The European Union (EU) is on its way to mandatory supply chain due diligence. At the same time, a number of due diligence initiatives are underway or already in place at the national level. Amidst ongoing legal initiatives, it is still unclear what specific due diligence obligations companies have to expect. But establishing a due diligence program from scratch or adapting it to changing needs takes relationship-building, knowledge of your supply chain and, above all, time. What steps can your company take now to get ready?
The European Due Diligence Landscape
Across Europe, an era of voluntary supply chain due diligence is coming to an end. Following the pioneering efforts of the UK Modern Slavery Act (2015), the French Duty of Care Act (2017) and the Dutch Child Labor Due Diligence Law (2020), Germany has recently adopted the Supply Chain Act. While these national-level regulations differ in scope and criteria, they share a few common characteristics. Above all, companies which are subject to these regulations are required to publicly report on their due diligence efforts. As long as they have relevant operations in a given EU country, companies may be subject to domestic due diligence legislation even if they are not headquartered there. Companies of any industry, size or geography that conduct business with EU buyers will face increased scrutiny and transparency demands, typically in the form of questionnaires or audits.
In addition to initiatives at the member state level, the European Commission is driving mandatory human rights and environmental due diligence, and its proposal is expected to enter the EU’s trialogue – interinstitutional negotiations for the adoption of EU legislation – as soon as the second quarter of 2021. This newest directive will expand the EU’s existing reporting framework, and takes a comprehensive approach to corporate human rights, environmental management, and reporting obligations.
Due Diligence Obligations on the Horizon
Trends among ongoing legislative initiatives point towards defining how corporate due diligence can be effective. Through a number of mandatory elements, lawmakers want to ensure that due diligence efforts go beyond a “tick the box” exercise – an aspect of particular importance to EcoVadis in our recent discussion paper. Another trend is pointing towards fines for non-compliance, currently seen in the Netherlands and Germany as well as in debates for the EU’s initiative.
But a number of characteristics are still under debate when it comes to the specific requirements that will be imposed through the EU’s mandatory due diligence framework. Companies have yet to find out whether they will be asked to report on the first tier of their supply chain or beyond, a question that remains unanswered for the French Duty of Vigilance Act and has been criticized due to its limited scope under the German Supply Chain Act. Similarly, we do not know to date which specific due diligence elements – such as risk analysis, impact assessments, or stakeholder engagement structures – will be included in the EU’s mandatory process, and whether companies will be liable for shortcomings in their due diligence practices, or persisting human rights incidents. Most importantly, the Commission’s directive will be translated into national law by each member state and potentially override existing member state legislation, which can introduce further uncertainty.
But amidst ongoing legal developments, there are underlying foundations of mandatory due diligence that all initiatives have in common, whether at the national or European level and no matter the detailed legal obligations they impose: Due diligence legislation requires increased internal scrutiny about social and environmental management in the supply chain, and external transparency through advanced reporting practices.
Getting Ready to Meet Reporting Requirements
Even while it is not fully known which requirements the EU’s mandatory due diligence directive – or new national frameworks – will entail, there are immediate steps that companies can take now to get ready. Supplier relationship building will prepare you for a variety of due diligence elements, be it risk analysis, stakeholder engagement, or reporting channels.
Practitioners can start by trying to better understand the parties involved in their supply chain, and what their respective social and environmental risks are. Companies also want to lay the foundations for robust reporting practices, including processes to collect information from their suppliers. Supplier relationships can take years to establish and are key to obtaining reporting data. Through early action, companies can prepare their trading partners for the data provision needed once new due diligence requirements are legally binding or existing legislation expands.
Read our recent discussion paper on EU Policy Recommendations.
About the AuthorMore Content by Hannah Roberts