By George Porter
Under the proposed EU Corporate Sustainability and Due Diligence Directive (CSDDD), companies will face increased requirements for conducting effective due diligence to prevent adverse environmental and human rights impacts within their value chains.
Failure to comply is likely to result in significant punishments for businesses who do not have defensible due diligence programmes in place. The current wording of the directive outlines “consequences including civil liability for those companies that cause or contribute to harm by failing to carry out due diligence”. Those consequences include bans on participating in public procurement, goods being taken off the market or fines of at least 5% of net worldwide turnover.
Revising Questionnaire Based Due Diligence
Traditionally, the bulk of supply chain due diligence has focussed on standard questionnaires sent to suppliers requiring them to confirm their working conditions, policies and other aspects. While there are probably still areas in which this approach is valid (for example upstream partners, distributors or marketers based in countries with solid human rights records), the increased penalties and scope of the CSDDD mean that relying solely on partners to self-assess their compliance exposes businesses to significant risks.
Instead, implementing a risk-based approach is a better option to ensure compliance with the CSDDD. Identifying and categorising higher risk partners or those that operate in regions with identifiable issues with respect to human rights and the environment and following up with an enhanced due diligence process for those who warrant it is a more robust approach. For third parties with moderate risk levels, simple steps like engaging a local researcher to check local media coverage for adverse issues and searching court records for any criminal or civil cases may be sufficient.
For higher-risk cases, involving local agents to conduct site visits and human source enquiries will provide essential insight beyond what is publicly available in jurisdictions that may have opaque information structures. By adopting a risk-based approach, companies can better identify and address potential risks within their supply chains and reduce the risk of significant consequences under the CSDDD.
Mitigating Negative Impacts in the Supply Chain with Due Diligence
The CSDDD places a responsibility on companies to prevent or minimise adverse environmental and human rights outcomes caused by partners or members of their value chain. While the directive provides some exemptions for certain cases, firms must have measures in place that are proportionate to the severity and likelihood of the adverse impact, as well as their own size, resources, and capacities.
In cases where a partner in the value chain is identified as causing a negative impact, the directive encourages continued engagement and remediation efforts rather than terminating the business relationship. To address such issues effectively, strong communication and a well-defined plan are necessary. Further targeted due diligence is required to monitor compliance with the plan and evaluate the effectiveness of measures taken.
Public disclosures and attestations submitted by partners should be carefully monitored, but on-the-ground due diligence is likely to be crucial. Monitoring local media by individuals familiar with the language and reporting practices can help confirm if issues persist or are being successfully addressed.
In addition, physical visits to sites can provide visible evidence of compliance or non-compliance, particularly in cases of environmental degradation or waste management. Interviews with partner staff and relevant local regulatory agencies can also shed light on whether the mitigation plan is actually being followed in practice.
Are You Ready to Embrace the Growing Role of Due Diligence in Sustainability?
Under the CSDDD, due diligence programmes must evolve to meet the increased requirements and address potential risks in supply chains. Adopting a risk-based approach and conducting remedial due diligence are essential. By engaging local researchers and agents, monitoring media and physical sites, and conducting interviews, companies can effectively mitigate negative impacts and work towards compliance with the CSDDD.
Implementing robust due diligence processes will not only help companies avoid penalties but also uphold environmental and human rights standards, contributing to a sustainable and responsible business ecosystem.
Get in touch today to discover how GTI is streamlining global due diligence with coverage in more than 250 jurisdictions.