Due diligence and the full value chain

Anna Triponel

January 6, 2023
Our key takeaway: Under leading international standards, the risk-based approach to due diligence applies to the full value chain. This includes both upstream and downstream goods, activities and actors. A recent briefing paper authored by several NGOs shows that this approach is taken both in the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, even though the latter refers to “supply chain” rather than “value chain.” The shared expectation, therefore, is that companies should prioritise and take action on their most severe risks and impacts—regardless of where they sit in the value chain. Restricting attention to upstream issues alone could increase risks for people in every part of value chain and roll back the progress towards meaningful human rights due diligence made by companies, regulators and other stakeholders over the last decade.

OECD Watch, Swedwatch, the European Coalition for Corporate Justice, the European Center for Constitutional and Human Rights, and SOMO published Downstream Due Diligence: Setting the Record Straight (December 2022):

  • International consensus on a risk-based and full value chain approach to due diligence: The briefing paper explains that the risk-based approach to due diligence expectations, both in the UN Guiding Principles and the OECD Guidelines, applies to the full value chain, including both downstream and upstream. This has been confirmed by the OECD, ILO and the UN Office of the High Commissioner for Human Rights (OHCHR). Crucially, this interpretation has also been internalised and acted on by many businesses and industry associations. From the outset, the critical insight of the UN Guiding Principles and the OECD Guidelines is that prioritisation of human rights impacts is risk-based, not based on proximity to the business or whether businesses already have leverage. This means that companies are expected to prioritise and take action on their most severe risks and impacts, “regardless of where they sit in the value chain.”
  • The OECD Guidelines and OECD National Contact Points confirm the full value chain approach: The briefing paper points out that, even though the OECD Guidelines use the term “supply chain,” a careful reading reveals a full value chain approach consistent with the UNGPs (e.g. Principle 13). First, the OECD Guidelines refer to enterprises operating in “all sectors of the economy,” and give examples of downstream business relationships when defining the scope of the relationships covered. Second, the full value chain perspective was clarified in the OECD’s 2018 Due Diligence Guidance for Responsible Business Conduct. Third, the point has been been confirmed through a formal clarification from the OECD Investment Committee, the ultimate authority for interpreting the OECD Guidelines. These points have been borne out in practice by cases brought before multiple OECD National Contact Points (NCPs), which “have interpreted and clarified downstream value chain impacts and relationships as being in scope of the Guidelines’ due diligence provisions. The OECD’s recent Stocktaking Report on the OECD Guidelines indicated that NCPs have clarified downstream due diligence expectations of enterprises when it comes to their customers and the buyers or users of their products or services.” The paper delves into the numerous NCP instances that where NCPs have applied the OECD Guidelines to downstream value chain impacts and relationships.
  • A full value chain approach to due diligence is crucial for preventing harm: The paper makes the case that a risk-based approach is the most effective when it comes to thorough and robust due diligence: “The risk-based approach … means that arguments insisting on ‘supply chain' but not ‘value chain’ miss the point of due diligence, which is to prevent harm in the global economy in a risk-based manner, wherever it actually occurs – not according to an arbitrary upstream-downstream or tier-restricted designation.” As the OHCHR, ILO, and OECD recently remarked in a joint public letter to the European Commission, this approach “can help bolster the impact and effectiveness of the EU’s efforts,” not least by “guarding against box-ticking compliance approaches and overreliance on contractual assurances.” It also ensures that certain severe risks and impacts are not overlooked. The briefing paper notes that downstream due diligence is “particularly important in certain sectors such as financial services, ICT/surveillance, pesticides, arms, pharmaceuticals, and heavy machinery.” Some recent examples include military equipment and ship-building materials supplied to the Russian Black Sea fleet by a Danish engineering company; harmful pesticides supplied to India by a Swiss agrochemical company; the production and sale by OECD-headquartered companies of mining equipment associated with human rights abuses in Myanmar; and the use of software developed by European countries for government surveillance in Syria.

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