When we talk about "due diligence in the supply chain" we refer to the process of thoroughly assessing and mitigating risks associated with sourcing and procuring goods and services. This involves conducting a comprehensive examination of suppliers, their practices, and their compliance with ethical, social, and environmental standards.
As listed companies, in particular, are increasingly required to integrate due diligence in their decision-making processes, GUBERNA and VBO-FEB decided to put this challenge central in their annual and jointly organised Listed Company Day. After all, the consequences for the accountability and the liability of companies and/or their directors are not to be underestimated.
Where transparency meets due diligence
On October 18th we assembled a group of about 100 board members, general secretaries, CEOs, and legal advisors in the VBO-FEB premises to take a corporate governance approach to due diligence and sustainable value chains.
In his introductory speech, Arie Van Hoe, executive manager of law & business at VBO-FEB, discerned two trends for the supply chain:
An increased demand for more transparency and more information,
More companies will be obliged to have due diligence processes.
That poses a lot of corporate governance questions that will impact boards of directors. Thus we will have to "boldly go where no one has gone before" ...
Focus on the supply chain
Professor Miriam Wilhelm, professor of ‘sustainable supply chain management’ at Vienna University of Economics and Business, presented a clarifying keynote about "Sustainable supply chains. From voluntary governance to mandatory due diligence."
The supply chain is the sequence of organisations, their facilities, functions, and activities that are involved in producing and delivering a product or service. One can examine it both upstream from the suppliers or downstream to the final consumers. The market now demands appropriate information about the material flows.
We should also remember that sustainability in supply chains will always remain a difficult governance problem. Because the suppliers are independent legal entities. The supply chains have a complexity in their structure. And in many sourcing countries, there is weak regulatory enforcement of local laws. So it's so difficult to manage it all over the world.
From voluntary or private governance…
First, the professor introduced the 'voluntary' or 'private' governance for sustainable supply chains. Supplier audits and supplier codes of conduct or certifications are the most common forms of private governance. This voluntary private governance is meant to fill the vacuum between weak enforcement of environmental and labour protection laws in several countries. But over the years, we have seen only limited success: An analysis of six years of 4000 audits for instance shows that the level of compliance is stationary...
One of the main reasons is the fact that the purchasing and sustainability functions in a company are decoupled. Purchase places the orders and the compliance function can detect the violations. But with a central function missing, there is no real incentive for compliance. So the purchase orders keep continuing, no matter whether the factory improved or declined in sustainability compliance. We also see that the supply chain transparency is low. In different sectors either they don't want to be or they can't be transparent about their supplier lists in the chain.
…to mandatory due diligence regulation
Today we are witnessing a move to mandatory due diligence, which will cause some kind of a paradigm shift. It goes from voluntary to binding human rights and environmental obligations. We see that corporate due diligence will be a standard of care for social and environmental harm in the supply chain.
Miriam Wilhelm stressed that due diligence regulations emerge around the globe and become increasingly stringent with an extra-territorial corporate liability. However, most companies still lack guidance on how they should translate these abstract requirements into concrete practices.
We also witness an increase in technology adoption to support risk identification and the assessment of the due diligence regulations. There is a new market of supply chain sustainability risk assessment providers with all kinds of technologies emerging. Ecovadis, Sedex, Chainpoint, and Verisk Maplecroft are some of the important players. They offer data sources, software tools, and consulting services to support the risk assessment.
The professor concluded her instructive speech with three concluding remarks:
Voluntary standards and audits were largely unsuccessful in ensuring the sustainability of global supply chains
Disclosure-based legislation has not brought the desired outcomes either.
The mandatory treatment and the mandatory due diligence will cause a paradigm change, but many implementation questions need to be resolved. That poses some challenges.
CSRD and CS3D
Stan Brijs and Nicolas de Crombrugghe, both Nauta Dutilh lawyers, gave us a more technical and legal overview of the European legislation, explaining the regulatory wave for a sustainable value chain and offering a detailed overview of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D) impact.
Despite a lot of voluntary actions towards a green economy the development of a new European hard law is real. The EU Green Deal and the CSRD involve standards and labels for sustainable finance, sustainability reporting, and sustainability governance. Every supply chain will cause an important data collection challenge. The CS3D, currently under negotiation at the European level, will introduce a duty to act with mandatory due diligence.
We face a real 'game changer', as the implementation of those new legislations might cause an uprise of litigation by different stakeholders against states, companies, and directors. One can no longer afford to disclose a risk without disclosing how one will mitigate that risk. You have to show your client and supplier that all requirements about ESG will be met. You need data to report on this. And you also need it for monitoring.
The CS3D will also have consequences for directors' duties: When fulfilling their duty to act in the best interest of the company, directors of companies will have to take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights and climate change and environmental consequences, including in the short, medium and long term.
"Pressures on the value chain are a strategic opportunity to make the business model more sustainable"
The ABC of responsible sourcing
Raymond Williams, Umicore's 'responsible sourcing' manager gave a short explanation of sustainable supply chains in practice. He defines responsible sourcing as a practice of procurement and supply chain management that aims to increase ethical, lawful, and social behaviours in the supply chain.
Umicore goes for the ambitious slogan: Let's go for zero. That means zero harm, zero inequality, and net zero GHG emissions by 2035. This seems quite a challenge when dealing with raw materials such as cobalt and lithium to produce batteries while facing tremendous public pressure and attention. He explained Umicore's due diligence process in detail along four clear steps: supply chain traceability, risk assessment, risk mitigation, and review & reporting.
On the supervising governance side, Umicore has an "approval committee" with representatives from management, business, and operations. They take the ultimate responsibility for all the actions on responsible sourcing.
Company director voices
Nicolas Coomans, research associate responsible for Listed Companies at GUBERNA moderated a final panel discussion with Valentine Deprez, board member at Greenyard, Jules Noten, board member at bpost Group, and Gauthier van Thuyne, partner at Allen&Overy.
They discussed topics such as the risks associated with sustainability and the value chain, the governance of the relations inside the value chain, the role of the board in fostering better due diligence, the likely impact of the European regulatory projects, and so on.
Starting from a risk perspective, Gauthier Van Thuyne recommended companies be aware of the regulatory and litigation risks. Such risks are not only theoretical, therefore businesses must educate themselves and, even more importantly, anticipate and prepare themselves. This includes good due diligence regarding your suppliers.
Of course, the sustainability risks become increasingly important. Jules Van Noten for instance stated that we should no longer ignore externalities like air, nature, or water that used to be free when he started his career. Even without being able to price them correctly, we really must respect them. But he wants to avoid the red tape as much as possible. "We should be pragmatic. Let's do it for nature and the world, not for the paperwork and the reporting."
Valentine Deprez emphasized the need to not only look at the risks but also the opportunities. She testified that in this world of uncertainty, the ambition to remain relevant must be a priority. Shifting your business is both a risk and an opportunity. She also insisted on the strategic approach and the necessity of a long-term vision for the next generation.
The panellists stressed the crucial role of the board of directors in this domain. According to Valentine Deprez, the board has both a strategic role (decide on the direction) and an operational role (supervise that things are done). Jules Noten also noted that the board needs to define the materiality of the risks in the supply chain and make sure that sustainability is integrated into all aspects of the company's governance. Finally, Gauthier Van Thuyne provided some crucial questions each board should ask: What do you need to do legally? What is expected from you? How do they look at you? What do you want to achieve? And what does your organisation need?
The panellists concluded that we should not only look at the risks and compliance but also the opportunities. Indeed, those pressures on the value chain are also a strategic opportunity for companies and their boards to reflect on their business model to make it more sustainable.