within three weeks of receiving the information request.

Collaboration

According to the preparatory work, enterprises can collaborate on the due diligence assessments in order to avoid duplication of work and to increase the enterprises’ degree of impact. An enterprise could, for example, base its due diligence assessment on another enterprise’s due diligence assessments so that duplication of work related to identifying risks is avoided. An enterprise may thus rely on an importer’s due diligence assessments of the supply chain, and a subsidiary will be able to rely on the parent company’s due diligence assessments. In both cases, however, the enterprise or subsidiary itself is responsible for the due diligence assessment, including to ensure that it is comprehensive and sufficient for the enterprise or subsidiary.

Enterprises should also note that the preparatory works seem to suggest that the enterprises in their report on due diligence assessments may refer to other enterprises’ reports. When doing this, however, it is important to note that the enterprise’s own report with references to the other enterprise’s report must meet the minimum requirements set out in the Transparency Act in order to fulfil the reporting obligation.

The Norwegian Consumer Agency is the supervisory body

The Norwegian Consumer Agency is the supervisory body for the Transparency Act, while the Market Council will act as the appeal body for appeals against the Norwegian Consumer Agency’s decisions. These bodies will therefore be able to review the companies’ reports with the aim to decide whether they fulfil the reporting obligation. It is important to be aware that everyone has an obligation to provide information that the Consumer Agency and the Market Council require in order to enforce the Transparency Act.

Both bodies can make decisions on prohibitions, injunctions, coercive fines and infringement fines. The sanctions in the Transparency Act may only be imposed for breaches on the reporting and information obligations in the Act, as well as the duty to perform due diligence assessments. The administrative sanctions may in other words not be used as reactions to any violations of human and employee rights.

The Norwegian Consumer Agency is now in the process of hiring resources for a separate department with responsibility to enforce the Transparency Act. Many look forward to the unit commencing their work so they can provide guidance, which the Norwegian Consumer Agency itself has stated to be their most important task in the near future.

How should the enterprises prepare?

Many enterprises are already well on their way preparing for the Transparency Act entering into force, while others still have a way to go to establish or adapt their systems and routines to meet the requirements of the Transparency Act. Regardless of how far the enterprises have come, the most important activity for now is to ensure that management in the enterprises become familiar with the Transparency Act and its requirements on a high level. This is to ensure that sufficient resources are allocated to the work. The duty to provide information takes effect as early as 1 July 2022. It is therefore important that the enterprises already now focus on establishing systems internally that enable them to answer requests within the three-week deadline.

Secondly, it is important that the enterprises update existing policies and risk assessment forms, which will form the basis for the due diligence assessment. As a minimum, policies must cover the requirements of fundamental human rights and decent working conditions. The risk assessment shall include the enterprise itself, its supply chain and business partners. If the enterprise has the resources to do so, we also recommend that the enterprise carry out due diligence assessments in other areas as well. This is due to the authorities’ expectation that all enterprises follow the guidelines of the OECD and UNGP.

In order for the policies and risk assessment forms to be of practical use and sufficiently comprehensible for the enterprise, it is important to include resources, departments and functions related to the enterprise’s supply chain in the work on the Transparency Act. These may be employees or departments that are responsible for purchasing, product and service development, compliance, quality, sustainability or logistics. It is also recommended to establish efficient systems that ensure that risks related to suppliers and business partners are communicated efficiently and properly documented. By allocating sufficiently resources to the Transparency Act, enterprises may turn potential business risks to a competitive advantage.