The due diligence concept has different applications in a business context. If we apply one of the accepted definitions due diligence often is associated with voluntary research and analysis of financial and legal information necessary to make a decision before entering into a contract. It is widely used in the mergers and acquisitions process to assess the seller’s validity of claims.
Therefore this transaction may include different types of due diligence: administrative, financial, human resources, assets, and environmental. It is recommended to conduct an ongoing due diligence process regardless of the transaction and by all stakeholders – business partners, suppliers, buyers, and sellers to ensure compliance.
Types of due diligence
The term is becoming more widely used in several key international documents such as the Organisation for Economic Co-operation and Development (OECD). The OECD guidelines cover due diligence in several key areas: responsible business conduct, responsible supply chains of minerals from conflict-affected areas, agricultural supply chains, deforestation, child labour, and forced labour. All the guidelines have in common the voluntary nature and the requirement for conducting due diligence.
However, there is also a trend towards making the due diligence mandatory which is laid down in the Timber trade control regulation that requires setting up a due diligence system. The mandatory nature of this type of due diligence is indicative of the need for a continuous monitoring process where each actor in the supply chain should act in a responsible and transparent way.
Due diligence in the field of sustainable management
The process of conducting due diligence is becoming widely applied within sustainability management. When we talk about ESG reporting of the companies’ activities the term that is used is “sustainability due diligence”. This definition is aligned with the international instruments proposed by the OECD and UN, and it sets out the recommendation for companies to undertake measures to address potential negative impacts on the environment and the people. Even though human rights here are not explicitly stated, it could be inferred that sustainability due diligence is similar to the human rights due diligence set out in the UN Guiding Principles on Business and Human Rights. In addition, it also sits within the current mandatory requirement on “corporate due diligence” prescribed in the proposed Corporate Due Diligence and Corporate Accountability Directive.
Here, the process clearly sets out the requirement for companies to carry out due diligence throughout the value chain to reduce potential adverse human rights impacts. The process essentially includes a risk assessment of the most salient human rights risks that can be identified depending on the industry and location of the business activities. The data shows that a large number of companies do carry out voluntary due diligence on human rights, but the recent developments in Germany, the Netherlands, Great Britain, and France are indicative of the growing need for a mandatory nature of due diligence.
A shift in the focus is required from the pure extraction of resources for profit at the expense of the environment and human rights. No matter which due diligence you would apply the reality is that regardless, of your location and size the mandatory due diligence will be coming into force impacting first the large companies where we can see the ripple effect on smaller companies within the supply chain.