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20 Jul 2021

Frank Bold, Alliance for Corporate Transparency

Briefing analyses what mHREDD means for companies and how EU sustainability reporting standards can help

"Sustainability due diligence - what it means for companies and how EU sustainability standards can help", 20 July 2021

Human rights and environmental impacts in European companies’ global value chains present a major business risk as well as a challenge to fair competition. They are incompatible with the goals of the European Green Deal and EU Sustainable Finance agenda.

With these initiatives, the EU aims to redirect private and public funds to support the transformation towards a sustainable economy. However, business activities won’t meet sustainability requirements if their value chains remain linked to impacts such as deforestation, forced or child labour. 

The tool which can help companies overcome these challenges, ensure to protect people and planet and increase access for sustainable financing is ‘due diligence’...

However, companies can struggle to get a grasp on what they are supposed to do and disclose, due to the proportionate nature of this concept, lack of clarity in law and diverging investors’ demands...

...The primary purpose of due diligence is to prevent and mitigate impacts on affected people and the environment, in particular those of systemic nature. 

Most in business would never knowingly breach human rights or environmental norms. However, due diligence enables companies to properly assess relevant ESG risks and impacts that they would wish to avoid if they knew and which, if left unmanaged, would sooner or later lead to regulatory, investor, public or legal pressure, against the company. Similarly, companies and investors are already required to assess and disclose risks to their business stemming from sustainability factors in their sustainability reporting. This cannot be done without clarity on where the company and its supply chain may have adverse impacts on people and the planet...

...More generally, due diligence is becoming a norm in business-to-business relationships in sectors dependent on global value chains. The ability of companies to demonstrate to their buyers that they have a sound due diligence system will become an increasingly important asset, helping companies to retain their business partners and to grow....