Human Rights and Environmental Due Diligence in Supply Chains

EU companies operate in increasingly complex settings and rely on global supply chains. These businesses have a responsibility to identify and mitigate risks in their supply chains linked to respect of human rights and environmental impacts. To uphold this responsibility, new regulations like the EU Corporate Sustainability Due Diligence Directive (CSDDD) require companies to undertake human rights and environmental due diligence (HREDD) in their supply chains.

For many businesses, this presents uncharted territory. While they may have a grasp on managing human rights and environmental issues within their own operations, they may find it intimidating to delve into their supply chains, not knowing where to start and fearing the unknown challenges that may surface.

Human rights and environmental challenges within supply chains vary depending on the sector in which an organisation operates, the nature and geography of its supply chain, and the goods and services it purchases and provides. For instance, the supply chains of a typical food manufacturer include agricultural commodities (sugar, grains, cocoa, coffee) and packaging materials (glass, corrugate and cartons, aluminium, plastic), while a construction company will heavily rely on the supply of concrete, steel and lumber. The supply chains of many companies will also include transportation and facilities management – two categories that traditionally rely on subcontracting, which carries additional risks from a human rights perspective. The geographies of sourcing will also play a role; for example, some landscapes have a higher level of water stress, or contain higher levels of carbon in the soil, which will carry additional risks from an environmental perspective. 

Some of the human rights and environmental issues are relevant for all of these categories, like occupational health and safety, wages, working hours, and climate change. Others, such as modern slavery, child labour, land rights, and biodiversity,  vary in relevance based on the nature of the category and the sourcing region. How can an organisation navigate this complexity? We've outlined some considerations to guide businesses embarking on their human rights and environmental due diligence journey in supply chains. 

Many businesses lack comprehensive data on their Tier 1 suppliers, let alone those further upstream.  This is no surprise as this level of data has not been a historic requirement for many procurement functions. While traceability solutions are increasingly offering greater visibility and enabling better data across the upstream value chain, those solutions can be as diverse as the supply chains they are serving, and can also create timeline and efficiency challenges for some businesses. Nevertheless, a better understanding of your supply chains is essential for pinpointing where human rights and environmental impacts are most pronounced.

Starting with Tier 1 is a logical first step. Collaborate with your Procurement department to identify strategic and direct procurement categories as high priorities for human rights and environmental due diligence. This may include raw materials, packaging, contract manufacturing, facilities management and logistics. 

Next, unpack your high priority categories beyond Tier 1 by conducting industry research, engaging with peers, industry associations and NGOs. You will be surprised how much you can learn about these categories and where things are likely to come from without investing into sophisticated traceability solutions. For many categories, this step will be crucial, as the most significant risks often lie at the beginning of supply chains. 

When conducting due diligence, the key concept to remember is that it’s about assessing impacts on people and the planet and not about reputational risks for businesses. Human rights risks in supply chains refer to potential adverse impacts on people affected by the activities within those supply chains. These adverse impacts encompass workplace issues, such as discrimination, abuse and harassment, health and safety concerns, freedom of association, wages and working hours, as well as illegal working practices like forced labour and child labour. Beyond the workplace, issues like land rights, food security, water and sanitation, are also significant for many people in global supply chains. Environmental risks in supply chains refer to potential adverse impacts on the planet affected by the activities within those supply chains. These adverse impacts encompass issues such climate change, biodiversity loss, degradation of land, marine and freshwater ecosystems, deforestation, air, water, and soil pollution, and mismanagement of waste. Human rights and environmental risks are interrelated. Negative impacts on the environment directly or indirectly affect livelihoods of millions within global supply chains, and negative impacts on human rights can directly or indirectly affect environmental protection.

With myriad categories and diverse human rights and environmental issues to address, the task of due diligence in supply chains may seem daunting. Budget constraints necessitate making choices. But how can companies make a choice between a programme to address child labour in agricultural supply chains and another programme to tackle greenhouse gas emissions from a manufacturing category? For due diligence, the OECD Due Diligence Guidance for Responsible Business Conduct provides a useful framework to guide these decisions.

In this framework, the OECD Due Diligence process is structured in six steps, which help companies establish and enhance their own due diligence systems and processes. The framework primarily focuses on the following aspects:

1. Incorporating responsible business conduct into policies and management systems

2. Identifying and evaluating adverse impacts within operations, supply chains, and business relationships

3. Taking measures to prevent, cease, or mitigate these adverse impacts

4. Monitoring the implementation of actions and assessing their results

5. Transparently communicating the approach taken to address impacts

6. Facilitating or collaborating in the remediation of adverse effects when necessary

By adhering to the OECD framework, companies can navigate the complexities of due diligence more effectively and make informed decisions about their priorities and strategies.

The KPMG Sustainable Supply Chain team is equipped to support your journey in human rights and environmental due diligence within supply chains. We have the substantive and technical human rights and environmental expertise and tested methodologies to demystify this field, assisting you in designing processes that seamlessly integrate into your existing procurement and supplier management programmes.