Designing an EU Due Diligence Duty that Delivers Better Outcomes (Shift)

Our key takeaway: What is the point of a new due diligence duty if it fails to meet its intended outcome? Let’s take a step back: why are we discussing a new EU corporate sustainability due diligence duty to begin with? To help incentivize business practice that is respectful for people and planet. To help set a level playing field, so that companies that do conduct meaningful human rights due diligence and environmental due diligence are not penalised for doing so. To help push companies be more mindful about how their operations and supply chain activities can negatively impact people and planet, and help them do something about it - in a way that makes the situation better for those people involved and the planet. However, these objectives will not be achieved if companies conduct flawed due diligence - and if this flawed due diligence is perpetuated through the directive. Based on conversations with suppliers and local stakeholders on the ground, Shift asks us to be honest about what is happening in a number of instances of human rights due diligence (with a few exceptions): there is a one-sided top-down relationship between buyers and the suppliers; buyers are quick to penalise but slow to incentivize strong human rights performance by suppliers; buyers don’t provide financial or capacity-building support; buyers don’t connect the dots with how their own business practices could be contributing to these impacts in the first place; and buyers are not necessarily engaging with affected stakeholders - those who are supposed to be the beneficiary of this directive. The answer? Ensure that the directive tackles this head on by aligning with the international standards (UN Guiding Principles and OECD Guidelines). The directive needs to move companies from: (1) unilateral to mutual responsibilities, (2) punishment to incentives, (3) passive to active, (4) ‘out there’ to ‘in here’ and (5) avoidance to engagement. ‍

Shift released From Policing to Partnership: Designing an EU Due Diligence Duty that Delivers Better Outcomes (May 2023):

• First-hand experience: “While the new duty will only apply to certain companies headquartered or operating in the single market, their business partners and other companies in their value chains in key sourcing and production markets outside the EU will also be affected by the law. Their first-hand experience of their European business partners’ current approaches to management of human rights and environmental risks can provide vital insights into the kinds of practices and behaviors that should be incentivized in the new Directive – and those that should be discouraged.” The report is based on a series of interviews with businesses and local stakeholders in Bangladesh, Kenya, Tanzania, and Thailand. This in turn helps inform what it would take for the new duty to “incentivize the right kinds of approaches by companies that are more likely to deliver better outcomes in practice.” “[T]he single best way to do this is to align the duty as closely as possible with the existing, authoritative international standards for sustainability due diligence – the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises.”
  

• What are views from the ground? The report highlights five key findings from the conversations. First, there is experience of one-sided relationships between business partners: “We heard that many EU companies continue to base their due diligence efforts mainly or exclusively on social audits and third-party certifications.” “The majority of company interviewees acknowledged the limitations of the audit-only model, including that the model does not encourage or measure progress over time, is ill-suited to deal with complex issues such as gender-based violence, and does not sufficiently take into account the perspectives of affected stakeholders in understanding impacts and evaluating the effectiveness of mitigation actions. Second, there is a lack of positive incentives to deliver on human rights expectations: “Many suppliers feel that the focus is on punishment for non-compliance with different human rights and environmental expectations.” “interviewees reported few positive incentives or innovative strategies to encourage suppliers to tackle issues.” Third, there is a lack of financial and capacity-building support to suppliers: “Many company interviewees said that they are expected to do the heavy lifting and feel that they have to solve impacts with little support.” “We heard that the human rights impacts that receive the most attention are … those that correspond to EU business partners’ priorities.” Fourth, there are low levels of reflection on EU companies’ potential role in contributing to impacts: “We heard numerous examples of how some EU companies’ purchasing practices can hinder the ability of their business partners to comply with human rights expectations.” And fifth, engagement with affected stakeholders is low: since “discovery of an impact can create cause for a buyer to terminate a contract, many suppliers see affected stakeholders as a potential business risk. Their grievances or feedback may provide evidence of problems in a company’s operations, potentially threatening the company’s business relationships with its European partners. This is a significant problem given the centrality of engagement with affected stakeholders to meaningful human rights due diligence.” 
  

• What is the opportunity in the draft directive? The report “explore[s] what it looks like to move away from the kinds of approaches outlined above that outsource responsibility for the management of sustainability risks through contracts and police compliance through audits towards an approach grounded in mutual responsibilities that is more likely to deliver better outcomes in practice.” The report highlights five opportunities in the draft directive. First, a move away from unilateral to mutual responsibilities: “moving from one-way contracts to agreements based on mutual due diligence responsibilities to manage human rights.” In particular, the directive should make clear that “contracts are an essential foundation for leverage – where they set the right terms. These should reflect the mutual due diligence responsibilities of the parties, including when remedy is required. Second, a move from punishment to incentives: “moving from punishing poor performance on human rights to incentivizing continuous improvement.” For instance, the directive “should incentivize the use of a range of forms of leverage beyond traditional commercial leverage alone” and “should require companies to put in place robust internal processes for deciding to suspend or withdraw from a relationship.” Third, a move from passive to active: “moving from passively expecting partners to deliver results to actively supporting better practices that deliver outcomes for people.” The directive “should require companies to carry out risk identification across the value chain and across the different ways a company may be involved with an impact”; “should emphasize that leverage is not relevant to prioritization”; and should reflect the fact that collaborative initiatives “cannot replace an individual company’s responsibility for the quality of its due diligence.” Fourth, a move from ‘out there’ to ‘in here’: “moving from assuming others are the problem to reflecting on one’s own potential contribution to human rights impacts.” The “due diligence duty should be grounded in the involvement framework in the international standards” and should capture how the company’s own activities (such as its own purchasing or sales practices) can heighten risks. Fifth, a move from avoidance to engagement: “moving from seeing stakeholders as a problem to be managed to championing meaningful engagement.” The directive should clearly define affected stakeholders and “require companies to carry out meaningful engagement with affected stakeholders to inform their risk identification and prioritization approaches.”