On 23 February the European Commission (‘EU’) finally published the long-awaited proposal for a Directive on Corporate Sustainability Due Diligence (DD Proposal).
The aim of this directive is twofold – to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations into companies operations and corporate governance. It introduced a corporate due diligence duty.
There have been changes since the proposal was first published for comment and it has received a mixed reaction. It may still be negotiated which would result in further delays before it can be adopted in a final form.
The DD Proposal will applies to both EU and Non- EU companies that are large , limited companies. SMEs will be excluded. For a more detailed breakdown on the scope for the DD Proposal see ‘ European Commission: Proposed mandatory due diligence: key features.
There will be far reaching due diligence requirements in respect of the company’s own operations, its subsidiaries and their values chains.
Procurement professions will have a key role to play in ensuring that an organisation will sufficiently address:
The DD Proposal requires that organisations will need to have in place a due diligence policy which should contain a description of the company’s approach, including a code of conduct describing the rules and principles that will need to be followed by employees and subsidiaries. They will also include measures to verify compliance with the code of conduct and to extend its application to established business relationships.
The code should apply to all relevant corporate functions including procurement and purchasing decisions.
Procurement professionals will also have a key role to play in helping to identify the actual or potential adverse impacts. This should include assessing the impact of the business relationship’s business model and strategies – which will include procurement and pricing practices.
The DD Proposal explains that for a company to comply with its due diligence obligations it will need to be able to take appropriate measures with respect to the identification, prevention and bringing to an end adverse impacts . Pre-qualification requirements will be crucial. Effective due diligence will have to assess purchasing practices at all steps of the process. Potential exploitative buying practices in the supply chain should be identified through risk assessments.
Monitoring and assessment of the effectiveness of the implementation of their due diligence measures is another key feature of the Proposed DD where procurement professionals will be involved. They will also play a role reviewing existing social audit programmes.
Where an organisation cannot bring to an end an adverse impact it should be able to prioritise its action. As the DD Pdoes not encourage terminating a business relationship where for example child labour has been identified which could give rise to more severe impacts, these considerations should be taken into account. Procurement professionals will be key actors in the decision making. This may require training for procurement professionals who may not want to take any risk and end the contract. This is discussed in a study on due diligence requirements in the supply chain. Procurement professionals will play a key role in price negotiations, confirmation of technical standards, contractual terms, payment terms and lead in terms.
No doubt procurement and supply chain professionals will play a key role in supporting the requirements of the legislation.
While the legislation is still draft and some changes may be changed before the final draft is agreed, organisations should be starting to consider how they will address the requirements. It is also becoming apparent in practice that brands and business operators are cognisant that their customers will be asking for evidence of appropriate due diligence systems and are starting to benchmark their current practices to highlight the gaps.
☛ Colleen Theron is CEO at Ardea International