Corporate sustainability due diligence: TOP FIVE LEARNINGS from the implementation of the German Supply Chain Act - Löning - Human Rights and Responsible Business (2024)

Companies often approach human rights as a one-off project to be implemented by a specific team, by a specific deadline. In reality, and as many companies have come to realise, integrating human rights goes beyond publishing a human rights policy, adding human rights KPIs to the risk management system and setting up a human rights complaint hotline. The effective implementation of sustainability due diligence requires a change in the company’s processes, structures and culture.

Sustainability is not a task, but a perspective.

It is the way a company relates its business to the world around it. It is not just a change in processes, but a change in the way people see and act. It requires a shift in risk management from an understanding of the risks that external factors pose to the company to an understanding of the risks that the company poses to people. This transformation requires the involvement of multiple functions, but also ownership from every employee. It should be led by professionals with the right expertise and a strong commitment to human rights.

It requires an open mind and a willingness to shift the mindset of the people and how they approach their work – as well as the company’s purpose. To do this well, a company needs to approach it as a longer-term transformation process that brings together multiple business leaders in the company, is driven by top management, endorsed by the board and supported by adequate human and financial resources.

So how do you achieve this transformation?

You need to speak the language of your audience and build ownership internally. For example, if you’re addressing your human resources colleagues, you may need to emphasise the benefits in terms of employee retention. Or if you need the buy-in of your colleagues in the legal department, you may need to frame the issue in terms of compliance and litigation risk. You may also need to adapt your language to fit the location of the person you’re speaking to. For example, with colleagues based in a high-risk country or a country with a weak democracy, you may need to reframe the term ‘human rights risks’ as ‘health and safety risks’ or ‘ethical employment’. By establishing links between corporate sustainability goals and the issues valued by different functions, you will build wider acceptance and ownership of the sustainability agenda across the company and effectively weave social considerations into existing business processes.

Companies often assume that the greatest human rights risks exist at the lower levels of their supply chains. This may be true, but sustainability due diligence requirements apply to both your supply chain and your own operations. The requirements may also apply to your downstream value chain, i.e., to your customers and beyond. To take a risk-based approach to sustainability due diligence, a company needs to look at its entire value chain. Through a risk-based approach, a company can effectively identify the high-risk segments of its value chain and develop appropriate, effective measures for preventing these risks.

In the context of the German Supply Chain Act, the government enforcement agency explicitly emphasises a company’s duty to share with its suppliers the responsibility for addressing human rights risks. This means that companies should not make the mistake of passing on due diligence obligations to suppliers through contractual obligations in supplier contracts.

A similar misconception is that no serious human rights risks exist in Europe even though modern slavery, child labour and health and safety risks are still widespread in Europe. In fact, there are an estimated 130,000 modern slaves in the UK alone. A truly risk-based and objective approach to sustainability due diligence requires abandoning preconceived notions and keeping an open mind.

Environmental, social and governance (ESG) factors are interconnected. This has become even more apparent since the unanimous UN resolution affirming a clean, healthy and sustainable environment as a human right. Therefore, environmental and social sustainability should not be treated as two separate issues.

A negative environmental impact almost always has a negative social impact.

Because companies are often more advanced in integrating environmental sustainability into their processes and culture, they can benefit from existing environmental knowledge and processes to establish and strengthen new social governance and processes. Existing knowledge of environmental risks can also help to identify and mitigate some of the company’s human rights risks more quickly. Leveraging existing environmental expertise can therefore accelerate improvements in corporate human rights governance.

The close link between environmental and social, the E and the S, can also be a factor in gaining wider buy-in from teams that own and accept the environmental agenda and goals. The link can also help leverage the often greater resources allocated to environmental governance for the purpose of conducting corporate sustainability due diligence.

Educating employees on human rights issues is key to bringing human rights risk management to life. While the concept of human rights may be well known, human rights in a business context and human rights due diligence are often not clear concepts to business professionals. Effective human rights due diligence requires building a certain level of understanding of human rights issues throughout the organisation. While not all teams need to have the same level of knowledge, a transformation of the company culture (and thereby an effective corporate sustainability strategy) cannot be achieved without the involvement and ownership of each and every employee.

Most companies opt for a diversified approach consisting of basic and advanced human rights training, delivered in a variety of formats depending on the potential human rights impacts of the participating teams and their role in the company’s sustainability due diligence process. Often, all employees are trained on general business and human rights issues through a standard e-learning course. They learn about human rights in general and in the business context, as well as their role as rightsholders vis-à-vis the company and, in many cases, as duty bearers vis-à-vis stakeholders.

Sometimes the company requests tailored training, with examples and exercises related to the company’s industry, sourcing destinations or product categories. The general training also educates employees about the company’s human rights policies and mechanisms, including the channels through which employees can make human rights complaints and how such complaints are handled once they’ve been raised. In the second stage of corporate human rights training, companies introduce function-specific, customised human rights training that covers advanced human rights issues, such as the role of procurement or human resources in human rights risk management.

Many companies also train their direct suppliers on human rights issues and the company’s Supplier Code of Conduct, which explains the human rights standards that suppliers are expected to meet. These training programmes often have two levels: an introductory programme for all suppliers and a second programme that high-risk suppliers are required to attend.

Only those who understand what human rights risks are can identify them.

The benefits of corporate human rights training are twofold: to build human rights understanding and ownership among employees, and to strengthen human rights risk management. Only those who understand what human rights risks are in the first place can identify them, and then report them to the company. Training employees and suppliers on human rights is therefore a cost-effective and easy-to-implement preventive measure in sustainability due diligence.

An effective corporate sustainability due diligence system hinges on meaningful stakeholder engagement. Start by identifying all relevant stakeholders who may be affected by your organisation’s activities. These may include employees, customers, suppliers, investors, local communities, NGOs and government bodies. There are several ways in which companies can benefit from engaging with different stakeholders, including those who may appear to be adversarial.

First, engaging with potentially affected rightsholders is not only at the heart of effective human rights due diligence, but will also improve the company’s understanding of risks and therefore its ability to mitigate them.

Companies often make the mistake of engaging only with a limited set of stakeholders, such as their own employees, customers and end-consumers – and overlooking groups such as local communities affected by the company’s or its suppliers’ production activities, or temporary workers, who often fly under the radar but face higher human rights risks than workers on the payroll.

Second, robust engagement with suppliers on human rights risks and a shared responsibility approach as defined above will help improve the resilience of the company’s supply chain, as companies will better understand and be able to mitigate the human rights risks faced by their suppliers – and by extension, themselves.

A key consideration for companies is that stakeholder engagement in the context of human rights due diligence needs to be appropriate to the local context. An engagement format that works well with one group may not be effective with another. Therefore, companies need to understand the needs and realities of the stakeholder group and tailor their engagement strategy accordingly.

Third, engaging with a diverse group of stakeholders will help companies strengthen their grievance mechanisms.

Companies often adapt their existing whistleblower hotlines to cover human rights complaints. But this is a typical corporate approach, and often more costly than setting up a human rights grievance mechanism in line with corporate sustainability laws. Early stakeholder engagement can inform the design of the grievance mechanism and ensure that it meets stakeholder needs, thus avoiding costs in the long run.

Fourth, effective stakeholder engagement can help develop appropriate preventive measures and an appropriate human rights due diligence roadmap for the company.

For example, if a human rights risk hotspot is identified, the next step may be to conduct a human rights risk impact assessment.

Fifth, companies can achieve greater impact by engaging with peers and participating in multi-stakeholder initiatives.

Collaborative efforts among peer companies, as well as companies at different levels of a supply chain, can help to address larger, systemic human rights issues. Such sustainability-focused multi-stakeholder initiatives are encouraged by regulators and are exempt from anti-corruption regulations.

Finally, internal stakeholders represent one group of stakeholders that should not be overlooked.

Engaging with various teams within the company can reveal a wealth of information that can serve to inform and improve corporate sustainability due diligence processes.

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In conclusion

No company can identify and effectively address all of its human rights risks at once. Sustainability due diligence is a continuous, long-term process of improvement. The risk-based approach expects a company to assess and prioritise its human rights risks, develop effective responses to those risks, and improve its risk assessment and mitigation processes over time. To do this, however, a company needs to start the process somewhere – and soon.

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