Global Supply Chains: How Far Should Corporate Due Diligence Obligations Go?

How much responsibility can companies in the agri-food sector be given for human and labor rights and environmental protection along their supply chains? The recently introduced Supply Chain Due Diligence Act has answered this question for Germany: Companies of a certain size must establish a risk management system that covers not only their own business operations but also direct suppliers at the upstream stages of the value chain, as well as indirect suppliers if there is knowledge of possible violations. The due diligence obligations comprise compliance with central international conventions such as core labor standards of the International Labor Organization ILO (e.g. prohibition of child or forced labor), certain substance-related conventions in the environmental area (e.g. with regard to the handling of mercury or waste) and the United Nations Covenants on social and civil rights (International Covenant on Economic, Social and Cultural Rights, International Covenant on Civil and Political Rights). A similar response is also emerging in other EU member states and G7 countries through the introduction of various regulations. Corporate due diligence is increasingly being extended to the preliminary stages of the supply chain in particular.

A corresponding regulation led to heated debate at EU level. Previously, a regulation on deforestation-free supply chains had been agreed relatively easily. This obliges companies to prove that their supply chains for cocoa, coffee, palm oil, beef, soy, rubber and timber are not linked to deforested areas starting at a defined point in time. The decision-making process for the due diligence directive on horizontal human rights and labor law (Corporate Sustainability Due Diligence Directive), on the other hand, was bumpy and on the verge of failure. In addition to civil liability provided for in the directive, Critics cited high bureaucratic costs, particularly for SMEs, as the main argument against extending corporate due diligence.

Indeed, the number of business relationships subject to due diligence is very high, but there are possible solutions to support companies in their implementation and to minimize the bureaucratic burden of due diligence obligations without watering them down. In the end, the EU member states were able to agree on a legal text after repeated attempts. However, this was only possible after Belgium, holding the Council Presidency, had twice submitted compromise proposals. In particular, the scope of the law was restricted. Instead of over 16,000 companies, only around 5,400 companies will be subject to the directive after thresholds had been raised in terms of numbers of employees and turnover: They will have to comply with their due diligence obligations along their supply chain.

A Paradigm Shift

The fierce disputes surrounding the EU directive and the resistance from parts of the business community point to the paradigm shift that is associated with supply chain laws for companies. Supply chain laws extend the responsibility of companies beyond their own area of business. Responsibility for the actions of suppliers, and even more so for the actions of direct suppliers at the upstream stages of the value chain, has rarely been a topic of corporate management and had not been provided for by law.

Previous corporate efforts on a voluntary basis, such as sustainability certification or multi-stakeholder partnerships, have not led to a fundamental improvement in working and living conditions as demonstrated, for example, by the high and in some cases rising levels of child and forced labor.

While, in general, the possibility of implementing ILO standards is not fundamentally questioned, the EU directive also addresses the Right to Food as a fundamental human right. Implementing this right in low and lower-middle income countries (LMIC) poses particular challenges. The following article therefore contains a basic assessment of the due diligence regulations as well as a more in-depth discussion of this requirement, both based on the current Report of the Scientific Advisory Board on Agricultural Policy and Food (WBAE) at the Federal Ministry of Food and Agriculture (BMEL).

Basic assessment of the due diligence regulations

The WBAE generally welcomes the legislation on corporate due diligence obligations, but also calls for the regulations to be designed and implemented in an effective and efficient manner for all stakeholders, including those abroad. To this end, the Council believes that an intensive dialog with international trading partners, particularly LMICs, and the provision of support measures are necessary.

The establishment of risk management systems for compliance with basic occupational health and safety rights and with human rights in the companies directly affected by the due diligence laws seems indicated. The direct costs are fairly limited, as companies in the agricultural and food industry already have a great deal of experience with quality assurance systems in complex value chains. However, costs may also be incurred by upstream suppliers and through unintended effects: Some companies may therefore choose to withdraw from areas or economic sectors with difficult human rights situations ("cut and run") or find other strategies of avoidance rather than investing in the development of their suppliers. Certification systems could play a key role in efficient and effective implementation, but currently still have major weaknesses.

The effectiveness and efficiency of due diligence regulations depend largely on the specific design of implementation and monitoring. Coordinated interfaces between companies and authorities are particularly important here, so that companies do not have to supply different authorities with data multiple times, and vice versa. From a legal perspective, effective control as a result of the German Supply Chain Due Diligence Act is limited by the lack of a liability provision; however, the European Directive now provides for this.

As due diligence regulations are a new instrument, support services for companies as well as monitoring and impact assessment of the laws are necessary in order to identify problems at an early stage and make adjustments if necessary.

It should be viewed critically that the due diligence regulations represent a unilateral approach by Germany and the EU – despite existing bilateral and limited multilateral options. Trading partners were not consulted during the drafting of the laws despite the fact that they have an extraterritorial impact. Not only against the backdrop of Europe's colonial past are a partnership approach and an open ear for the experience of local stakeholders in trading partner countries elementary to further implementation. This could also prevent trading partners from turning away from European companies and the EU from losing trading partners, which would mean that human rights or environmental problems persist in the context of exports to other target countries. Therefore, home grown approaches by trading partners to improving the situation on the ground should be supported, in addition to cooperation in monitoring and reviewing the impact of the laws. At the same time, serious efforts should be made to increase multilateral approaches.

Overall, however, the WBAE supports the introduction of legal due diligence obligations in supply chains and recommends their gradual expansion as a learning system. In addition to environmental and climate protection, this gradual expansion could also include the Right to Food as a corporate due diligence obligation.

Gradual expansion of corporate due diligence obligations: The Right to Food

The Right to Food is a fundamental human right to ensure that everyone has access to adequate, sufficient and healthy food. It already formed part of the United Nations Universal Declaration of Human Rights adopted in 1948, which states in Art. 25 (1): "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food...". In the UN Social Covenant of 1966, over 170 states have committed themselves under international law to implementing this human right. In it, states explicitly recognize the Right to Food in the above stipulation and undertake to take "appropriate steps to ensure the realization of this right".

Over time, a broader perspective on the right to food has developed, with the FAO's definition of food security including availability, access, utilization and stability. Food security exists "when all people at all times have physical and economic access to adequate, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life."

In view of the figures for people affected by hunger, the human right to food is often cited as the "most frequently violated human right". It is a crucial human right for the agricultural sector in particular, as a large proportion of hungry people around the world are smallholder farmers.

Neither the German Supply Chain Due Diligence Act nor the regulation on deforestation-free supply chains explicitly lists the Right to Food in the reference agreements used to define due diligence obligations. Although the final version of the EU Directive refers to the aforementioned Article 11 of the UN Social Covenant, it is unclear to what extent companies can ensure the right to food along their supply chains at all.

Due to the complexity of the Right to Food and the diverse descriptions of aspects of food security in corporate obligations, it seems sensible to differentiate between aspects that should be included directly in the due diligence regulations and aspects which can be taken on incrementally and added after an impact assessment.

The Food Security Standard (FSS) can serve as a valuable basis for this. It was developed by Welthungerhilfe and the WWF in cooperation with the Center for Development Research and with the support of the BMEL and offers certification along the four dimensions of food security mentioned above. In some cases, the FSS contains criteria that cover due diligence obligations in accordance with supply chain due diligence, such as the provisions of the ILO core labor standards. The FSS thus offers certification that is compatible with the German Supply Chain Act, supplemented by additional aspects that are specifically related to food security.

Criteria in the FSS that have a particularly direct link to entrepreneurial activity should be explicitly classified as corporate due diligence obligations. One example of this is ensuring the availability of food in the workplace for fully employed staff. Other regulations, such as educational programs for healthy nutrition in companies, could be considered voluntary measures and experience could be gathered in the context of a learning system. Overall, the FSS can play an important role in strengthening the awareness of violations of the Right to Food.

In principle, wages and entrepreneurial incomes in agricultural value chains that do not constitute a living wage cause many of the existing human and labor rights risks – including the Right to Food. Compliance with minimum wages should therefore be a central component of due diligence regulations. The EU directive goes even further: living wages and incomes are defined as a corporate due diligence obligation in the annex. If they can be implemented, they could be a key factor in enabling the right to food along global supply chains. However, the level of minimum wages and, in particular, living wages and incomes are closely linked to competition issues and market developments and are therefore often still fraught with difficulties in implementation.

For this reason, the WBAE's considerations on how the Right to Food can be successfully integrated into corporate due diligence obligations focus more on availability and access and further development in partnership. They are summarized in the following WBAE recommendations:

• Define safe food provision in the workplace as an element due diligence. In addition to an affordable food supply at the workplace, sufficient breaks for meals also play a role.
• Land displacement and deprivation of means of subsistence can have a direct impact on the Right to Food of the people affected. Both the Supply Chain Due Diligence Act and the EU Directive address the deprivation of land and means of subsistence. One starting point could be for companies to check, as part of their duty of care for their supply chain, whether displacement is taking place or has taken place at a time after a reference year to be determined. At this point, however, it is still necessary to specify how companies can best implement this.
• Investigate further obligations relating to the Right to Food within a dynamic, learning system. Due to the complexity of the factors influencing the Right to Food, the specification of further, somewhat programmatic aspects should be examined in stages, e.g. the feasibility of implementing the Food Security Standard.
• Strengthen problem awareness and systematic impact assessment for the Right to Food. The WBAE proposes that the impact of all due diligence regulations on food security be included in the general impact assessment.
• Provide targeted support to companies in the implementation of due diligence obligations with regard to the Right to Food. In order to achieve the implementation of these due diligence obligations, support for companies is recommended through, for instance, handouts or best practice examples for various aspects.
• Establish and support forums of dialogue and pilot projects with companies and local stakeholders. If several companies have suppliers in a region that is characterized by a high prevalence of malnutrition or moderate to severe food insecurity, a first step could be to connect the companies to one another and to local stakeholders in order to jointly develop solutions. Experience in implementing the Right to Food should be strengthened, e.g. through pilot projects in supply regions.

In summary, it can be said that the Right to Food is a fundamental human right, which is why it seems sensible to include it in the supply chain due diligence obligations of companies. To some extent, this is the case in the EU Directive. However, in order to further embed and implement this human right in corporate due diligence regulations, it is important to provide a more concrete and business-oriented specification of how companies can protect this human right. This would be a sign of significant progress.