Governance, risk and compliance
Finding the risks isn’t something anyone has to do alone either. Broadly speaking, the UNGPs and the European Parliament’s recommendations agree that due diligence should be built through transparency and stakeholder engagement, making it possible for others to alert companies to potential problems in their value chains. “To find out where the most severe and salient risks are, and how to address them, you [should] have proactive engagement with rights holders – including human rights defenders, workers and unions – to get their feedback, not just as an add-on, but really as something that co-shapes and forms the whole due diligence strategy,” says Blankenbach. It’s not about surveilling eyes as much as open ears.
But businesses tend to think a little differently about exposing themselves to outside scrutiny and influence. Almost half (45%) of those assessed by KTC fail to disclose even their first-tier suppliers. Only 15% include workers – the people with the best knowledge of how operations impact lives – in their due diligence processes. Instead, companies prefer to rely on third-party social audits of their first- tier suppliers. Ducu’s a social and ethical auditor himself, but even he doesn’t believe that approach is sufficient. Too often, compliance audits devolve into box-ticking competitions. Particularly in sectors like textiles, agriculture and technology, Ducu feels a closer look at supply chains is almost guaranteed to reveal problems with where and how products are sourced. Once those problems are clearly visible, they’re a lot harder to ignore. Facing up to them is bound to add significant costs for the multinational corporations that have benefited most from cheap globalisation. The Parliament’s recommendations called on the Commission to mandate just that sort of close look for the largest and most high risk of EU-based and operating companies. The Commission took a long time to respond. Inevitably, any cost increases would be passed on to European consumers. Even before war broke out on the bloc’s borders, they were feeling the pinch. In the delay-strewn year between the Parliament’s recommendations and the Commission’s proposed directive, Ducu wondered whether the two institutions were trying to understand quite what another inflationary move would mean. “They’ve stopped at the top of the hill,” he said at the time, “and nobody wants to push the snowball down the slope. They’ve seen at the bottom there are houses, there are people”.
A compromise directive Unsurprisingly, then, the EU Commission’s draft directive, which was eventually announced on 23 February 2022, is what Blankenbach calls a
Finance Director Europe /
www.ns-businesshub.com 65
“compromise”. Ducu argues it represents a completely different philosophy. “The Parliament’s document is more like one written by NGOs, while the Commission’s is much more like what the business sector would write.”
“The UNGP concept is you go where the risks are, be it tier one or tier 12, and do something meaningful about them.”
Johannes Blankenbach
In practice, that approach may make some form of mandatory due diligence easier to implement. Rather than centring on transparency, traceability and stakeholder engagement, the Commission’s draft directive is structured around something businesses already know well: contracts. In essence, it proposes that EU-based and operating companies use them to ‘cascade’ their due diligence and human rights obligations all the way through the value chain. It’s not quite revolutionary – and is likely to increase the reliance on third-party audits – but it won’t cause an
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