Raising the bar on corporate sustainability 💜🌳

The EU's 2020-2024 action plan on human rights, identifies the implementation of international standards on responsible business conduct and the eradication of forced labor as a priority (Joint communication to the european parliament and the council - EU Action Plan on Human Rights and Democracy 2020-2024 - 25 March 2020).

“According to the 2021 Eurobarometer on social issues, nine in 10 Europeans consider a social Europe to be important to them personally. Fair working conditions were highlighted as one of the key issues, and 71 % of respondents saw a lack of social rights as a serious problem” (Briefing - EU Legislation in Progress - Proposal for a ban on goods made using forced labour - November 2023).

In line with this priority, several directives and regulations are in the pipe. The most notable items are:

• The Corporate Sustainability Reporting Directive (CSRD), which has been adopted and focuses on reporting obligations for undertakings from 2024 onwards.
• The Proposed Corporate Sustainability Due Diligence Directive (CS3D), which focuses on due diligence processes and company behavior.
• The Proposed Regulation on Forced Labor, which seeks to prohibit the placing and require the withdrawing of products made with forced labor in the EU or their export.

I know we have it really good in our ivory towers, but this is not only a theoretical conversation, it’s real, and it’s pretty scary. If you want a good concrete reality check, I recommend you watch (and potentially, ask teams in your organizations to watch) this investigative reportage made by Arte: Forced Labour - SOS from a Chinese Prisoner. The investigation starts when someone purchases a pregnancy test in which package they find a written cry for help. It is a letter written by a Chinese prisoner forced to work against their will. The goal of the reportage is to find this prisoner, which is a heart wrecking journey. 

Bottom line is:

• Many well known reputable brands source goods through intermediaries that propose the cheapest prices, which may involve forced labor in prisons;
• As consumers, what we purchase really matters, and the price at which we purchase it does matter too (I am guilty of that temu.com purchase too, and after watching that reportage I promised I would never do it again);
• As companies, it matters even more: what is the impact for your brand that your products are made by people who have to work 16 hours a day, every single day, or else physically abused? Would we want to work for such a company? Would we want to buy their products as a consumer? Would we want to invest in them as a shareholder? What part of our margin are we willing to sacrifice to not contribute to this.

And lastly, how can we level the playing field so that everyone is held to the same standards that say no to forced labor, for example?

So now, the regulatory framework is raising the bar. In this blogpost we will work to make sense of what is there and what is coming, and share a few ideas on what we can do to prepare. Before that, let’s have a look at why this is actually a good idea.

The benefits of raising the bar

Benefits are vastly impacting companies, developing countries, as well as citizens, they’re expressed quite nicely in the CS3D summary provided by the EU Commission (EU Commission, Corporate sustainability due diligence: Fostering sustainability in corporate governance and management systems):

• Citizens should benefit from a better protection of human rights, live in a healthier environment now and in the future, get more transparency and an increased level of trust, as well as an easy way to access justice.
• Companies should have a leveled playing field and similar standards, work to increase the customer, employee and stakeholders trust, increase the awareness of their impact as an organization, provide a better access to finance and increase their attention to innovation. 
• Developing countries should benefit from a better protection of the environment and human rights and improved practices all across the board, favor sustainable investment, and increase their awareness of these issues.

Let’s now examine the new and planned requirements

The EU Corporate Sustainability Reporting Directive (CSRD)

The EU Corporate Sustainability Reporting Directive, entered into force on 5 January 2023 caters for reporting obligations for organizations. The goal is to enable consistency in information related to the sustainability efforts of organizations and thus increase transparency and accountability.

The CSRD builds on the EU’s 2014 Non-Financial Reporting Directive (NFRD), which laid the parameters of sustainability reporting for approximately 11,000 large companies, builds on the above by increasing the scope and reporting requirements: approximately 50 000 companies will need to progressively report their data from January 2024 on Sustainability, and this means on the following: 

• Environmental factors: climate change mitigation, including greenhouse gas emissions, climate change adaptation, water and marine resources, resource use and the circular economy, pollution, biodiversity and ecosystems.
• Social & Human rights factors: equal treatment and opportunity for all, working conditions, respect for human rights, fundamental freedoms and democratic principles
• Governance factors: the role of your broad management regarding sustainability matters, internal control and risk management systems, business ethics & corporate culture (including anti-corruption and bribery), political influence and lobbying activities, and the management and quality of relationships with customers, suppliers and communities affected by the company’s activities. (Article 29 (b) Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022).

On 31 July 2023, the Commission adopted the final delegated act of the European Sustainability Standards (ESRS) drafted by EFRAG (the European Sustainability Reporting Standards (ESRS). It’s a pretty lengthy document, to say the least. And this giant book is only the sector agnostic set. Due in a few years are also sector specific reporting sets (for mining, oil & gas, road transportation, agriculture, farming and fishing, SME standards and non EU Standards for in scope entities not HQd in the EU), which adoption will probably be postponed from 2024 to 2026.

Organizations in scope need to report on:

• Two cross-cutting standards (General Requirements and General Disclosures), notably identifying affected stakeholders, and users of the sustainability reporting, such as investors and creditors, but also business partners, trade unions, social partners, civil society and NGOs.
• Topical ESG standards, organized in three categories:
• Environmental: climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy
• Social: workers (direct and supply chain), local communities, consumers and end-users
• Governance: business conduct

Companies should carry a double materiality assessment to determine which topical standards are “material” to their operations. This assessment needs to take into account the impact of our activities on the environment and people (“impact materiality”) and the risks and opportunities that affect our business financially (“financial materiality”).

Each reporting on the topics above will need to cover :

• Governance
• Strategy
• Impact
• Risk and opportunity management
• Metrics and targets

It’s obviously a titanesque task to cater for this reporting, and we recommend that you team up cross-functionally to prepare, make sense of the ESRS, run the materiality assessments and organize to collect from January onwards the data you will need to report. 

But of course, this is only reporting, which is complemented by more action oriented regulatory frameworks that are in the pipes.

The Proposal for a Directive on Corporate Sustainability Due Diligence (CS3D)

The Proposal for a Directive on corporate sustainability due diligence (CS3D) complements the CSRD effectively:

“The aim of this Directive is to foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe” (EU Commission, Corporate sustainability due diligence: fostering sustainability in corporate governance and management systems).

This Directive was adopted on 1 December 2022, then by the Council as a negotiating text on 1st June 2023, ongoing now is a trialogue expected to conclude by 2024. The Council and the Parliament just reached on 14 December a provisional deal on the CS3D. 

Given that local laws are already enforcing ESG Due Diligence in Member States (such as the German Lieferkettensorgfaltspflichtengesetz, the French Law of Vigilance, or the recent Norwegian Transparency Act), the aim of this Directive is to unify the ESG requirements in the EU, so that it can be seen and treated as a single market with one set of rules. There are also proposals for legislations in Belgium, Luxembourg, the Netherlands, and Sweden. All of these regulations will have to evolve to take the CS3D into consideration. 

The Proposal Directive focuses on due diligence processes and company behavior (rather than reporting). The due diligence directive sets obligations for big companies regarding adverse impacts (actual and potential) on human rights and the environment, with respect to:

• their own operations, 
• those of their subsidiaries, and 
• those carried out by their business partners.

“The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling (Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights - 14 December 2023).

Many points were being discussed between the Council and the Parliament, and a deal was struck on 14 December 2023 for a provisional agreement.

This provisional agreement notably clarifies:

• The scope of the directive: EU large companies with more than 500 employees and a net worldwide turnover of €150 million. EU limited liability companies that operate in specific high-impact sectors with more than 250 employees and a net turnover of €40 million. Non-EU companies with €300 million net turnover generated in the EU, three years from the entry into force of the directive.
  
• The exclusion of the financial sector from the initial scope.
• Civil liability, reinforcing the access to justice of persons affected, and allowing a period of 5 years to bring claims based on adverse impact.

"This Directive will apply to the company's own operations, its subsidiaries and their value chains. In order to comply with the corporate risk-based due diligence duty, companies need to:

•  integrate due diligence into their policies;
• take appropriate measures to:
• (i) identify, assess and, where needed, prioritise actual or potential adverse human rights and environmental impacts;
• (ii) prevent or mitigate potential adverse impacts; and
• (iii) bring to an end, minimise and remedy actual adverse impacts;
• establish and maintain a notification mechanism and complaints procedure;
• monitor the effectiveness of the due diligence policy and measures; and
• publicly communicate on due diligence." (Press Release - Commission welcomes political agreement on rules enforcing human rights and environmental sustainability in global supply chains)

Relationships will need to be ended when harm cannot be mitigated. Penalties wise, the provisional agreement confirms injunction measures, and pecuniary penalties from national authorities take into account the company turnover (5% of the company’s net turnover). Victims will be able to seek redress for the harm they suffer as a result of the lack of adequate due diligence being conducted.

The provisional agreement reached with the European Parliament on 14 December 2023 now needs to be endorsed and formally adopted by both institutions. Model clauses and other guiding documents will be proposed.

This CS3D proposal addresses the global value chain, however, it does not impact the placing of products on the market in case of violation (Briefing - EU Legislation in Progress - Proposal for a ban on goods made using forced labour - November 2023). That's where the proposed regulation on forced labor comes into play! Let’s examine this last one.

The proposed Regulation on prohibiting products made with forced labor in the EU Market

This CS3D Directive is complemented by the Proposed Regulation on prohibiting products made with forced labour from circulating on the EU market.

“Forced labour, including forced child labour, is still widespread across the world. The International Labour Organization (ILO) estimates that globally there are around 27.6 million people in a situation of forced labour, of whom 3.3 million are children” (Briefing - EU Legislation in Progress - Proposal for a ban on goods made using forced labour - November 2023).

This Proposed Regulation aims at prohibiting availability of products made with forced labor on the EU market, whether they come from the EU or not. This includes their components. 

• It provides authority to national bodies to investigate whether forced labor has been used. 
• In case of infringement, the authorities can prohibit the products placement on the market or their export from the EU. 
• Products already placed on the market will have to be withdrawn and disposed of.

“In the Council, the Working Party on Competitiveness and Growth is working on the file. Once the Council has adopted its position, trilogue negotiations can start” (Briefing - EU Legislation in Progress - Proposal for a ban on goods made using forced labour - November 2023).

What should we be doing now to get ready?

Of course, read all the texts carefully. First assess if you are within the applicable scope of these acts and by when they should apply to your organization. Then, if you already need to report the 2024 data pursuant to the CSRD, you should get a team going to work on the data collection and the assessments. All my good energy for this immense work that’s coming!

For the CS3D and the Proposed Regulation, and more generally to get one step ahead in Human Rights Ethics & Compliance, below a few ideas, by no means exhaustive, to get started:

• Sensitize the company and stakeholders about what is coming and more generally how we should care as companies on our impact on human rights and the environment;
• Set-up a governance and ensure an oversight of these initiative at the highest level of your group;
• Designate one or several person(s) in your team responsible for environment / human rights;
• Generally, assess the needs for resourcing that will come with these new regulations and requirements: which expertise will be required, how could we leverage the expertises of a cross functional team including members who are already in our workforce?
• Assess the risk of human rights violations in our own operations;
• Identify who forms part of our supply chain, upstream in particular;
• Assess the risk of human rights violations in our supply chain;
• Prepare a company statement and policy about human rights;
• Review our due diligence process and policies to integrate human rights and environmental risks;
• Create risk indicators to help identify instances of forced labor and other violations of human rights;
• Review our supplier code of conduct, template contract clauses, make sure business partners abide by them and transfer similar obligations to their suppliers, and that any violations would enable us to exit the relationship where necessary;
• Audit our supply chain as appropriate based on your risk assessments, find where the risks are and investigate where needed; 
• Keep a list of remedial action well documented and work to mitigate the adverse impacts where you find them, if they can be remediated. If they cannot be remediated, terminate relationships as appropriate and document such termination.

So, there’s a LOT of work to do, and the above list is far from being exhaustive. It's a giant company wide and transformative project and it’s likely that it’s coming on the shoulders of the Ethics & Compliance Teams. This is also a solid opportunity for companies to build up on their existing anti-corruption practices and program, and for Chief Ethics Officers to increase their remits further, as the “companies with strong anti-bribery and corruption policies and controls have a strong framework on which to build the governance limb on an ESG program.” (Companies wanting to prioritize ESG compliance face headwinds integrating ESG into their compliance programs - quoting Crispin Rapinet, IWCF partner in London - Hogan Lovells Navigating Deep Waters Survey, August 2022). 

Cheers to an even more strategic positioning of the Ethics & Compliance Function in our organizations!

Follow Upright Solutions on Linkedin for more inspiration to lead your E&C Team and initiatives.

Love from Copenhagen 💜