Financial Communications

Human Rights Due Diligence and Sustainable Supply Chains: Insights from FTI Consulting Europe, US and Asia

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The European Union is expected to shortly roll out new legal obligations which could include civil liability for human rights abuses and environmental harm in supply chains. This has important implications for European businesses working in a globalised economy across almost every industry; from fashion brands sourcing from textile factories in South Asia, major technology companies reliant on rare metals mined in Africa or food brands using ingredients farmed in Latin America, for example. The climate emergency and the COVID-19 pandemic have accelerated the need and demand for a more sustainable future. FTI Consulting looks at how mandatory human rights due diligence in supply chains has gained urgency, how Europe is responding and what companies should be doing.

What is the issue?

The European Commission announced in April that it will introduce legislation on Mandatory Supply Chain Due Diligence. This should shed more light on extended parts of corporate supply chains, seeking to create more sustainable and resilient business practices and to leverage the influence of European companies to improve the livelihoods of people around the world. The regulation will require companies to assess, report and possibly remedy the impact of their business operations on human rights and the environment throughout their supply chains, including amongst suppliers and sub-contractors, wherever they may be. Modern business assembly, that can take place across multiple jurisdictions, before the product reaches consumers. Every step of these supply chain could include potential breaches of human rights and environmental degradation, under European law, that may or may not be accurately accounted for. The COVID-19 pandemic has highlighted the challenge, with many companies reliant on informal labour in poorer and potentially less regulated markets, that has become more difficult to source as countries introduce measures to compact the virus.

Most global corporations have supply chain due diligence in place to address human and labour rights abuses and environmental harm. In many circumstances, this is a voluntary process, and the quality and enforcement of any standards may be less robust if it concerns contractors and third parties engaged by global corporations. In many
sectors, voluntary industry codes are one way for global corporations to ensure that suppliers comply with mandatory requirements, but it is difficult to enforce these measures uniformly across the globe. Mandatory due diligence for European business aims to influence upstream sectors, turning high human rights and environmental standards to a competitive advantage. Once implemented, such rules could also serve as a technical trade barrier, giving advantage to suppliers from countries with higher standards of governance and human rights.

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