The Rise of ESG Due Diligence Legislation and Impacts on Supply Chains
While certain specific issues such as food safety, restricted chemicals, and health and safety have been legislated for decades, responsible business conduct and due diligence have been largely managed through weak standards, voluntary initiatives, and individual companies’ codes of conduct.
This is now changing. There are a plethora of regulations and standards, schemes, certifications, and other initiatives that focus on ensuring ethical practices throughout value chains. Collectively, this legislation is known as due diligence legislation. This evolving landscape is a significant paradigm shift that highlights the growing imperative for ethical supply chain practices around the globe.
Key Takeaways
Due diligence legislation focused on ensuring ethical and sustainable business practices is rapidly increasing globally, with a focus on human rights, environmental impacts, and labor issues like forced and child labor. This marks a major shift towards mandatory ethical standards.
Due diligence laws focus on a diverse array of topics, including human rights topics like forced labor and environmental topics like illegal logging.
Companies must invest in robust due diligence processes including supply chain assessments, risk analyses, traceability measures, and transparent reporting to comply with emerging regulations and avoid issues like greenwashing allegations or imports of conflict minerals.
What Is Due Diligence Legislation?
Due diligence is the process that organizations should carry out to identify, prevent, mitigate, and account for how they address actual and potential adverse ethical, labor, human rights, and environmental impacts in their own operations, their supply chain, and other relationships.
While commonly labeled as mandatory human rights due diligence laws, legislation focused on ensuring due diligence typically encompasses environmental protection as well, and may have specific requirements on issues such as forced labor or conflict minerals.
In 2022, the UN General Assembly adopted a resolution stating that access to a healthy, safe, and sustainable environment is a basic human right. Thus, environmental concerns are increasingly included under the umbrella of due diligence, and environmental due diligence is included in legislation.
Global Rise in Due Diligence Legislation
In recent times, there has been a notable surge in the enactment of due diligence legislation, with a specific emphasis on Environment, Social, and Governance (ESG) considerations. This heightened focus reflects a growing recognition of the pivotal role that ethical and sustainable practices play in contemporary business operations. Ethical business conduct is no longer voluntary, but mandatory.
Fig. 1. Rise of due diligence (and related) legislation globally
Source: QIMA 2023
The French Duty of Vigilance Act of 2017 was the first comprehensive due diligence legislation. More recently, Germany, Norway, and Switzerland passed laws on human rights and environmental due diligence. Examples of key pieces of due diligence legislation include:
EU Corporate Sustainability Reporting Directive (CSRD): The CSRD intends to increase companies’ disclosure of sustainability matters for greater accountability and standardize what is reported and how this is done.
Germany Supply Chain Act: This Act requires companies and direct suppliers to carry out human rights risk analyses, engage in risk management, and establish a grievance mechanism for workers.
UK Modern Slavery Act: Companies that are in scope need to publish a ‘slavery and human trafficking Statement’ for each financial year, disclosing the steps they have taken to ensure that slavery and human trafficking is not taking place in their own operations and supply chains.
For a full list of global due diligence legislation, including which companies and industries are impacted, see the appendix of our whitepaper: Mandatory Human Rights & Environmental Due Diligence: How to Get Prepared
Issues Covered by Due Diligence Legislation
Human rights and the environment are the most common issues regulated by global due diligence legislation, followed closely by forced and child labor. Existing due diligence legislation also covers illegal logging, climate change, and disclosure and reporting requirements.
Fig. 2. Topics covered by due diligence (and related) legislation globally (in force, proposed and drafting)
Source: QIMA 2023
Human Rights
Human rights stand as a cornerstone in the spectrum of issues addressed by global due diligence legislation. Nearly ubiquitous in its coverage, this broad category is at the forefront of regulatory frameworks, reflecting the shared acknowledgment of the importance of safeguarding human rights within business operations.
Environment
Closely trailing human rights, environmental concerns form a pivotal focus of global due diligence legislation. This reflects an increasing awareness of the interconnectedness between business activities and environmental impact, highlighting the imperative for responsible practices that contribute to sustainability and the preservation of ecosystems.
Conflict Minerals
Since 2010, targeted legislation addressing metals and minerals originating from conflict-affected areas has been in effect, particularly in the United States (US) and the European Union (EU). These regulations are designed to prevent the sale of tin, tungsten, tantalum, and gold sourced from regions marred by conflicts. The focus on these minerals underscores a commitment to curbing the economic support provided to conflict zones through the trade of these materials.
Child Labor and Modern Slavery
Within the realm of labor practices, forced and child labor represent critical issues addressed by existing due diligence legislation. The inclusion of stringent measures underscores a collective commitment to eradicating exploitative labor practices and ensuring ethical standards throughout supply chains.
Several countries, such as the US (California), the UK, and Australia, have implemented due diligence legislation to eradicate slavery and human trafficking from supply chains.
In addition, import bans on products made with forced labor through tariffs or customs acts are in place in the US, Canada, and Mexico.
Timber Legality
Beyond human rights and labor, due diligence legislation extends its reach to encompass broader environmental challenges. Illegal logging, recognized as a significant threat to global ecosystems, is subject to regulatory scrutiny, aligning with legislation to curb deforestation.
Additionally, the evolving landscape acknowledges the urgency of addressing climate change, prompting legislation that encourages responsible business practices to mitigate environmental impact.
Legislation aimed at fighting illegal logging and the import of illegally harvested products exists in the EU, the US, the UK, and Australia. Due diligence includes traceability information, risk assessment, and risk mitigation.
Disclosure Requirements
A common thread in global due diligence legislation is the emphasis on transparency. Mandating disclosure and reporting requirements, these regulations aim to foster accountability, enabling stakeholders to assess the ethical and sustainable dimensions of business operations.
In the European Union (EU), numerous regulations and directives, notably the Corporate Sustainability Reporting Directive, the Taxonomy Regulation, and the Sustainable Financial Disclosure Regulation, specifically center on disclosure requirements.
Concurrently, various countries are passing legislation to detect and mitigate instances of "greenwashing," often integrated into consumer protection laws. Mitigating the risk of greenwashing allegations necessitates rigorous due diligence, traceability measures, and transparent disclosure practices by companies.
Ensuring Compliance with Due Diligence Legislation: How QIMA Can Help
In today's ever-changing regulatory landscape, businesses strive to achieve compliance with dynamic due diligence legislation. At QIMA, we offer a wealth of global expertise and a wide range of due diligence services to empower organizations with customized solutions that meet their industry-specific requirements.
Through meticulous supply chain inspections, rigorous risk assessments and more, we enable companies to adhere to the exacting standards mandated by due diligence legislation. Our steadfast commitment to transparency, traceability, and ethical considerations aligns seamlessly with the foundational principles of responsible business conduct, We are ready to equip you with the assurance and resources essential for navigating the complexities of regulatory compliance.
Learn more about our due diligence services or read our whitepaper Mandatory Human Rights & Environmental Due Diligence: How to Get Prepared to get a full picture of the landscape of due diligence legislation.
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