In our previous post, we outlined the new European-wide corporate sustainability due diligence directive (CSDDD), who it applies to and what areas of a company’s activities are affected. So, why should businesses care?
Doing Good and Doing Well
Beyond compliance, avoiding personal liability, and reputational harm there are other important reasons to implement ESG related initiatives. Consumers say they care about sustainability and all the consumer sentiment surveys bear that out and, for the most part, so do their actions. According to a McKinsey Survey, consumer packaged goods with ESG-related claims like “eco-friendly” and “fair trade” saw sales grow nearly 2 percent faster than other consumer packaged goods year over year for the last five years.
At the same time, consumers are growing wary of potential greenwashing desiring authenticity as a necessary factor in what they buy viewing their consumptive habits as a reflection of who they are. Risks to companies manifest in threats stemming from consumer boycotts prompted by the prominence of messaging that travels quickly on social media. When deciding on business strategy, companies should ask themselves whether they are driving decarbonization and the move to net zero and how? Are they focused on fair labor practices like paying a living wage and safe working conditions?
While some executives might view a competitor’s “margins as my opportunity,” those sentiments have catalysed a revitalization in the labour movement and put consumers in the uncomfortable position of grappling with a sort of moral dilemma that does not bode well for the future. Millennials and Gen Z care about the planet and are most on guard for inconsistent messaging. This coupled with the potential to bring private rights of action under forthcoming legislation creates a scenario of incentives for companies to make good on their ESG program.
Wrangu’s Corporate Sustainability Due Diligence Directive product utilizes ServiceNow’s platform strength to provide cost-effective, low-risk, and high-impact supply chain management solutions through transparency, automation, and visualization.
So, what do businesses need to do to be prepared?
Steps to Take Now
Notably, these requirements are part of a Directive meaning their application into national law will leave room for variation. Building on our experience with the LkSG (German Supply Chain Due Diligence Act), we have identified the following general steps all companies should take on the road to sustainable business operations.
1. Map Business Relationships
Under the CSDDD, companies are obligated to set up and carry out due diligence measures in their business process, their subsidiaries, as well as direct and indirect business relationships throughout the value chain. Companies do not need to guarantee that something bad will not happen. Rather, the expectation is to take measures that “can reasonably be expected to result in prevention or minimisation of” violations to human and environmental rights. This includes upstream and downstream relationships meaning your company’s suppliers and the companies you supply products or services to ensuring that your business output does not result in harm.
This will naturally be a challenge. Supply chains are complex, and this effort will be an operational burden with the Directive spelling out the need to go beyond “first tier” suppliers that have a direct contractual relationship to the company. Businesses need to figure out how they are going to gather this information. One suggestion is to send out questionnaires to existing suppliers gathering information about second, third and tier n suppliers and their business practices around human rights and environmental risks. This kick starts documentation and the ability to demonstrate accountability and compliance with the Directive including gathering actual and potential impacts from independent reports, auditors, and activists.
Another potential activity is to introduce contractual clauses requiring new suppliers to identify their suppliers with sufficient guarantees that raw materials, products, and services are procured from where suppliers say they are. This must include some form of redress for bringing violations to an end and consequences for failing to do so.
2. Review and Update Policies
Companies need to “integrate due diligence into all their corporate policies” describing the company’s approach to implementing due diligence and have a code of conduct describing the rules and principles that employees and subsidiaries must follow.
Most companies will have some type of policies and codes of conduct in place. However, these need to be updated to cover the specific requirements of the CSDDD and will require amendments to other policies like employment and supplier contracts.
Training of employees and business partners will be key to ensuring new policies and procedures and put in place, understood, and actionable.
3. Adopt a Risk Management System
The Directive’s requirement to identify “actual and potential adverse impacts” is all about risk management. Risk management is a complex calculus around likelihood and impact of violations taking into account factors like geopolitical conflict, pandemics, local rules and practices on human and environmental rights, and climate change to name a few. The Covid pandemic is a careful reminder of the complexity around managing supply chains.
Because this is likely to be an important investment, companies should start looking now for experienced providers around compliance, vendor risk, and integrated risk management.
4. Establish a Complaints Procedure
A complaints procedure is also a key part of the Directive. Because new requirements stipulate the complaints procedure must be open to the operations of business partners, existing whistleblowing procedures will need to be updated and provisions made to include information gathering.
5. Document and Publish your Efforts
This step is both proactive and reactive. Under the Directive, Companies are required to publish an annual report. Not only is this a requirement, but this is also an opportunity for companies to proactively tell their story around sustainability and many already do this. To effectively do this, companies will need documented evidence supporting the claims they make highlighting the importance of keeping records on what decisions were made, the reasons for those decisions, and when decisions will be reviewed.
Another reason for keeping records, beyond demonstrating accountability and compliance, is the requirement that companies make decisions based on principles like “fair and “reasonable.” Because these principles do not have clear definitions, it is likely that decisions will be challenged. Especially when something goes wrong. To make a defence or provide a justification, companies will again need evidence for doing so. Keeping up-to-date and accurate records will make it easier to respond to requests and complaints and provide information to regulators and defend legal claims.
Conclusion
Regulation on corporate sustainability due diligence is coming, and the road to compliance is not a technological quick fix. We recommend that businesses act now to be compliant with forthcoming legislation and sync with their customer, investor and employees demands.
At Wrangu, we have years of experience and dedicated consultants for developing products and services to solve your compliance, vendor, and integrated risk challenges on the ServiceNow platform. We are an elite level partner that moved quickly to develop solutions around the German Supply Chain Due Diligence Act. Learn more at https://www.wrangu.com/corporate-sustainability-due-diligence-directive/.
