Before you can start implementing due diligence, it is important to become familiar with a number of basic concepts and insights.
At the end of this section:
- You are familiar with the concepts risk, supply chain, and due diligence;
- You understand how you can be linked with risks for human rights and the environment;
- You understand why companies should carry out sustainability due diligence.
!! Downloads !!
To use this manual correctly, you need to download the excel and word template below, and store it in a safe location. Companies in the food and technology industry (and related industries) can also download sector-specific guidelines as a complement to this manual.
Excel template - Due Diligence Toolbox
World template - Due Diligence Strategy
What is a risk?
In this manual, the term risk refers to a possible adverse impact of business activities on human rights or the environment. It thus refers to risks you create for others, and not to risks for your own business. Yet the risks that your company creates for people or for the environment might soon become a financial, commercial, or legal liability for yourself. This entanglement between risks for your own company and risks for society is embodied by the concept of ‘double materiality’.
While risks for human rights or the environment can and certainly will exist in your own activities, and while due diligence should be carried out to identify and mitigate these risks, the focus of this manual lies on risks in your supply chain. A supply chain contains all activities that companies and workers (both in the formal and informal economy) carry out before a good or service enters your company. While the term supply chains is sometimes used interchangeable with the term value chains, the latter also includes the downstream, i.e., what happens to a product once it has left your company.
How can you be linked with risks?
While your own activities can certainly create risks for employees (e.g. health and safety) or the environment (e.g. water or air pollution), for most companies the most pressing risks lie further up their supply chain. In some cases, risks in a supply chain can be a direct consequence of your procurement decisions. Making unrealistic or inconsistent demands to suppliers may inadvertently lead them to take cost-saving measures (cf. case 3) or to engage in unsustainable outsourcing practices (cf. scenario 1), which may in turn harm workers or the environment. The link between procurement actions and risks is outlined in the figure below, which is partly based on an excellent report by Ethical Trading Initiative.
You can also be indirectly linked to risks in your supply chain. A common example is when you purchase a product from a trader, who in turn buys raw materials from mines, plantations or factories where human rights or environmental regulations are regularly flouted (cf case 2 above). In these cases, it will be crucial to try and exercise leverage over business partners to encourage them to take action. We will return to this in more depth in the section on 'Mitigating risks'.
What is due diligence?
While the term due diligence has a longer history in corporate law (notably in relation to mergers and acquisitions), in recent years it has become more closely associated with human rights and the environment. Specifically, human rights and environmental due diligence is a set of processes aimed at (1) understanding risks for human rights and the environment; (2) mitigating these risks; and (3) integrating due diligence into your business operations. These three processes each consist of a range of sub-processes, which correspond with the different sections in this manual.
Is due diligence mandatory?
Due diligence is rooted in international ‘soft law’, notably in the UN Guiding Principles on Business and Human Rights (2011) and the OECD Guidelines for Multinational Enterprises. When we refer to ‘international due diligence guidelines' throughout this manual, we refer primarily to these two texts. In recent years, due diligence obligations have increasingly been integrated into hard law. Several countries have adopted (France, Germany, Norway) or proposed (Belgium, Netherlands) due diligence legislation, and in 2022 the European Commission proposed a European directive on 'corporate sustainability due diligence', that would integrate existing due diligence rules on conflict minerals, deforestation-free products, and batteries. Also in 2022, the EU approved a Corporate Sustainability Reporting Directive which obliges large companies to report on their due diligence processes.
While most due diligence legislation does not apply directly to SMEs, they will be confronted with this legislative push for due diligence in indirect ways, as large companies start pushing costs and responsibilities towards their suppliers. Moreover, it is plausible that some (notably Western and Northern European) countries will still impose due diligence obligations upon SMEs.
Why should you carry out due diligence?
Even if due diligence is not (yet) a legal obligation for your company, you have very good reasons to start. Aside from your moral duty as a company to treat people and the environment with respect, there are also 'hard' incentives.
Societal attention for how companies engage with human rights and the environment has never been greater. Particularly among young consumers, there is growing demand for responsible products. Arguably more important are the pressures in B2B relations. Coming under increased scrutiny by legislators and investors, large companies are imposing transparency and due diligence requirements upon suppliers. Likewise, public buyers are paying more and more attention to how their suppliers deal with human rights and environmental risks, whether or not in the form of explicit due diligence clauses.
In the future, access to finance (in the forms of loans and investments) will increasingly come to depend on how you, as a company, engage with risks. For financial institutions, the focus no longer lies solely on financial risks for the company, but also on the 'ESG-profile' of your company.
In a context of rising geopolitical tensions and intense resource competition, knowledge about your supply chains is becoming increasingly important. In a painful way, COVID has exposed how risks for human rights (e.g. overcrowded workplaces) can be linked with risks for supply chain disruptions. Due diligence can help you understand these risks, and think more strategically about resilient supply chains.
Carrying out due diligence is also a good opportunity to strategically reflect about your sustainability approach. All too often, well-intentioned sustainability efforts are based on faulty or incomplete understandings of risks. Due diligence, on the other hand, starts with a solid analysis of risks before deciding which actions should be taken.
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