The business responsibility: due diligence in global supply chains
Slowly but steadily, it is clear that the concept of sustainability due diligence – essentially meaning ‘reasonable care’ – is here to stay. For companies sourcing, processing or using raw materials in their production processes, the identification and management of human rights, environment and government risks in the value chain has already been a common practice. Especially as raw materials such as minerals (from tin, gold, manganese or nickel), cotton or palmoil and cocoa are often originating in countries and regions with a developing country context where heightened risk of unacceptable or otherwise negative ESG impacts can arise.
Industry standards with a voluntary nature have long been guiding the practice of due diligence to enhance responsible business conduct in textiles, agriculture and mining, minerals and metals supply chains. However, the past years have shown a shift towards mandatory due diligence requirements especially on the European continent, with the EU Deforestation Regulation, the existing EU Conflict Minerals Regulation, the Battery Regulation and the Corporate Sustainability Due Diligence Directive ('CSDDD') as well as the Corporate Sustainability Reporting Directive ('CSRD') all integrating a strong responsibility on the side of business operators to identify, address, mitigate and (sometimes to remediate) severe human rights and environmental impacts with matching reporting requirements.
Defining responsible business conduct in global supply chains
But what exactly is the definition of responsible supply chains? Whereas the process of due diligence follows a structured approach, the breadth and depth of risk management as part of responsible business conduct in global supply chains depends on many factors.
The trend towards mandatory legislative requirements on responsible business conduct also show the shared responsibility; between public and private actors, and increased emphasis on 'stakeholder engagement' throughout the due diligence process.
As a company active in international supply chains, how to determine the level of effort in sustainability due diligence? Whilst businesses are advised to set a general ambition of compliance with mandatory legislation (and beyond), operating in line with specific industry standards will help to focus on relevant ESG risks for the specific industry and raw materials.
The general approach should follow the OECD instruction that due diligence should be proportionate to the company’s circumstances and context. This means that size, risk profile and particularities of the upstream supply chain determine the level of effort to be taken. This instruction is equally reflected in the European Commission guidance in the CSDDD, or as part of it’s ‘Forced labour import ban’.
In addition, in order to meet the specific goal of compliance with selected industry standards, businesses need to juggle compliance with the variety of 1) industry-schemes to which they adhere (ie RMI in minerals, RSPO in palmoil), 2) Government legislation in source-countries and countries of presence (EU, US, other).
For example, under the new EU Deforestation Regulation, companies wanting to put relevant products on the EU internal market, will need to submit a due diligence statement confirming that these are deforestation-free and have been produced in accordance with the relevant legislation of the country of production.
Does it matter if products are imported from outside the EU, or EU-made? Mostly not, sometimes yes. The concept of due diligence applies – in principle- throughout the supply chain, hence would include ESG risk management on operations inside and outside the EU. However, in practice, the new EU approach to product and process measures (so-called PPM’s) essentially work as a non-tariff measure to all ‘high risk’ goods and/or services from outside the EU.
At business level; sustainability due diligence as standard business practice
For companies operating in global markets, responsible business conduct and sustainability due diligence has become a boardroom matter. Whereas ensuring compliance with (EU) legislation, OECD and UNGP voluntary standards, or industry standards may be the ambition for one company, more experienced companies approach responsible supply chains as a key element towards competitiveness in global markets.
What is sure; sustainability due diligence on material supply chains has become a key business area integrated across the company's processes and engaging a variety of in-house teams. Nowadays, ESG risk management on supply chains is to be approached as a 'business risk' rather than complementary effort.
Where to start? ESG risk management that follows a step by step approach, with ambitions that suit your company maturity and trade profile
Whereas some companies have developed mature approaches to sustainability due diligence, such as global companies operating in high risk materials (minerals, cotton, certain agri-products), the concept of ‘sustainability due diligence’ remains relatively new for many firms within and outside Europe and demands improved skills and adjustment of strategies and processes.
And then again, even for the most experienced businesses, there are always improvement areas. If there is one insight from Hyacint Consult's practice experience in guiding companies on sustainability due diligence, ESG risk management and responsible sourcing, it is that there is no one size fits all. As the OECD Due Diligence Guidance states: 'due diligence should be commensurate with risk and appropriate to a specific enterprise’s circumstances and context'. Every company will need to establish it's ambitions, and take a phased approach to integrate due diligence into it's business practices, commensurate with.
The efforts to set-up OECD-compliant sustainability due diligence policies and processes will depend per company size, maturity, industry and trade profile (ie source countries').
Based on over 15 years of experience in guiding sustainability due diligence at Hyacint Consult, we advise to consider the following elements and steps;
First, start with 'understanding your own house'; identifying high-risk products and suppliers, based on insights into supply chain actors up to the origin (transparancy), and understanding key ESG risks relevant to the company and in the value chain (upstream and/or downstream).
Second, develop ambitions and policies on responsible value chains, and a matching Responsible Value Chain Strategy and action plan, with specific KPI’s for internal and external monitoring, evaluation and reporting (linked to reporting guidelines such as GRI and industry standards);
Third, set-up processes and systems to allow for continuous sustainability due diligence through ESG risk identification, to identify and assess ESG risks in a pro-active and re-active manner. Developing a separate policy on responsible value chains, a supplier code of conduct, and high-risk countries of origin (such as based on the EU CAHRA list for minerals) are advised.
Pro-active due diligence includes supplier engagement with Tier 1 and beyond, through SAQ's, ESG dialogues or site visits where needed. Here, industry standards may be highly relevant to rely on certifications, audits or even use leverage.
Re-active due diligence would include results from grievances received, or stakeholder engagement results that point to concerns in relation to human rights, environment and corruption. Based on key ESG risks identified, further assessment will be needed through dialogues with key suppliers or actors, and possibly third party audits (in line with OECD step 4).
Fourth, for high-risk suppliers, efforts may need to be directed to addressing and tackling negative impacts on human rights and environment as well as corruption through mitigation efforts (and remediation). Here, key tools include Corrective Action Plans (CAP) agreed with the key supplier (and sometimes with other supply chain actors and/or stakeholders), followed up by continuous engagement. Where corrective actions within a set time-frame do not lead to improvements, responsible disengagement is to be considered (or, prior to the start of a contract a no-go advise is to be provided).
Fifth, internal and external reporting on performance, based on a ambitious yet feasible set of KPI's and departing from a clear responsible value chain strategy serves to monitor and evaluate progress and identify improvement areas. Only through structural data collection, your company’s sustainability report can reflect findings on traceability, due diligence process outcomes and ESG risk management as well as negative and positive impact on the wider society. Furthermore, continuous stakeholder engagement is to be embedded throughout all steps of due diligence (see separate blog post).
How to move forward? Key questions to ask as a company
As illustrated in this article, a customized and step-by-step approach is key for companies that wish to improve maturity on sustainability due diligence for compliance (or beyond) in line with OECD, industry standards or (EU) legislation. A step by step approach essentially means identifying key challenges that demand incremental improvements and setting ambitions to improve the scope, breadth, and depth of the sustainability due diligence approach.
Possible guiding questions to craft a way forward can be:
In terms of 'maturity’ of our responsible value chains approach and program, where do we stand as a company compared to OECD and UNGP standards, industry standards, and/or compliance with EU Legislative requirements ('CSDDD', 'CSRD', 'Forced Labour import ban' and other)?
Looking at your company's trade portfolio with source markets and suppliers, what could be key elements of an ambitious yet feasible responsible value chain strategy and action plan?
From a legislative compliance point of view; how are key legislative initiatives on sustainability due diligence developing? Which mandatory requirements are to be expected, from process to reporting, and what will they mean for our strategy and processes?
Are there low-hanging fruit actions that can be initiated (such as setting up supplier questionnaires and engagement, joining an industry standard, improving awareness on requirements, setting up stakeholder engagement), whilst preparing for longer-term improvements?
Interested to learn how Hyacint Consult can support?
Reach out if your company wishes to address the over-all maturity or re-set a clear strategy for improvement on sustainability due diligence and/or a responsible value chains program.
Reach out if your company has specific areas for improvement and/or assessment, from supply chain traceability, to ESG risk identification and assessment, process improvements, audit preparations or deviations, to strategy setting and KPI reporting.
Often, a light maturity scan is sufficient for our expert team to propose a set of improvement actions to reach key goals, whether it is to guide a company towards starting with sustainability due diligence, or to enhance an existing responsible value chain program with key elements for improvement.
If you wish to discuss, send us an email and we can plan an informal call or discussion. Email: info@hyacint.org