Businesses are increasingly being called to account for injustices occurring in their supply chains – be that forced labour in Leicester or China, to deforestation in Brazil. Pressure is mounting on businesses to clean up their supply chains making it increasingly important that they have oversight of who is making their products and under what conditions–right down to the sourcing of raw materials, even when this is not directly under their control. This is driven by a range of factors:
Regulators are demanding it
Governments around the world are translating UN guidance on businesses responsibility to respect human rights into hard law. Human rights due diligence is central to this guidance, as is the principle that businesses’ responsibility extends beyond their own direct activities, to adverse impacts connected to their operations, products or services. Legislation is evolving from less prescriptive reporting requirements, as was the case in the 2010 California Transparency in Supply Chains Act and the 2015 UK Modern Slavery Act, to the introduction of mandatory human rights due diligence measures.
There is also a growing emphasis on environmental due diligence, for example France’s 2017 Duty of Vigilance law requires that businesses identify, prevent and remediate human rights and environmental violations. Earlier this year the EU committed to mandatory corporate human rights and environmental due diligence and, as we wrote about last month, the UK government has recently announced plans to introduce deforestation due diligence legislation.
Increased investor attention
Investors are increasingly factoring in businesses’ management of social and environmental risks into their investment decisions, recognising that this leads to better financial risk management. However, the Corporate Human Rights Benchmark, published last month, reports that too many businesses are failing to meet investor expectations on human rights due diligence, including 95 high impact businesses who failed to score any points on the human rights due diligence indicators. As a result, investors, including an alliance representing $5 trillion in assets under management, have expressed their support for mandatory human rights due diligence legislation. Investor support and engagement on due diligence is only going to increase; last month the UN Principles for Responsible Investment launched a new 5 year programme to embed the UN Guiding Principles on Business and human rights into investment activities. Effective due diligence processes are central to this framework.
Lastly, its clear that customer demand for transparency and sustainable products is only growing. In a recent survey, three quarters of consumers stated that transparency is more important than ever and Accenture reports that since Covid-19, 45% of consumers have started making more sustainable shopping selections. Customers, including the public sector, are also integrating social and environmental considerations in their purchasing decisions, and many demand that that those they procure from have effective oversight and management of their supply chains.
What does this mean for business?
Many leading businesses already have effective human rights and environmental due diligence measures in place. Indeed, over 70% of business survey respondents in a study commissioned by the European Commission agreed that “EU regulation on mandatory due diligence may benefit business by creating a level playing field”.
While the details of due diligence legislation, such as that proposed in the EU and UK remain to be seen, businesses would be well advised to get ahead of the regulatory curve. Existing authoritative global standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises show how. Businesses need to conduct due diligence to identify, prevent, mitigate and account for how actual and potential human rights and environmental abuses are addressed – in their supply chains and through their business relationships.
- Mapping supply chains to understand who is ultimately supplying goods and raw materials
- Understanding the human rights and environmental risks at each level of the supply chain – to be robust this should include meaningful consultation with potentially affected groups and relevant stakeholders
- Prioritising due diligence processes depending on the risks identified, based on the severity and likelihood of the adverse impact – critically, the lens should be risks to people, or the environment, not the risks to the business – though with growing scrutiny, these risk are converging
- Ceasing, preventing or mitigating adverse impacts
- Tracking implementation and results
- Reporting on how impacts are addressed
Though this process sounds challenging and costly, the European Commission study estimates that the costs associated with due diligence obligations for large companies would not exceed 0.005 percent of their turnover.
There are also many benefits – and its not just about risk mitigation – effective due diligence can also help businesses create more value. Understanding your supply chains better means that you can pre-empt regulatory, reputational and business continuity risks that could shut down your supply chain, divert senior management time or destroy the productivity of the suppliers you rely on. Due diligence enhances understanding of markets and sources of supply, and creates opportunities to identify areas where you can intervene to improve conditions, livelihoods and even productivity, for instance by applying standard best practice already in use elsewhere in your supply chains. It makes you more resilient and better placed to respond to crises such as Covid-19 when they hit. Ultimately, it can help protect the people and planet that sustain supply chains, as well as the bottom line.
To find out more about how sustainable supply chains will become a new area of competitive advantage and a bulwark against future threats, read our report ‘New Shocks, Better Solutions: Beating disruption with stronger, more responsible supply chains’ or get in touch with our Consultant, Pendragon Stuart.
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