Supplying value to your business - supply chain due diligence

More and more companies are calling for stronger regulation for themselves and their peers to codify supply chain best practice into UK law.

Recently, 47 companies, investors, business associations and initiatives published a joint statement calling on the UK Government to “introduce a new legal requirement for companies and investors to carry out human rights and environmental due diligence”.

These businesses are ahead of the curve, prioritising morality and reputation over efficiency and costs — but why? While there is still little quantifiable evidence of the impact that an ethical supply chain has on value, there is a clear collective understanding that strong ESG values are required for good business.

Global examples

Despite this limited evidence, most agree that better company values drive better returns. Human rights due diligence can be costly and time-consuming, but many businesses understand that it is essential to retain their reputation in modern society. Several high-profile supply chain scandals — and the associated impact on brand value which followed — testify to this.

Across Europe, jurisdictions are beginning to wake up to the necessity of writing thorough due diligence checks into law. Mandatory human rights and environmental due diligence legislation has already been introduced in several jurisdictions, or is under discussion, and has gained substantial public support from businesses and their customers. For example, the Bundestag, the German Parliament, adopted the “Act on Corporate Due Diligence in Supply Chains” on 11 June 2021. The Act imposes, for the first time, a binding obligation on companies to establish, implement and update due diligence procedures to improve compliance with specified core human rights and, to a limited extent, environmental protection in supply chains.

Where law makers have been slower, some corporations have taken matters into their own hands. Many are implementing due diligence processes in line with the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises. But companies in the UK are calling for regulation to go further than guidelines. The joint statement by businesses called on “more companies … to assess, act and report on their potential and actual impacts on human rights and the environment.” They want measures to go beyond guidelines, and instead want legislation which mandates thorough due diligence processes to set a common standard for supply chains, while also creating a starting point from which progress can be made.

Proactive not reactive

It’s clear that for businesses, the cost element of tightening up supply chains and conducting thorough due diligence checks to ensure there are no human rights or environmental failings outweighs the potential risks. For the best results, it’s a case of being proactive, rather than reactive, throughout the entire business.

In a market that changes quickly, due diligence needs to be a continual monitoring process rather than a one-time fix. Should legislation requiring stringent human rights due diligence to be carried out throughout the entire supply chain be brought into force, it is likely that a number of issues will be exposed — knowingly or not.

By investing in strong ESG policies and ensuring these are carried out throughout the company, brands can put forward a genuine argument for good to improve their reputation, which should in turn drive more business. We are unified in agreement that purposeful and value driven investment will deliver stronger returns. The alternative looks bleaker.

Authored by Andrew Probert
Regional Managing Director of Growth and Head of ESG Advisory, Kroll