In broad terms, corporate due diligence indicates how companies understand, manage and communicate about risk. ‘Risk’ is intended as the adverse effect that a company generates directly or indirectly, upstream or downstream in the supply chain.
In the context of sustainable growth, due diligence can be defined as the processes that companies need to carry out to identify, prevent, mitigate and account for the negative impacts caused by their supply chains on human rights and the environment (including deforestation).
In order to understand the status quo on due diligence in the EU and to provide a basis for the development of related EU-wide regulatory initiatives, the Commission published a Study on due diligence requirements through the supply chain in February 2020. The study was commissioned as part of the Commission 2018 Action Plan on Financing Sustainable Growth.
The study presents an overview of market practices and regulatory measures at EU and Member State level. Building on such research, different scenarios explore the potential impact of different regulatory interventions at EU level.
The market survey highlights that:
Only one-third of the companies surveyed/interviewed carry out due diligence including human rights and environmental impacts. In addition, the majority of them cover only first tier suppliers (e.g. refined oil producers in the case of margarine and spreads), with just few businesses going down the whole chain;
The main incentive for undertaking due diligence practices for companies are reputational risks, investors’ and consumers’ demand for high standards;
Legal certainty and the development of a level playing field are considered top priorities for the introduction of an EU mandatory legislation on due diligence;
Multinational companies seem to be the most in favour of stricter rules, in contrast with the position of industry associations, which are overall against any mandatory legislation.
Analysing different legislative options, the study does not give specific recommendations, but it concludes that:
Issuing new voluntary measures on due diligence would have little impact on enforcement by companies;
Introducing new reporting requirements would only moderately affect companies and would not have a great social and environmental impact either;
A mandatory due diligence requirement at EU level would have the biggest impact on companies’ reputation, legal certainty and competitiveness, but it will carry significant costs depending on the company’s size and sector.
The EU is to move on with legislation on due diligence.