How to achieve resilience and prosperity? Conduct due diligence, say experts

‍Sustainability due diligence is fast becoming an important part of the green transition. In the context of the EU's sustainable finance strategy, due diligence is one of the pre-conditions for sustainable activities and green financing, including green bonds. In addition, the EU is preparing common rules on sustainability due diligence for companies. Get to know what challenges and benefits due diligence brings to businesses. 

Sustainability due diligence refers to the process of identifying, addressing, preventing or mitigating negative human rights and environmental impacts of a business. In most sectors, human rights risks are predictable, which makes it easier for companies to identify whether they are or are not exposed to such typical risks of severe impacts. 

Experience from Ericsson, Vaude and Shift

In case there are more human rights issues coming up, companies should apply a lens of severity from the perspective of the people who could be affected to identify salient human rights issues.

‍“If we look at our supply chain, we often deal with issues related to labor rights such as living wage, working hours or trade union rights. If we look at our sales and the end-use, we deal with issues such as privacy and freedom of expression related to potential misuse of our products. Therefore, we also have two separate due diligence processes to deal with those different sets of salient human rights issues,” describes Corporate Responsibility Expert Théo Jaekel from telecommunications company Ericsson. 

If a company is connected to potential or actual severe impacts, it should take appropriate action based on the company's position, its involvement in adverse impacts, and its ability to influence these impacts. For example, good due diligence practice in high-risk supply chains (e.g. cotton, palm oil) means that the company knows its chain, assesses new suppliers, and engages with them.

“On the contrary, if a company takes no precautions and does not screen its suppliers, it fails to meet the due diligence standards," explains Filip Gregor from Frank Bold. 

Indeed, the engagement with suppliers and other stakeholders such as workers, trade unions or NGOs is a crucial due diligence principle. “Whenever the company is dealing with an issue that it did not cause on its own, it is still expected to use its influence in order to achieve a better outcome for people. Building capacity with suppliers or customers, or getting help from industry peers to influence governments, can be important ways of using leverage,” confirms Rachel Davis, vice-president and co-founder of Shift.

Business experience shows that besides the efforts in companies’ operations and supply chains, the adoption of due diligence processes also brings a lot of benefits. “Sustainability management makes companies crisis-proof. Even in the pandemic, we had stable supply chains and we could find solutions with our suppliers when they struggled with the covid-19 impacts,” says Bettina Roth, Head of Quality Management & CSR Supply Chain at apparel company Vaude and adds that it is nowadays not a decision whether to be economically successful or to be sustainable and take the responsibility. “We can clearly show that sustainability leads to economic success,” concludes Roth.

Besides higher resilience and positive effects on a company's performance and growth, due diligence benefits include an increase in trust between companies and suppliers and business partners. Also, banks and financial institutions are keen on supporting projects that implement due diligence. 

According to Théo Jaekel from Ericsson, the investors' interest in due diligence has only increased over the last couple of years. “Many times we have experienced direct questions from investors on our due diligence. By being prepared, and by having due diligence frameworks, we have seen quite positive reactions from them. That is not saying that we are perfect, but that we have processes in place that are well geared towards being more prepared to respond to risk when they emerge. We also have regular engagements with our investors to update them on the situation in specific high-risk countries and that has been really appreciated by them,” describes Jaekel the experience of his company.

Businesses need to get ready

France, Norway and Germany have already adopted legislation that requires large companies to carry out due diligence with respect to all of their activities and business relationships. The European Commission will publish its Sustainable Corporate Due Diligence proposal (SCDD, formerly Sustainable Corporate Governance initiative) including rules on human rights due diligence and submit it to Parliament and Council on 23rd February 2022.

More than 100 companies and investors recently supported the adoption of the Directive in a joint statement. They urge the EU to adopt human rights and environmental due diligence rules under the Directive as soon as possible. Signatories include Aviva, Danone, Ericsson, IKEA, or Vaude.

How can we help you access investments?

At Frank Bold Advisory we offer comprehensive ESG services that include due diligence. We will assess your business in relation to the emerging European ESG framework and set up the relevant processes and reporting outputs to meet the requirements of the EU Taxonomy. We will also help to assess due diligence requirements for companies looking to issue green bonds.