In connection with the proposed DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting the issue of due diligence is very important for institutional investors and asset managers.
Kristina Touzenis, Managing Partner BST-Impact and Head of the investRFP Expert Group on Sustainability provides an overview on the main points to consider. Please also refer to more information on investESG.eu.
Due diligence is defined (in the preamble of the proposed directive) as the process that undertakings carry out to identify, prevent, mitigate and remediate the principal actual and potential adverse impacts connected with their activities and identifies how they address those adverse impacts.
Impacts connected with an undertaking’s activities include impacts directly caused by the undertaking, impacts to which the undertaking contributes, and impacts which are otherwise linked to the undertaking’s value chain. The due diligence process concerns the whole value chain of the undertaking including its own operations, its products and services, its business relationships and its supply chains.
In alignment with the UN Guiding Principles on Business and Human Rights, an actual or potential adverse impact is to be considered principal where it measures among the greatest impacts connected with the undertaking’s activities based on:
– the gravity of the impact on people or the environment;
– the number of individuals that are or could be affected, or the scale of damage to the environment;
– and the ease with which the harm could be remediated, restoring the environment or affected people to their prior state
It may be important to note that, while it is legitimate to aim at restoring the environment to its prior state (if we go back long enough or take for granted that that state is its unpolluted state), when it comes to people one thing is to operate on a do no harm basis and make certain that if harm is done redress is available and ensured, which is important.
But also, in order to truly implement human rights standards it may fall abysmally short if a company only restore people to their prior state.
Suggested indicators to keep in mind for due diligence work:
For sectors where negative impacts on human rights and the environment are common in supply chains, mandatory reporting standards should at a minimum require the disclosure of the following criteria:
Supply chain description:
- % suppliers by region, preferably by sourcing country
- % of suppliers that have collective bargaining agreements in place
- access to health care
- social security
- non-discrimination and inclusion
- estimated number of workers per location, disaggregated by gender (job roles and % of women in management positions) and vulnerable groups such as migrants (internal and cross-border) workers broken down by nationality, type of contract and gender
- gender pay gap and living wage gap, including details on the calculation methodology adopted
- details on whether the supplier has a trade union and if that is not possible due to local difficulties (it is important to guarantee representation but also not to endanger workers) if internal representation and participation is guaranteed
- worker committee and all its workers covered by a collective bargaining agreement – or equivalent
Specific indicators should be developed for specific sectors such as for agriculture: e.g.
- seize and ownership of suppliers/farmers; engagement with suppliers
- promotion of business models and/or governance systems and structures that give greater power to workers, small-scale farmers and local communities
- living wage or income
- property issues (land grabbing)
- educational level including literacy
- community engagement
Asset owners should integrate these topics in their asset manager and fund due diligence requests. They can use the investRFP.com platform to perform this type of due diligence work in a very efficient way and use the platform at no cost. For more information please refer to the description on the website or register for a free asset owner account here. For support in your due diligence projects please contact Kristina Touzenis at BST-Impact.