The 6 steps of value chain due diligence
To identify, prevent, mitigate, and account for adverse human rights and environmental impacts in your value chain can be a daunting task – especially when there is little insight into your value chain to begin with.
What steps does your organisation need to take to gain insight and transparency in your value chain, and how to then ‘take responsibility’?
The OECD’s 6-step framework to due diligence forms the basis of the approach that is expected of companies. Impact House’s method is therefore based on these steps.. In the description of each of the steps outlined underneath, we propose pragmatic and practical actions based on our experience and best practices from companies that are ahead in in their value chain due diligence journey.
Getting the house in order: embed responsible business conduct into policies and management systems
Value chain due diligence starts within your own operations: 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 robust 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.
Officially, policies are part of the first step. Practically, we see that companies benefit from taking an iterative approach. Starting with a mandate from senior management to start with value chain due diligence, combined with a cross-functional working group including ESG, Legal, Risk, Supply Chain and Procurement, can help ensure cross-functional buy-in for effective implementation and a collective, iterative approach. Translating first actions into policies later can sometimes help ensure that policies are based on practical implementation, rather than theoretical commitments.
Identify and assess adverse impacts
Companies should 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 the most severe negative impacts are most likely to occur. To start with any form of impact identification, a clear view of the value chain is needed. This can be done using a simple Excel template or a schematic visualisation of your value chain. Start by listing what is already known and extend the view through desk research as well as internal and external stakeholder interaction. Continue filling the gaps over the years as you learn more about your value chain through your due diligence activities.
Mapping your value chain
By mapping out your value chain, you create the basis for a clear, data-driven strategy that enables you to manage and mitigate impacts more efficiently, as well as foster a more sustainable, responsible and resilient supply chain. But what specific activities should you consider, and how extensive should the mapping be?
Covering the full value chain is essential to comprehensively address human rights and environmental impacts, including transport, downstream activities, usage and product disposal. Without it, a good assessment and prioritization become a challenge.
It is important to note that different laws might have different views on what is in scope in the value chain. Our advice is to start with the whole value chain in this first phase to ensure your assessment is complete and identify compliance needs based on specific regulatory requirements.
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 such as workers in the value chain or affected communities) 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 organisation can subsequently dive deeper into the selected value chains and corresponding business partners, activities and impacts. Impact House can help with the creation of such a prioritisation mechanism that aligns with the risk-driven method the OECD prescribes.
Time for action! Cease, prevent or mitigate adverse impacts
Implement measures to cease, prevent, or mitigate potential adverse impacts. The adequate response (and resources needed) to address impacts depends on the context, including the severity of impacts and the leverage your company has that helps to cease, prevent or mitigate these impacts. It is important to note that, depending on how your organisation is involved with the impact (whether your organisation caused the impact, contributed to it, or is ‘only’ linked to it) determines what type of action is expected from the organisation.
There is no one-size-fits-all formula for the best due diligence system: each impact needs a different approach to mitigate effectively, and each company works differently, operates in a unique context, and has different forms of leverage available to them. This means you will need to develop your own approach, focused on maximising impact, practical and proportionate in its implementation, while meeting compliance needs.
Measures can include contractual assurances, performance criteria for suppliers, audit or certification regimes, direct engagement with stakeholders on the ground, collaborative efforts with suppliers and collaboration through sector initiatives. When designing your due diligence toolbox, key tips include:
- Use a risk-based approach: Addressing negative impacts in your value chain can seem like a daunting task; however, you cannot do everything at once. To maximise impact and comply with regulations, your prioritisation should guide your actions and your rollout over your value chain.
- Keep it manageable: For each prioritised impact, ask yourself: what is the most effective action I can take to address this impact now? From which key internal stakeholders do I need support to implement these actions? Balance your efforts in a way that allocates the right resources where it matters most.
- Don’t do due diligence alone: Many negative impacts will be better addressed together with others. Work with industry initiatives and value chain partners (horizontally and vertically) and create win-win situations in terms of impact and efficiency.
- Learn by doing: Your first efforts to address a negative impact will likely reveal all kinds of challenges, including internal and external information gaps, lack of internal knowledge and capacity to engage with suppliers, unrealistic supplier expectations, and more. Due diligence is meant to be iterative: find a logical starting point, make a plan, adjust based on your learnings, and document well.
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. Value chain due diligence is an iterative process, which means that companies are not expected to have everything figured out from the start. Highlight both achievements and challenges and engage in two-way communication to ensure trust.
Provide for or cooperate in remediation when appropriate
If your organisation has caused or contributed to adverse impacts, you must provide for or cooperate in remediation to affected parties. This can include financial or non-financial compensation and other remedial measures. To support this, you should establish a fair, accessible and transparent system for receiving feedback and complaints, such as anonymous reporting mechanisms. Your grievance mechanism is not only important for supporting remediation processes: it also serves as an early warning system, in which stakeholders can help you to identify potential or emerging risks in your value chain that your own analyses might have missed.
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.