In today’s globalized economy, businesses operate in a complex web of relationships that span multiple continents and countries. In such an interconnected world, the environmental and social impacts of corporate activity can have far-reaching consequences that may be difficult to track or manage.
To address this challenge, a new report published by GRI explores the relationship between due diligence and sustainability reporting, offering insights into the current state of play within the global policy landscape.
Why is Due Diligence Essential in Sustainability Reporting?
According to the Organisation for Economic Co-operation and Development (OECD), due diligence is the process of assessing the potential risks and impacts of a company’s activities, including those of its suppliers and partners. It involves identifying, preventing, mitigating, and accounting for adverse impacts that may arise from business operations.
The report, ‘Corporate sustainability due diligence policies and sustainability reporting,’ emphasizes that due diligence is not only an ethical obligation but also a legal requirement in many countries, including the European Union. Moreover, it is increasingly becoming a criterion for investment decisions by responsible investors.
Six Guiding Principals
The report calls for a risk-based due diligence approach that informs business decisions and helps companies to identify, prevent, and mitigate risks and impacts throughout their value chains. The approach should be based on the following principles:
- Due diligence laws set expectations for all corporate behavior, not just on human rights: Due diligence is not limited to human rights but also covers other areas such as tax, procurement, and corruption.
- Public reporting is important for the effective implementation of due diligence: Public reporting on due diligence creates transparency and accountability, covering a wide range of areas, including corporate governance, supply chain impacts, and operations.
- Due diligence considerations have a growing impact on financial decision-making: Broad impacts identified through the due diligence process can be included within enterprise risk management systems and serve as input for identifying financial risks and opportunities.
- Cross-border implications of due diligence laws require global harmonization: The need for broad representation and input in the development of new policies that ensure alignment with widely adopted standards and international due diligence policies.
- Due diligence requires meaningful stakeholder engagement: The importance of engaging relevant stakeholders to achieve credible due diligence outcomes, creating an imperative for this information to be public.
- Due diligence is not possible without supply chain mapping: Effectively assessing potential impacts tied to a company’s products, including the use of raw materials, necessitates transparent and traceable supply chains.
Additionally, the report also emphasizes the importance of the human rights-based approach and due diligence, which form the cornerstone of the Universal Standards.
Globalized Economy: Adopting a Risk-Based Approach
“There are a growing number of due diligence-related policies around the world, in particular those that set expectations for greater accountability on environmental and social impacts. Organizations must be prepared for this reality. However, there is no widely adopted due diligence disclosure system, making it challenging to track, measure, and compare progress. Reporting with the GRI Standards puts impact information on an equal footing with financial reporting and – crucially – addresses impacts throughout the value chain. It also supports companies in aligning their due diligence processes with international expectations, as set by the UN and OECD.” -Peter Paul van de Wijs, GRI’s Chief Policy Officer
Adopting a risk-based approach that is informed by global standards and informed by meaningful stakeholder engagement is critical to identifying, preventing, and mitigating risks and impacts throughout a company’s value chain. By doing so, companies can help to protect the environment, promote human rights, and create value for all stakeholders.