Shared Responsibility and Responsible Disengagement (blog series Towards New HREDD Laws)

Two weeks ago, we published a study about changes in corporate practice resulting from the implementation of HREDD laws, namely the French DVL and German LkSG. This blog provides some reflections on engagement with suppliers and shared responsibility approach and on responsible disengagement.

Engagement with suppliers and shared responsibility

Visibility of the full value chain and gathering supplier data remains one of the more difficult and resource intensive exercises for companies, especially from low tiers and in sectors characterised by long and complex supply chain. We find that despite difficulties in obtaining full and continually updated visibility into their entire supply chain, stringent regulatory obligations for HREDD risk assessment - and the risk of liability - are forcing companies to find innovative ways to overcome these challenges. We find that while still not a common practice, some large companies are improving their engagement with suppliers and SMEs.

We find, however, notable gaps. In general, companies in Europe continue to rely on social audits, third party certifications and contractual clauses, not yet implementing a shared responsibility approach. Audits and certifications have already shown to not be effective in identifying and assessing adverse impacts in value chains and to be inconsistent with the UNGPs. Buyer's requests for information do not often further a real dialogue between the supplier and the buyer in relation to what the actual risks are. Suppliers spend considerable resources to comply with requests, with little support, and have yet to see the connection between these activities and addressing relevant human rights impacts. Buyer companies in turn gain little insight into key issues. Several companies are strengthening their contractual obligations to suppliers - the CSDDD will require companies to seek contractual assurances from a direct business partner; the German LkSG already requires contractual assurances from a direct supplier. Contracts are useful to make HREDD standards enforceable, but they often lack effectiveness if only suppliers are obliged, and the buyer's s role is ignored. In addition, EU companies often do not reflect on the ways that their purchasing practices can impact suppliers and SMEs.

The CSDDD embraces a shared responsibility approach by requiring large companies to enter into 'fair, reasonable and non-discriminatory' contracts with their business partners, and provide 'targeted and proportionate support', and bear the cost of independent third-party verifications, and it clarifies the importance of addressing the impact of the company's purchasing practices It also states that the use of contractual assurance and third- party verification does not equate to the fulfilment of due diligence obligations, nor preclude liability.​

Policy makers should require companies to approach the use of contractual leverage as a shared responsibility practice providing support and capacity-building measures to suppliers, and to conduct thorough analyses of their purchasing practices, to identify areas for improvement and gather feedback from suppliers.

Responsible disengagement

Both the UNGPs and the OECD Guidelines outline the decision- making process for business disengagement, based the concept of leverage. When considering ending the relationship, the UNGPs elaborate on the business responsibility to engage with a business partner and use its leverage to address adverse impact; the OECD Guidelines refer to disengagement as a measure of 'last resort'. The UNGPs recognise situations where termination is appropriate, due to severity of the abuse and the inability to exert leverage to change the situation. The CSDDD also clarify that disengagement from suppliers should only happen in a responsible manner when there is no reasonable expectation that leverage efforts would succeed. It recognises the need for immediate disengagement in cases of state-imposed forced labour.

Despite fears of HREDD laws' 'unintended consequences' such as promoting business termination (without responsible engagement) or even complete divestment from certain countries, we did not find evidence of such practice. Withdrawal from specific countries or regions cannot be directly linked with the implementation of the French or German laws. Evidence related to companies divesting from high-risk countries, and conflict-affected areas show that reasons like legal and reputational risks and operational issues play the most significant role.

Policy makers should reflect the responsible disengagement requirements of the CSDDD and the expectations of the UNGPs by ensuring that disengaging is an option of last resort. They should require companies to consult with stakeholders, invest in time-bound responsible exit strategy, consider in their assessment that disengagement can lead to a worse situation for rightsholders and the environment, while also recognizing when there are no reasonable prospects that their use of leverage can be effective, and finally adopt remediation measures.

This blog is part of a series of reflections based on our study, published on 15th October 2024 during a launch event at BIICL. You can read the full report here.