Corporate responsibility experts: due diligence leads to greater resilience and prosperity

Sustainability due diligence refers to the process of identifying, addressing and preventing or mitigating serious negative impacts on human rights and the environment in businesses and value (supply) chains. In the context of the EU's sustainable finance strategy, due diligence is one of the pre-conditions for the sustainable activities as defined by the EU Taxonomy Regulation and green financing under the SFDR, including green bonds.

The European Commission will publish its Sustainable Corporate Due Diligence proposal (SCDD, formerly Sustainable Corporate Governance initiative proposal) and submit it to Parliament and Council in February 2022. This proposal will clarify rules on due diligence, based on the UN Guiding Principles on Business and Human Rights and OECD standards. The negotiations on the Directive are likely to take place during the Czech EU Presidency. In response to these developments, Frank Bold has prepared a webinar to introduce the principles of due diligence to public administrations and companies.

Filip Gregor from Frank Bold presented examples of good and bad due diligence practices at the event.

Due diligence is about identifying and addressing risks

The webinar was opened by Lucie Slavíková from the Czech Ministry of Justice, who pointed out the importance of the forthcoming directive and the need to harmonise the rules of individual Member States on the EU level. France, Norway and Germany have already adopted their own national due diligence legislation. Thus, legal provisions may vary from one national law to another. "The Czech Republic is ready to continue negotiations on the Directive under its Presidency. It is necessary to create a level playing field for all European companies," Slavíková said.

The fundamental aspects of due diligence were presented by Rachel Davis from Shift. She stressed that the corporate responsibility to respect means that companies are expected to prevent and address risks to people that they are involved with, not only in their own operations but also across their entire value chain. “Companies can be involved with a number of human rights impacts and may not be able to take action on them all at once. In such cases, companies need to prioritize those issues that are most severe from the perspective of the people who are affected – their salient human rights issues – and take action on those," Davis described. In most sectors, human rights risks are predictable, which makes it easier for companies to identify whether they are or are not exposed to such typical risks of severe impacts.

*Graphics: Rachel Davis, Shift

Davis also explained that the action companies are expected to take depends on how they are involved with adverse impacts. For example, companies often need to address impacts that they themselves are not causing. “Whenever the company is dealing with an issue that it did not cause on its own, it is still expected to use its influence in order to achieve a better outcome for people. Building capacity with suppliers or customers, or getting help from industry peers to influence governments, can be important ways of using leverage,” Davis outlined.

Companies must know their supply chains

Susanne Gasde from the German Ministry of Labour and Social Affairs followed up with a presentation on the new German legislation that requires large companies to carry out due diligence with respect to all of their activities and business relationships. She explained that the central principle of the new law is appropriateness, which in practice means that the obligations of individual companies depend, for example, on the type and scope of their business activities or the probability of human rights violations.  

In order to help companies better understand due diligence requirements, Filip Gregor from Frank Bold presented several examples of good and bad practice. "A proper due diligence process in high-risk supply chains, such as palm oil, means that a company knows its chain, assesses new suppliers and engages with them. On the contrary, if a company takes no precautions and does not screen its suppliers, it fails to meet the due diligence standards," Gregor clarified.  

Investors' interest in due diligence has been increasing

Practical experience with the application of due diligence was provided in the second part of the webinar by corporate responsibility experts from Ericsson, Vaude and Lorenz. They agreed that the adoption of due diligence processes brings benefits to their business. “Sustainability management makes companies crisis-proof. Even in the pandemic, we had stable supply chains and we could find solutions with our suppliers when they struggled with the covid-19 impacts. From our point of view, it is nowadays not a decision whether to be economically successful or to be sustainable and take the responsibility. We can clearly show that sustainability leads to economic success,” said Bettina Roth, Head of Quality Management & CSR Supply Chain at apparel company Vaude.

Besides higher resilience and positive effects on a company's performance and growth, due diligence benefits mentioned by speakers included an increase in trust between companies and suppliers, business partners and also investors. “A positive message for companies to share is that banks and financial institutions are now willing to support projects in this direction,” Julien Lavarini, Responsible Supply Chain Manager at food company Lorenz, confirmed.

According to Corporate Responsibility Expert Théo Jaekel from telecommunications company Ericsson, the investors' interest in due diligence has only increased over the last couple of years. “Many times we have experienced direct questions from investors on our due diligence. By being prepared, and by having due diligence frameworks, we have seen quite positive reactions from them. That is not saying that we are perfect, but that we have processes in place that are well geared towards being more prepared to respond to risk when they emerge. We also have regular engagements with our investors to update them on the situation in specific high-risk countries and that has been really appreciated by them,” Jaekel added.

Moreover, the business case for due diligence is manifested by more that 100 companies and investors calling for effective EU corporate accountability legislation. In the joint statement released on 8th February 2022, they are urging the EU to swiftly adopt a legislative proposal on mandatory human rights and environmental due diligence, within the Sustainable Corporate Due Diligence initiative. Signatories to the statement include, for example, Aviva, Danone, Ericsson, IKEA, or Vaude.