In 2022, the European Union proposed a new directive to encourage responsible corporate practices covering sustainability, environmentalism and mitigating human slavery. The Corporate Sustainability Due Diligence Directive will ensure companies are adopting sustainable and ethical practices inside and outside the EU.
We’re here to help you understand what the directive entails, its purpose, who it will impact, why it is important and how Authenticate’s supply chain software can help you prepare for the changes.
What does the directive require?
The directive requires companies to understand their impact on the environment and human rights throughout their corporate practices, from order fulfilment to the companies they work with.
Here are a few topics included according to Sedex:
- Modern slavery, child labour, forced labour and other forms of slavery
- Freedom of association rights
- Health, safety and hygiene
- Gender equality and discrimination
- Bribery and corruption
- Land use and indigenous rights
- Greenhouse gas emissions
Policies
Companies are immediately required to implement due diligence policies which contain your company’s approach, code of conduct and processes to verify your due diligence systems. These policies MUST be annually assessed and reviewed. Your long-term approach should be to ensure you have sustainable, environmentally friendly and human rights-conscious policies across your organisation.
Risk assessment
Companies must immediately assess potential human rights and environmental risks internally and throughout their supply chains. You must then use this information to evaluate your business operations and ensure they align with the requirements of the directive. With our trusted software, Authenticate can help your company to mitigate supply chain risks.
Risk management
Companies are required to develop and implement sustainable risk management systems to prevent any human rights abuses and environmental impacts. They must also develop targets to ensure action for improvement.
Businesses are expected to seek contractual assurance from their suppliers and partners that align with the directive, while conducting audits across their entire supply chain through solution providers like Authenticate. Any SME suppliers who struggle to meet required standards must be provided with support.
Ultimately, companies must have measurements in place to prevent any future risks, thus, companies can strengthen their strength against any future challenges.
Remediation
Any organisations who fail to protect vulnerable people, communities, the environment or local areas must improve their practices and establish appropriate remediation for affected individuals or communities. This can be in the form of financial compensation or rectifying any damage caused.
If any supplier breaches any contractual agreements on required standards, commercial relations must be temporarily suspended until the issue is resolved and rectified. Companies must also establish a criteria and course of action if any supplier or partner breaches required standards.
Grievance mechanism
Companies must establish a mechanism for individuals, groups, unions, communities and customers to address any concerns regarding their operations. These complaints must be followed up appropriately and any issues or concerns that go against policy must be addressed and resolved.
Monitoring and evaluation
An efficient monitoring and evaluation must be established in each company. The evaluation process must be conducted every 12 months or more regularly if necessary.
Communication and reporting
Companies must produce an annual report discussing their key areas, how they are tackling issues and how they are building supply chain transparency. This report must be published by April 30th each year, covering the previous calendar year.
What are the implications for non-compliance?
Non-compliance leads to financial risks, not only through sanctions and fines up to €4m or up to 4% of a company’s total global revenue. A company can also be liable for rectifying any damages or compensating any persons affected.
Businesses may also face divestment from key investors and partners if they fail to meet the required environmental and social standards. This controversy can lead to consumer boycotts and not only is this damaging to a company’s finances, but also reputation.
Directors can also be held accountable as it their responsibility to ensure the correct due diligence processes are being conducted efficiently and effectively.
Here are some benefits of the new rules
Benefits for citizens
Citizens will be better protected from exploitation from large corporations as the directive also pushes for a healthier society to develop in the future and present. Individuals and communities will have better access to justice if they are victims of human rights violations.
Citizens will also live in a society with more transparency so they can make more informed, ethical choices. This ultimately increases trust in brands, especially those who have well-established ethical policies.
Benefits for developing countries
Those in developing countries will have better access to ethical working conditions and labour rights, including fair pay and the eradication of modern slavery.
Suppliers in developing countries will receive sustainable investments as businesses are only permitted to work with suppliers who provide products or services that meet their ethical standards.
Communities in developing countries will also be less impacted by environmental issues such as deforestation as the directive encourages sustainable practices.
Benefits for companies
Companies will have increased trust from the public as consumers are turning towards more ethical choices when spending. As the public perception of the brand is more positive, businesses are likely to be more profitable compared to competitors where they can demonstrate improved sustainability and social credentials.
The directive works towards a level playing field, so no company can get away with unethical practices, such as supply chain managers accessing products or services from irresponsible sources.
The next steps for your company and how Authenticate can help
Step 1 – Does the directive apply to your business?
Check if the new directive requires your company to report on its due diligence processes. If it does, you can proceed to the next steps, however, if it doesn’t, perhaps consider if the directive impacts your customers or supply partners.
If you are a supplier, consider your current environmental and ethical practices to establish if they are sufficient for customers and companies who must meet the new directive requirements.
Step 2 – Use transparency technology to detect supply chain risks
Implementing Authenticate’s transparency technology can help to uncover human rights abuses and environmental issues within supply chains, providing businesses with the insight to prioritise areas requiring improvement, aligned with the directive. This can be an overwhelming process, but it can be simplified with our software and experienced, specialist team.
Step 3 – What due diligence is required for the EU directive?
Take a look at the EU directive criteria and establish if your company fulfils any of these requirements. Does your company offer remediation? Does it have a grievance mechanism? Do you regularly conduct assessments on ethical standards throughout your supply chain and operations? If it doesn’t, consider how our software could assist.
Step 4 – Document your due diligence
Document what steps and processes you have in place to meet ethical standards and publish this in a report by April 30th for the previous calendar year.
Ready to increase supply chain transparency and mitigate risks ahead of the new EU directive? Contact our friendly team today to find out how our technology could help.