Corporate sustainability will extend to value chains – four tips for implementing due diligence duty

Corporate sustainability is an increasingly integral part of business operations, and in the coming years it will permeate the strategy, ways of operating and value chains of companies. Just on time for Christmas, the European Parliament and the Council reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD), which will establish a due diligence duty for companies to respect human rights and the environment in their operations and value chains. Failure to comply with this duty could lead to a sanction of up to 5% of the company’s global turnover.

The CSDDD will apply to large companies with more than 500 employees and a net global turnover of over 150 million euros. Lower thresholds apply to companies that make at least 20 million euros of their net turnover in the textile industry, the minerals industry or in agriculture and forestry: in this case, the thresholds are 250 employees and 40 million euros. The CSDDD will also apply to non-EU companies with a net turnover of 300 million euros or more in the EU. The financial sector will be left out of the scope of application initially, but the directive will include an option to expand the scope later.

The practical implementation of the due diligence processes calls for systematic and continuous activities that are reflected throughout the value chain. Companies must identify and assess any negative impacts in their own operations, their subsidiaries and their business partners. Negative impacts must be prevented and, if this is not possible, mitigated. Companies must also assess and, if necessary, renew their procurement processes, documentation and agreements to comply with corporate sustainability requirements.

1. Evaluate value chains and identify risks

As part of preparing for the due diligence duty, companies should carry out a systematic and comprehensive evaluation of their value chains, procurement processes and related contracts. This evaluation should provide an in-depth overview of the environmental and human rights impacts in the operations of the company and its business partners. After this, companies should prioritise the actions required to prevent, mitigate and correct negative impacts.

The thorough evaluation of the value chain, risk identification and the possible renewal of the procurement processes call for multidisciplinary skills and close cooperation with the company’s business partners. It is a good idea to ensure the necessary skills and sufficient resources for the sustainability work already from the get-go so that unexpected surprises can be avoided during implementation.

2. Pay attention to contract management

Another key aspect of implementing due diligence processes is contracts with the company’s subcontractors and other business partners. Companies should ensure that the actions required by due diligence are also incorporated in their contracts. They should also assess whether their business partners can be reasonably expected to adhere to the provisions related to due diligence and aim to ensure compliance with such provisions. However, contractual provisions must not result in the other contracting party bearing responsibility for due diligence compliance or noncompliance.

The implementation of due diligence processes may result in a need to renew the company’s contracts to such a degree that a comprehensive review and update of the contract management system is in order. Companies should ensure that they have efficient and up-to-date contract management systems and processes that support the management, oversight and potential updating of contracts.

3. Include business partners whenever possible

The new guidelines adopted by the Commission this June provide a framework for cooperation between competitors as well as cooperation in trade associations in sustainability projects and make it possible for various stakeholders to work together. The reform allows cooperation that promotes sustainability and ensures compliance with legally binding international treaties’ obligations or prohibitions.

Companies should take advantage of this opportunity and engage in cooperation whenever permitted. Cooperation could mean sharing information and best practices or leveraging competition law flexibility as part of implementing due diligence processes.

4. Ensure that policies lead to actions

While the due diligence duty is in many respects connected to contracts, risk management and internal operating models and policies, its implementation also requires actions on the practical level. It is not enough to promote matters on paper; companies must make concrete changes as well as document these changes carefully and transparently. The due diligence duty means that sustainability must permeate the company’s operations as a whole and be integral parts of its strategy.