The Latest on Sustainability and Due Diligence

December 6th, 2018

In 2018 the world had a glimpse into how well large companies are implementing ideals of environmental care and fair labor into their supply chains and their own operations — and alas, the results were not great.

The Corporate Human Rights Benchmark published its assessment of 101 large companies on Nov. 12, and identified only three that scored well against its criteria for environmental sustainability, good governance, and human rights. Another thirty-three scored in the middle, and 65 scored in the bottom range.

The CHRB, a British non-governmental organization, measures how well large businesses meet a set of criteria derived from the U.N. Guiding Principles on Business and Human Rights. The grading is done against information the companies publicly disclose, and the results are meant to help institutional investors and other NGOs pressure companies to do better at ethical sourcing, fair labor, and related issues.

Companies (and compliance officers) have good reason to reflect on those CHRB numbers. Numerous studies have shown that companies committed to ethical business practices reap many benefits — from higher stock prices, to better perception among customers, to better employee retention. Building an ethical supply chain is just good business sense.

Business people shaking hands, finishing up a meeting

Moreover, institutional investors want to put their money into businesses that embrace ethical sourcing and other sound business practices. Socially responsible investment funds now have at least $6.5 trillion in assets under management, and activists are more likely to press their causes with environmental or social shareholder resolutions during proxy season. Nine such resolutions won majority support at companies earlier this year; another 18 received more than 40 percent shareholder support.

So how might a company embrace ethical supply chains and other responsible business practices, rather than risk being on the wrong side of investor pressure and public opinion?

First, build on the due diligence program you have, since the mechanics of assessing a third party — submitting questionnaires, performing background checks, and so forth — aren’t terribly different for anti-corruption, human trafficking, environmental damage, or other bad practices.

To do that, however, companies will need to find and use a suitable sustainability framework. The CHRB has its set of criteria and companies could measure themselves against that. Other standards include the OECD’s Due Diligence Guidance for Responsible Business Conduct, the Global Reporting Initiative, and the Sustainability Accounting Standards Board.

Third, consider the policies and procedures necessary to obtain the sustainability assurance your organization wants. For example, a company might need to restructure its contracts with suppliers to include ethical sourcing or fair labor standards as objectives; otherwise, the company has no leverage to exert over suppliers. Likewise, a company will need procedures to perform due diligence related to sustainability matters — everything from finding specialists that can perform background checks, to employees who might need to lead more in-depth reviews of key suppliers.

Finally, companies will need systems to document and report their sustainability efforts. For example, the CHRB only looks at sustainability data companies publicly disclose; a company might be making great strides on ethical sourcing but not disclosing it, and therefore still receive a low score. And relatively few disclosures are required by law, so companies have considerable discretion in deciding what to report.

So ultimately companies can do a great deal to further their efforts at ethical sourcing, and the benefits of communicating that effort to other stakeholders are real. The road to achieving that might be long, but compliance officers are well-positioned to lead that charge, since strong due diligence is the foundation of success here.


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