The 6 steps of value chain due diligence
To identify, prevent, mitigate, and account for adverse human rights and environmental impacts across activities involved in the production and distribution of goods and services can be a daunting task – especially when there is little insight into your value chain to begin with.
What steps do organisations need to take to gain insight and transparency their value chain, and how to then ‘take responsibility’? The OECD’s 6-step method to due diligence forms the basis of the approach recommended by Grant Thornton Impact House. In the description of each of the steps, pragmatic and practical actions are proposed based on our experience and best practices from companies that are ahead of the field in their value chain responsibility journey.
Getting the house in order: embed responsible business conduct into policies and management systems
Value chain responsibility starts within your own operation: practice what you preach. Create a shared understanding of the extent of the company’s ambitions, responsibility, and liability regarding the most important ESG topics throughout the value chain, including the opportunities and risks of (not) having proper value chain due diligence embedded in the organisation.
Subsequently, analyse what structures, policies, and processes the organisation has in place already, and which need to be implemented or updated to be in line with the company’s ambitions, values, and expectations. Integration into the existing corporate strategy and governance, securing commitment from the board, and assigning responsibility at a senior management or board level are crucial steps.
Identify and assess adverse impacts
Companies are required to identify and assess actual and potential adverse impacts on human rights and the environment from operations, subsidiaries, and business partners. This involves mapping the value chain and conducting in-depth assessments where potential negative impacts are most likely to occur.
To start with any form of impact identification, a clear view on the value chain is needed. This can be done (for example) using a simple Excel template. Start by listing what is already known and extend the view through desk-research as well as internal and external stakeholder interaction (see next chapter for more detailed recommendations).
Once a first view on the value chain has been established, use desk research and interaction with key value chain stakeholders (suppliers, but also affected parties) to identify possible impacts and risks related to the value chain activities. If no specific activities or impacts further up the value chain are known yet; start by identifying sector- and location-specific risks, as these can help uncover potential adverse impacts that take place in your value chain(s). Open source databases such as the CSR Risk Checker (MVO Risico Checker) and Encore are a great place to start.
It is important to note that for large, complex organisations, initial prioritisation of high-risk areas or value chains is key. Using a risk-based approach, the organization can subsequently dive deeper into the selected value chains and corresponding business partners, activities and impacts. Grant Thornton Impact House can help with the creation of such a prioritisation mechanism that aligns with the risk-driven method OECD prescribes.
Time for action! Cease, prevent or mitigate adverse impacts
Implement measures to cease, prevent, or mitigate potential adverse impacts. Develop corrective or preventive action plans, seek contractual assurances from business partners, and make necessary investments or modifications to business practices. It is important to note that, depending on how your organization is involved with the impact (whether your organization caused the impact, contributed to it, or is ‘only’ linked to it) determines what type of action is expected from the organization.
Collaborate with suppliers and affected stakeholders to ensure the most effective course of action is taken. Making informed choices about what works and what doesn't is crucial for effective risk mitigation.
Source: OECD Due Diligence Guidance for Responsible Business Conduct (2018) – “addressing adverse impacts”
Track implementation and results
Monitor and periodically assess the effectiveness of due diligence measures to ensure continuous improvements regarding the identified high-risk ESG impact areas.
Start by setting clear KPIs and benchmarks that align with your goals. Implement tracking systems to monitor progress and conduct regular audits (potentially using an independent third party) to evaluate the effectiveness of your measures. Engage with stakeholders and/or their representatives to gather feedback. Regular reviews and updates to these measures will help maintain their relevance and effectiveness. Document and report your progress to provide a transparent view of your efforts.
Communicate how impacts are addressed
Effective public communication on the progress of value chain due diligence activities is key to transparency and accountability. Develop a communication strategy that outlines how you will share information about your due diligence activities. CSDDD requires reporting through the CSRD report (if applicable), however, it is important to use multiple channels to reach different stakeholders. Highlight both achievements and challenges and engage in two-way communication to foster trust.
Provide for or cooperate in remediation when appropriate
If your organization has caused or contributed to adverse impacts, you must provide remediation to affected parties. This can include financial or non-financial compensation and other remedial measures.
Establish a fair and transparent system for receiving feedback and complaints, such as anonymous reporting mechanisms, potentially in collaboration with (for example) labour unions. Ensure confidentiality to prevent retaliation and provide timely follow-up. Inform complainants of the outcome and steps taken in response, fostering a culture of transparency and accountability driving meaningful and sustained improvements.
CSDDD and the Omnibus proposal
At the time of writing, trilogue negotiations regarding the Omnibus proposal are still ongoing. Hence, there is not yet clarity on the exact requirements of the CSDDD. Therefore, this whitepaper currently does not go into depth on CSDDD specifics. Please check our website updates regarding CSDDD and other relevant information. An updated version of this whitepaper with more detailed information on CSDDD will be published once the Omnibus negotiations have been finalised.
As value chain responsibility is a complex topic, companies are however recommended to start preparing for value chain responsibility today. This is best done by following the OECD Due Diligence Guidelines and Guidance as laid out in this whitepaper, as these guidelines are and will remain the basis of CSDDD and various other value chain regulations.
Why start now already? Proper implementation will take time. Additionally, the road towards future compliance will be less stressful and resource intensive, companies will be able to reap the benefits of value chain due diligence sooner and will also be ready for other value chain regulation that has been or will be introduced (EU Forced Labour Regulation; EU Deforestation Regulation; and various others).
No-regret move: start setting up the full OECD cycle for your organisation and all your tier-1 suppliers. This will help your organisation gain experience with value chain due diligence activities whilst providing a solid basis for possible exploration of tier 2 and further (for a selection of high-risk areas) in the future.
In doubt what the above would look like for your organisation? Grant Thornton Impact House can support in defining the extent of your organisation’s responsibility, as well as concrete instructions regarding the abovementioned no-regret move.