New EU legislation aims to enforce corporate due diligence on the environment, including proof of compliant supply chains. As corporations adjust to increased accountability, their long-term strategy should consider how sustainability benefits worker's wellbeing.
Companies concerned with the earth’s future, by extension, show more care for their people's wellbeing – and thereby attract more dedicated employees. Sustainable supply chains point back to corporations that behave as responsible stakeholders for the planet, while showing real concern for employee wellbeing at home and abroad. Considering this cause and effect, recent EU law states that major corporations operating in the EU market are now accountable for any harm they cause to the environment, with binding requirements that apply to the entire supply chain 1.
The legislation attempts to harmonize due diligence protocols across all member states while promoting sustainability as a shared global value, replacing less-transparent attitudes (e.g., ‘What happens in Vegas stays in Vegas’) with the understanding that, legally, what happens outside the EU also happens inside the EU.
A Self-Fulfilling Prophecy
Due diligence is anchored in core European values, linking healthy ecosystems to employees and the preservation of biodiversity as a fundamental human right 2. Treating the earth as a shared resource challenges a common hypocrisy in which environmental preservation at home is subsidized by environmental destruction abroad.
Improving due diligence codifies sustainability to benefit employees directly, regardless of where they fit in the company's operations.
"A sustainability-minded approach not only boosts company morale (increasing employee retention), but also attracts top talent." 3
Millennial labor markets lean toward jobs that bring positive change to the world – to such a degree that many list salary requirements as secondary to corporate sustainability 4. In this way, due diligence becomes a self-fulfilling prophecy by attracting and retaining younger top talent, who remain loyal and invested in the success of the company and help innovate towards higher sustainability and success.
Enforcement of supply-side environmental sustainability also supports a more equitable lifestyle for employees on issues like clean water access, healthy local food, sustainable sanitation systems, recreational spaces in nature, habitat preservation for native species and reduced conflict around natural resources.
The EU’s passage of the Directive on Mandatory Human Rights, Environmental, and Good Governance Due Diligence sets binding requirements for businesses to ensure environmental sustainability throughout their entire supply chain 5. The measure holds corporations accountable (and liable) when they harm the environment – anywhere in the world.
While countries like France and the Netherlands have long enacted similar frameworks, others like Germany, Austria, Sweden, Finland, Denmark and Luxembourg have been slower in detailing their due diligence process (most of it voluntary). This kind of bureaucratic disparity leaves some wiggle room for less wholesome corporate entities whose vague reporting keeps supply chains in the shadows.
Corporate Accountability: Is it Possible?
Market forces may not save the planet, but corporations can be hugely influential in effecting positive change toward greater sustainability. Due diligence across corporate supply chains is the EU’s open invitation to businesses with shared core values. In this light, corporate accountability is almost philosophical, akin to Rousseau’s social contract, which quoted Virgil: foederis aequas, dicamus leges (‘Let us set equal terms for the truce’). As a regulatory body, the EU seeks equal terms among its corporate citizens to uphold and protect a universal good (the environment).
The common EU standard attempts clarity on a muddled issue, but does it solve the problem? One recent EU study showed that only 37% of business respondents currently conduct environmental due diligence, while more than half feel requirements are ‘too ineffective and incoherent’ 6.
Well-intended regulations can still punish the compliant while incentivizing less-wholesome players to retreat to the shadows – a downward trend that rarely benefits employee morale or wellbeing. Intelligent legislation should consider the disincentives that regulations can introduce, especially for workers. Some corporate actors are environmentally sustainable because it’s profitable, others want to be good corporate citizens and others only want to be perceived as such. Some companies are merely corrupt or amoral, for whom accountability is simply not profitable.
Thus, the real question becomes enforcement. If the EU’s only leverage is to levy fines, they won’t get far. For some of the worst environmental offenders, paying the odd fine still costs less than major changes to infrastructure. Revoking business licenses from the non-compliant and removing access to markets holds a lot more sway. Direct economic consequence can incentivize accountability for better corporate citizens.
Who’s Ahead, Who’s Behind?
If the new EU requirements are game-changing, who leads the race, and who falls behind? Right away, corporations with younger leadership are exhibiting a push toward sustainability 7.
Not surprisingly, major multinational corporations with long-term strategic planning on the environment tend to be ahead of the curve. Having already anticipated increased regulation, they simply get out in front and adapt accordingly.
"Setting one’s own sustainability goals safeguards autonomy and internal decision-making in the transition to a more compliant future. That kind of forward thinking directly benefits the brand, earning consumer buy-in, while operationalizing due diligence as part of the work flow."
BASF Germany is another corporation that has moved ahead of the pack by creating their own ‘Responsible Care Management System’ based on the UN’s Sustainable Development Goals (SDGs). By making environmental sustainability a sincere part of their own internal audit (published annually online), BASF has made due diligence a marketing tool that shows real progress and shares the success with their customers 8.
Similarly, a company like IKEA (Swedish by brand and origin, but now a Dutch multinational) takes pride in its measurable path towards improvement. Having long faced criticism on their forest product supply chains, IKEA made significant progress in raising its sustainably-sourced wood from 61% in 2016 to 98% in early 2021 – and aims to reach 100% before the end of the year 9. Going several steps further, IKEA launched its 2030 Forest Agenda to remove pressure on growing forests, enhance biodiversity and mitigate climate change. To that end, IKEA has purchased wind farms in Romania and set in motion a whole program of freight densification that reduces both the carbon footprint and overall shipping costs 10.
For IKEA, making business decisions based on self-set sustainability goals boosts the brand and improves long-term competitiveness – but that does not work for everybody. A manufacturer like Daimler claims to welcome due diligence – as long as it does not affect competitiveness 11. Among industries competing in less-sustainable markets, the move to sustainability often cuts into profit (e.g., heavy manufacturing, petroleum, mining and timber). Highly competitive industries with low profit margins may struggle in the short term, especially if profit margins are based on high volume with less-than-transparent sourcing.
The high-tech service sectors can pivot much more easily than heavy industry. Extractive industries and the energy sector – and specifically petrochemical and mining – are simply not set up to make such rapid changes to their production end, which in turn affects employees. Knowing this, some corporations preemptively sue national governments to fight upcoming legislation rather than embark on a major regulatory overhaul.
The new EU legislation absolutely targets extractive industries with murky supply chains, with much attention focused on timber and logging in less-developed nations 12. Conflict mining is also of special interest, with tin, tungsten and gold facing increased scrutiny. Coincidentally, these are some of the same industries with less-than-stellar reputations for employee wellbeing.
Missing the Forest for the Trees
Planning around new regulation misses the forest for the trees and ignores the benefits to workforce wellbeing. Corporations would do well to not focus on the EU’s due diligence requirements but rather what they represent: a shift in market demand for increased accountability on the environment and a healthier, happier workforce. This month, stakeholders elected a third new member to Exxon’s board with explicit intentions to redirect the energy company’s environmental priorities 13. The lesson here is that corporations can take the necessary measures now, or else have measures taken against them – often by their own stakeholders and employees who see sustainability as key to their own long-term survival. Due diligence represents public transparency, and for European democracies, the public is still customer, consumer and worker.
Andrew Evans is an author and travel writer. A veteran of National Geographic, he has reported live from over 100 countries and all 7 continents. He lives in the Blue Ridge mountains of Virginia.
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