Understanding & Implementing Sustainability Due Diligence

Sustainability Due Diligence is no longer just a corporate buzzword; it is an essential framework for businesses striving to align their operations with global standards of responsibility and accountability. Rooted in the principles developed by the late Prof. John G. Ruggie under the UN Guiding Principles (UNGPs) on Business and Human Rights, this practice is both a moral imperative and a legal requirement for companies operating in today’s interconnected world.

In this article, we’ll explore the core aspects of Sustainability Due Diligence and provide actionable insights to help businesses navigate this complex but critical area of corporate governance.

What Is Sustainability Due Diligence?

At its heart, Sustainability Due Diligence involves regular assessments of the environmental, social, and governance (ESG) impacts of a company’s operations and business relationships. The primary goal is to prevent and mitigate adverse impacts while fostering transparency and accountability.

The foundational elements include:

Policy Commitment: Establishing clear policies that reflect the company’s commitment to sustainability.
Due Diligence Processes: Identifying, assessing, and addressing risks.
Access to Remedy: Providing mechanisms for addressing grievances and remediating harms.

Key Guidelines for Effective Implementation

1. Meeting Minimum Standards

Responsible business conduct begins with a robust management system aligned with the UNGPs and OECD guidelines. Companies must document and maintain their due diligence efforts to ensure accountability and compliance.

2. Understanding Regulatory Requirements

European regulations, such as the Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), and Corporate Sustainability Due Diligence Directive (CSDDD), demand rigorous implementation of the UNGPs/OECD standards. While large companies are held accountable with fines and liabilities, smaller businesses in their value chains are also expected to align their practices.

3. Leveraging Double Materiality Assessments

Conducting thorough due diligence provides valuable input for Double Materiality Assessments. This enables compliance with mandatory reporting standards like the European Sustainability Reporting Standards (ESRS 2) and streamlines reporting processes.

4. Two-Track Due Diligence Approach

Sustainability Due Diligence should address:

Internal Operations: Ensuring sustainability practices within the company’s direct control.
Business Relationships: Extending these practices to partners and suppliers.

5. Universality of Application

Sustainability Due Diligence applies to businesses of all sizes, particularly those involved in value chains. Even smaller companies are expected to assess and address risks to align with global standards.

6. Addressing Social Sustainability

Human rights play a central role in Sustainability Due Diligence. Companies must evaluate their potential impacts on the 48 human rights outlined in the International Bill of Human Rights. Most businesses face risks involving at least 20 of these rights.

The Importance of Transparency and Accountability

Transparency is vital. Companies must regularly conduct and share operational-level impact assessments with their business relationships. This fosters trust and ensures compliance with evolving regulations.

Key Distinctions: ESG vs. Sustainability Due Diligence

While ESG Due Diligence focuses on assessing investment targets, Sustainability Due Diligence ensures a company’s management processes align with sustainability standards. The two are complementary, but Sustainability Due Diligence is foundational.

Practical Steps for Implementation

1. Align with UNGPs and OECD Guidelines

Ensure your policies and practices meet the criteria outlined in these globally recognized frameworks.

2. Go Beyond Salient Issues

Focusing solely on salient human rights issues is insufficient. Companies must address all potential adverse impacts to mitigate risks before they escalate.

3. Focus on Material Impacts

Report only on actual material impacts in your value chain during the reporting period. This keeps efforts focused and actionable.

4. Embrace Technology

Consider using systems like SEE impacts to streamline documentation and management processes. These tools simplify complex requirements and enhance operational efficiency.

Navigating Industry-Specific Challenges

Supplier and Value Chain Management

A bespoke supplier code of conduct may signal a lack of alignment with UNGPs/OECD standards. Companies must require implementation across their entire value chain, not just upstream suppliers.

Digital Services and AI Compliance

Under regulations like the EU Digital Services Act and AI Regulation, companies must assess the human rights impacts of their products and services. Businesses with established due diligence frameworks are better equipped to meet these requirements.

Conclusion

Sustainability Due Diligence is not just a regulatory checkbox; it is a strategic imperative for companies aiming to build resilient, responsible, and sustainable operations. By adhering to the principles outlined in this article, businesses can mitigate risks, enhance transparency, and position themselves as leaders in sustainability.

Remember, simplicity is key. Leverage frameworks like SEE impacts to manage and document your efforts efficiently. Sustainability is a journey, and every step you take toward robust due diligence brings you closer to a more ethical and sustainable future.

Ready to enhance your sustainability practices? Start documenting your due diligence efforts today and ensure your business is equipped to meet tomorrow’s challenges.