Due diligence regimes need to be comprehensive and cohesive
This week the European Commission was expected to announce long-awaited legislation on Sustainable Corporate Governance, the latest and potentially most important new law on supply chain due diligence but its release appears to be even further delayed.
The European Union (EU) has already proposed a law in November aimed at preventing the import of commodities linked to deforestation by requiring companies to prove their global supply chains are not contributing to the destruction of forests.
Under the Draft Deforestation Regulation, products can only be sold in the EU if they are deforestation-free, produced in accordance with environmental protection and labor and human rights laws, and covered by a due diligence statement.
The rules would apply even if the deforestation were legal or illegal in the country of production.
These are just the latest in a swelling tide of supply chain due diligence disclosure requirements across the world—a handful of European countries, including France and the Netherlands already have legislation. The US state of California has for years required companies doing business there to disclose efforts to eradicate slavery and human trafficking from their direct supply chains for the goods they sell.
Since then, the legal landscape for human rights and environmental protections has changed along with the perceptions of businesses and consumers. Most businesses recognize that consumers want to know more about how the products they buy have been sourced, and that supply chain due diligence laws offer a level playing field and legal clarity. There is also a growing understanding among businesses that binding law, rather than voluntary frameworks, facilitates fairer competition.
In fact, a February 2020 European Commission study found that one in three companies in the EU is currently taking some form of due diligence measures, while 70% of European businesses support EU-wide due diligence rules.
The benefits are numerous and wide-ranging.
By publicly reporting on supply chain risks to the environment and human rights, and on what is being done to manage them, companies can show investors, consumers, and local communities that they are taking responsible and sustainable business seriously.
Consumers have some assurances about fairly sourced products, workers can experience greater social protection, and victims can be afforded the prospect of justice. Importantly, mandated engagement between companies and local communities has the potential to prevent environmental and human rights abuses before they happen.
Increased attention to the benefits of mandatory corporate due diligence and reporting is welcome. At the same time, regulators and advocates must avoid a counterproductive patchwork of different frameworks. This is a growing risk as countries, frustrated by the European Commission’s delays, take matters into their own hands as in the case of the recent announcement by the Dutch government. While the Dutch proposal is expected to be progressive, it is critical to prevent a legal system that is only as strong as the weakest law, which would devalue responsible business, hurt consumer interests, and leave workers and victims unprotected.
To start, emerging disclosure requirements should be based around the United Nations Guiding Principles (UNGPs) on Business and Human Rights. That means requiring firms to analyze risks among their suppliers and to publish a due diligence strategy covering the whole value chain.
Changing the perception of businesses which were, only a few years ago, largely hostile to due diligence reporting, is itself a major achievement. But the rush by different jurisdictions to legislate does not guarantee a well designed, consistent, and effective system of laws that has the potential to benefit all.