You’ve probably already heard of it, but what is due diligence? Why is it important to understand the concept of due diligence and how it might impact your business, particularly your supplier relationships?
In this article, we offer some answers that we hope will help you best prepare your company for the changes ahead.
Context
The legislation
On 10 March 2021, the European Parliament adopted a text on corporate due diligence and corporate accountability. This proposal aims to make multinational enterprises legally responsible for human rights violations and environmental damage in their production and supply chains.
The European authorities have now embarked on the issue of sustainable development in companies and do not intend to stop there. New laws and initiatives are being created, drafted and consolidated at this very moment. The same applies to other countries that will soon align with these European measures. Proof of this is Germany, which on 11 June 2021, passed a law requiring companies with more than 3,000 employees to comply with due diligence obligations.
The target
Admittedly, we are only talking about large companies for now, but it’s only a matter of time before these same requirements become a reality for smaller companies too. Whether they are aware of it or not, all companies have an impact on people and the planet through their supply chain. Due diligence is therefore a tool that transforms the unknown into the known, and supports companies on their responsible and proactive path towards sustainability.
What is Due Diligence?
As explained above, due diligence is a tool to help manage corporate risks. It’s a process that includes identifying and reducing companies’ negative impact on human rights and the environment. It also demands reporting on how they manage these actual and potential impacts in their operations, supply chains, services used or through their business partners.
By reporting publicly on these risks and the measures taken to manage them, companies can demonstrate to investors, consumers and local communities that they are committed to responsible and sustainable sourcing.
This action is also based on the UN Guiding Principles on Business and Human Rights and on the advice of the OECD. How complex due diligence is will depend on the size and potential risks associated with a company’s operating environment.
What does Due Diligence mean for the corporate world?
Its application
Although the European Parliament proposal is binding and issued by the public authorities, we believe it should be seen as a tool that will allow you to gradually become a responsible and resilient company.
This text is not the first regulation on sustainable development in Europe. However, a due diligence law has the potential to transform the impact that companies and stakeholders have in Europe, notably by creating a common legal standard on transparency and the requirements for a sustainable supply chain.
Under the proposal, the requirements will be proportionate to the size and resources of the company. Companies operating in so-called “risk” sectors will have to do more. The question of smaller enterprises is still unresolved. However, It would be a good idea to assume that they will follow quickly, and that preparing them now will allow for greater resilience and adaptability in the market.
Due Diligence as a tool
The main objective of due diligence is to prevent and mitigate negative impacts on people and the environment. As a result, Due diligence allows companies to adequately assess environmental, social and governance (ESG) risks and negative impacts that, if left unaddressed, could face pressure and/or legal action from investors or other stakeholders. A law on due diligence is therefore a way of proposing a common legal framework. The legislative proposal is designed to help companies more clearly understand what is required of them so that they have access to a ‘level playing field’.
The new norm
In addition to being an internal tool for a company, we see that due diligence has become the new norm in business relationships between companies relying on a global supply chain. A company’s ability to implement a robust due diligence system demonstrates its strong capacity for resilience. It also demonstrates a capacity for innovation since, in order to meet the requirements of this legislation, it could prove useful to design new management systems and establish new governance. This need for innovation could itself lead to a better analytical capacity within the company, for instance.
And to finish, by creating clearer and more standardised guidelines throughout the supply chain, due diligence could also help companies make quicker decisions about whether or not to continue certain business partnerships that may ultimately prove disadvantageous in the future.
How best to prepare for Due Diligence?
Processes for assessing and managing corporate impact on people and the environment are not new. Usually already a component of their sustainable outlook, responsible companies are already practicing due diligence on a daily basis. But others who are still unfamiliar with the process might need a period of adaptation. We are of course able to assist if you want to take your responsible approach further. To start with, here is a short list of recommendations:
- Improve your understanding of CSR
- Identify those responsible for CSR within your management
- Incorporate CSR commitments into your company’s missions and values
- Communicate and raise awareness internally
- Surround yourself with specialists
- Take stock of your company’s sustainable behaviour
- Assess your supply chain risks
- Create a risk map
- Take action to manage problems identified
- Get audits
- Get certified and/or awarded a label
- Report to the public
- Regularly assess your subsidiaries, subcontractors and/or suppliers
- Take appropriate actions
- Implement an alert and monitoring system
In this article, we have tried to summarise the implications of due diligence for companies in Europe. We have also shown you that this proposed law should be seen as a tool for adaptation and resilience. It will help companies better understand their impact and act responsibly.
If you want more recommendations and a more detailed view of what due diligence means for companies, please read this document written by the OECD. We are also available to provide you with more information and help you prepare for the future.