Due Diligence: The Corporate Sustainability Imperative

Due diligence has become a fundamental guide for companies. As a collective, companies have a duty to protect human rights. This means that they must avoid the negative consequences that their actions may have on society. Otherwise, the victims have judicial and extrajudicial claim mechanisms.

However, an analysis of the current situation calls into question the extent of adherence with this policy. The 2020 Corporate Human Rights Index (CHRB) is emphatic: 46.2% of the world’s largest companies were unable to demonstrate any commitment to upholding the most basic human rights.

In this post, we detail how your company can carry out due diligence concerning human rights and the environment.

Due Diligence Meaning

The Observatory of Corporate Social Responsibility provides a very comprehensive definition of due diligence. It corresponds to the «identification, prevention, mitigation and accountability for the negative impacts on human rights caused by business activities».

What is environmental and social due diligence?

The United Nations Guiding Principles refer, in Pillar II, to due diligence. In this sense, it must include four fundamental aspects:

• Identify the negative impact that commercial activity can have.
• Integrate findings into your assessments to guide action.
• Follow up on the implemented policies to verify their effectiveness.
• Communicate externally the measures taken as an example of action.

It should be noted that this same text records the irreversibility of corporate practice. What does this mean? That the negative consequences due to business activities are not outweighed by the positive contributions that corporations make. In the environmental field, issues such as carbon offsetting aim to reverse this idea.

These practices, taken together, are consistent with OECD and ILO standards. In ecology, certain authors provide a different definition: one of them corresponds to the «obligation to respect, protect and promote human and environmental rights».

Due diligence and the value chain

Integrating these policies in the value chain is of high priority. It means, first and foremost, questioning how the climate challenge is being addressed. Consequently, all corporate action must be made environmentally friendly. To do this, we must work on the following processes:

• Conception of the product/service with its possible social and environmental impact taken into account.
• Manufacture or generation of product through sustainable and non-polluting techniques.
• Ethical marketing and social outreach through concepts that respect human rights.

If these criteria are not met, certain risks may be assumed. The most relevant is the breach of the European law of due diligence in the supply chain.

How to carry out the due diligence process

In reality, efforts are needed from all sectors. It is essential to identify, prevent, minimise and assess the potential negative impact on HR and the environment. This must be done in a sustained, detailed and verified process.

Identify the impact

The first step is to identify the impact and acknowledge it publicly. Next, the human rights that may be affected by the business activity must be examined. In doing so, geographical, sectoral, industrial, commercial and dimensional aspects need to be taken into account.

Taking action

Work should be done within the company. To do this, the following parties should be informed of the measures taken and their role in the process:

• The staff: workers from all departments.
• External partners: contractors, investors and suppliers.
• Other relevant parties: clients, organisations, institutions.

Monitoring

Along with taking measures, it is important to appoint someone to oversee the process. This person should be from the highest possible level within the corporate hierarchy. It is certainly one of the common points of the ETI Base Code which is based on ILO conventions. The same happens with external audits, indicated as a priority issue.

External communication

It can be taken as a dynamic and cooperative element. This means that businesses can come together to share best practices and set trends. There are business and human rights committees that have the aim of serving as a communication platform.

Due diligence and SMEs

According to current legislation, human rights due diligence is mandatory for companies. It can be distinguished into three main categories according to the objective set:

• Mandatory disclosure laws – to share information about the human rights risks of your activity. In certain cases, sanctions are established for companies that do not do so.
• Mandatory due diligence laws: an example is the future law for the protection of human rights, sustainability and due diligence in transnational activities.
• Human rights due diligence and accountability laws: sets out the conditions under which a corporate entity can be held civilly or criminally liable for human rights violations.

However, to what extent should small and medium-sized companies respect these policies? The UN Guiding Principles are clear on this point. The UN Guiding Principles are clear on this point. The responsibility to ensure human rights is shared by all organisations. This of course includes SMEs, which account for 50% of the world’s GDP, according to the UN .

This can be further expanded with the key insights offered by the EU and the UN. This type of business can contribute in many ways, including the following:

• Getting business associations to collaborate.
• Disseminate the due diligence processes and techniques they have implemented.
• Build on the experience of established programs and businesses.
• Enlisting the joint efforts of other corporate entities in the same sector as well as others.

What is the EU Due Diligence Proposal?

The European Union recently approved a directive that aims to unify the due diligence effort. The key is to create an EU policy that can be transposed to each Member State through national legislation. In turn, it is based on two main criteria of international validity:

• Green Deal – The European Green Deal approved by the European Commission.
• UN Sustainable Development Goals: 17 objectives for the year 2030.

This proposal aims to:

1.     Mitigate the risks of harming the planet in the value chain.

2.     Optimise and demonstrate a sustainable corporate governance.

3.     Reorient behaviour to respect human rights

In order to guide its operation, a number of criteria have been outlined. They are specified in article 4 of the directive:

«Member States shall ensure that companies apply due diligence.» To do this, they must:

• Implement due diligence in corporate policies.
• Classify adverse impacts as real or potential.
• Prevent the adverse impact categorised as potential.
• Minimise and, where possible, eliminate the impact.
• Create a claim procedure for possible breaches.
• Review and audit the effectiveness of policies.
• Publicly disseminate the effect of its due diligence changes.

The directive is expected to enter into force after its official publication, i.e. 20 days after appearing in the Official Journal of the European Union. Medium-sized companies in sensitive sectors will have two years to adapt to the changes. The aim is to ensure a smooth transition that does not harm their economy.

Scope of the Proposal

The intention of EU institutions is to put the spotlight on corporations. They should aim to identify, prevent and minimise the negative impact of their activity on human rights and the environment. To do so, they should focus on the value chain, their own internal measures and their corporate partners.

In essence, these are the corporations that will meet the criteria of the new directive:

·       Large companies with limited liability: 500 employees and a net turnover of 150 million euros.

·       Companies with a lower volume and workforce, but in high-impact sectors (OECD criteria).

·       Large companies with limited liability: 250 employees and a net turnover of 40 million euros.

·       Companies from non-EU countries, but with activity in the EU and a comparable legal form.

On the other hand, SMEs are excluded from the obligation. However, the EU emphasises their importance in the EU’s productive fabric and, therefore, it is recommended that they sign a commitment. This can be made feasible as detailed above.

Regarding sanctions, the EU opens the door for States to impose punitive measures. To do this, they must meet three main conditions:

• They can be monetary, but must be coordinated with their turnover.
• They must be proportionate and effective, without harming the stability of the company.
• They must serve as a dissuasive measure to deter recurring non-compliance.

In short, due diligence has become a paramount issue for the EU. Businesses, regardless of their size, are responsible for respecting human rights and to the planet. Do you want to measure and monitor your social and environmental impact? Use our tool to calculate your emissions. Contact us!

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