Through due diligence, companies are asked to assume their social responsibility and sustainability, but also to take the necessary measures to prevent the impacts of their activities, both real and potential. Due diligence is thus akin to both a code of conduct and a risk management process for companies. Here is an overview of this concept and its importance in the economic landscape.
What is due diligence?
Due diligence is an obligation for companies to identify, prevent and mitigate the social, environmental and governance risks that are linked to their operations, but also to their entire value chain, i.e. their partners, subcontractors and suppliers.
There are ten types of due diligence (among which financial due diligence, environmental due diligence, human resource due diligence, intellectual property due diligence, etc.) which require companies to develop, implement and integrate a continuous process to prevent serious violations of human rights and fundamental freedoms, health and safety of people, or the environment into the heart of their operations. This includes an investigation of negative impacts, a proactive risks management, as well as a monitoring system to ensure the constant effectiveness of the taken measures.
The concept of due diligence is based on recommendations and principles developed by the United Nations, the OECD (Organisation for Economic Co-operation and Development) and the ILO (International Labour Organisation) that have been approved internationally. These texts have laid the foundations for international recognition of the responsibility companies have towards the territories in which they operate, the people they impact, the employees they employ, etc. Over time, this dynamic has been reinforced thanks to various legal and regulatory tools around the world.
What does the law say about due diligence?
Due diligence is now the subject of several existing or forthcoming legislations around the world. In this regard, there are three main categories of legislative initiatives.
Information disclosure
Some laws require a company to communicate about its efforts to manage the risks associated with its activities. For example, the California Transparency in Supply Chains Act (CTSCA)[1], the British Modern Slavery Act[2], the Australian Modern Slavery Act[3], or the European Corporate Sustainability Reporting Directive (CSRD).
Product-specific due diligence
These laws require companies to perform due diligence regarding specific goods, products or processes, and to communicate their reports on it. In this area, let’s mention the Dodd-Frank Act on conflict minerals, but also two European regulations. The first one concerns importers of tin, tantalum, tungsten and gold from conflict or high-risk areas. The second one relates to products associated with deforestation and forest degradation.
Cross-sectoral laws relating to due diligence
These laws pertain to the conduct of companies, including their sourcing, production and entire value chain. We can cite three laws, French, Norwegian and German, relating to due diligence that applies to companies above a certain size.
Most recently, it is the turn of the European Union with its Corporate Sustainability Due Diligence Directive (CSDDD). On March 15, 2024, the Member States of the European Council validated this text with the aim of strengthening corporate responsibility for respecting human rights and the environment throughout their value chain. The CSDDD (Corporate Sustainability Due Diligence Directive) concerns companies with more than 1,000 employees that generate a turnover of at least €450 million[4]. In total, this targets nearly 5,300 companies.
Due diligence is much more than just an obligation
Beyond a legal constraint, running a due diligence process is crucial for fundamental reasons, but also for a company’s sustainability.
Respect human rights
Respect for human rights is part of the universal principles that must be at the heart of businesses’ concerns. Due diligence makes it possible to identify and prevent risks of human rights violations linked to companies’ activities and their supply chain.
Preserve the environment
Protecting the environment is a major issue on a global scale, to address the multiple challenges of climate change, deforestation, pollution, etc. Due diligence requires companies to assess and mitigate their activities’ impacts on the environment, thus promoting more sustainable natural resource management and reducing their ecological footprint.
Manage risks
Through a mechanism for identifying and assessing potential risks, due diligence enables companies to implement preventive and corrective measures to minimise these risks. This not only protects stakeholders from harm and damage, but also prevents negative consequences on the company’s reputation, financial performance and sustainability.
Strengthen reputation
In an increasingly demanding context of corporate social responsibility (CSR), compliance with due diligence can be a real competitive advantage. By demonstrating their commitment, companies can strengthen their reputation, gain the trust of consumers and investors, and thus boost their market positioning.
Achieve compliance
Non-compliance with due diligence can result in significant legal sanctions and legal consequences for companies. Achieving compliance is an essential step to avoid legal risks, fines and litigation that could harm the company.
As you can see, due diligence aims to make companies accountable for the consequences of their activities on human rights and the environment. Faced with growing regulations in this area, companies must now adapt their internal practices and processes to comply with this obligation. While compliance with due diligence can represent a challenge for companies, this also offers the opportunity to strengthen their reputation, credibility and long-term performance.
