Risk Assessment and Management, Resilience

Introduction

In order for human rights and environmental due diligence (HREDD) to be effective, companies will need to develop the capacity to collect data on risks from the entire value chain on an ongoing basis. This task requires a combination of approaches such as assessment tools, digital data sources, involvement of workers and their organisations, local partners and stakeholders. We will look into the general concept, practical implications, and the business case for assessing risks along the value chain.

Risk focused on corporate practice rather than potentially affected rights-holders

Failure of corporate risk assessment processes to extend beyond the risks of the company to those who are actually or potentially affected by its supply and value chain (EC, 2020).

Most companies only take the initial step of risk identification and neglect environmental risks in comparison to others.

Most companies’ due diligence systems are very limited, covering little more than the initial step of setting expectations for their suppliers. Few systems extend to the critical stages of assessing supplier compliance, engaging with suppliers, and taking action to address any non-compliance. This is the case for due diligence systems on all three risk areas studied: human rights abuses, illicit financial flows, and environmental damage, with evidence particularly weak on assessment and mitigation of environmental risks. Without these elements the due diligence systems will never contribute to the prevention of these significant supply chain issues (WRFA & RMF, 2023).

According to the evidence available, most companies’ due diligence systems do not meet the minimum requirements for effective prevention of harmful impacts, as they cover only the initial step of risk identification and not the critical elements of risk assessment and prevention. Environmental due diligence systems are markedly weaker than those of other areas: Companies score an average of only 25% for environmental due diligence, compared to 29% and 43% for due diligence on human rights abuses and illicit financial flows, respectively (WRFA & RMF, 2023).

Company insight example

FAIRPHONE with their project “Fair Tungsten: From conflict-free to building community” (FAIRPHONE, 2024) is an example of a company going beyond mere risk identification. Together with the mine operator (a small-scale/semi-industrial mine in Rwanda) and the smelter, FAIRPHONE wanted to go beyond “conflict-free” and ensure they managed broader risks and achieved a positive impact on communities and workers. The supply chain partners jointly financed an initial risk and impact assessment in which the mine workers, sub-contractors, and local communities were involved in identifying impact areas, what had been achieved, and what could be done better. The intention is to involve these actors in the monitoring of the impacts going forward (LEVIN SOURCES, 2024).

The danger of disengagement or de-risking

Appropriate responses with regard to the business relationship may include continuation of the relationship with a supplier throughout the course of risk mitigation efforts; temporary suspension of the relationship while pursuing ongoing risk mitigation; or, as a last resort, disengagement with the supplier. Disengagement may happen after failed attempts at mitigation, or where the enterprise deems mitigation not feasible, or because of the severity of the adverse impact (OECD Due Diligence Guidelines).

In the context of human rights and environmental due diligence, disengagement is understood to be the process of terminating a business relationship based on the risks identified in the due diligence process (OECD Due Diligence Guidance for Responsible Business Conduct). When disengagement is wider than one single business relationship, we can speak of de-risking. In this context, de-risking is when a company chooses to avoid current or future sourcing altogether from a high-risk area, sector, or type of supplier, including for example small-scale producers, rather than considering engagement in due diligence and adopting nuanced risk assessment measures.

This raises the notion of responsible disengagement, which takes place when (IPIS & Solidaridad, 2023)it is used as a last resort for any of these reasons:

• it follows failed attempts at mitigation

• it happens where mitigation is not feasible

• it happens due to the severity of the adverse impact

• it is conducted taking into account potential new adverse impacts related to the decision to disengage.

Policy insight example

In 2010, the US passed a provision on conflict minerals (3TG minerals) from the Democratic Republic of the Congo (DRC) and adjoining countries as part of a larger law that became known as the Dodd-Frank Act. This law encouraged increased scrutiny on conflict financing from mineral trade in the DRC region, and as a direct consequence, most international mineral traders abstained from sourcing minerals from the DRC in 2010. As this example illustrates, well-intentioned regulations can have far-reaching negative effects on the most vulnerable communities (IPIS & Solidaridad, 2023).

Despite the broader geographical focus of the EU Conflict Mineral Regulation compared to the US Dodd-Frank Act, the risk of disengagement from the 28 countries on its list is still a concern as it will often entail higher due diligence, audit and organizational costs compared to sourcing outside a conflict-affected area. In short, there are few incentives for companies to engage with artisanal and small-scale mining (ASM) / Conflict Affected and High-Risk Areas (CAHRAs), and the trend to raise the bar in terms of sourcing standards has exacerbated this reluctance.

Further reading

European Commission (2020): Study on due diligence requirements through the supply chain. Final Report.

Mercedes-Benz (2024): Raw Material Report: Taking responsibility for raw material supply chains. https://group.mercedes-benz.com/responsibility/sustainability/supply-chains/raw-materials-report.html

OECD due diligence guidance http://www.oecd.org/corporate/mne/mining.htm

OECD (2021): Study of Global Uptake of the Due Diligence Guidance for Responsible Mineral Supply Chains from Conflict-Affected and High-Risk Areas Based on Corporate Disclosure.

World Resources Forum Association (WRFA), Responsible Mining Foundation (RMF) (2023): The Extractive Commodity Trading Report 2023. https://www.wrforum.org/extractivecommoditytrading

European Commission (2017): Guidelines on non-financial reporting (methodology for reporting non-financial information)” (2017/C 215/01), available at: https://ec.europa.eu/info/publications/170626-non-financial-reporting-guidelines_en

FAIRPHONE (2024): Fair Tungsten: From conflict-free to building community. https://www.fairphone.com/en/2021/10/28/fair-tungsten/

LEVIN SOURCES (2024): “Lean in” due diligence in value chains – How to move towards meaningful impact?. https://www.levinsources.com/knowledge-centre/insights/due-diligence-value-chains-impact

Boukje Theeuwes (Solidaridad), Catarina Vieira (Solidaridad), Lotte Hoex (International Peace Information Service, IPIS), (2023): DUE DILIGENCE AND THE RISK OF DISENGAGEMENT: Experiences from the mineral sector and a way forward for the CSDDD. https://ipisresearch.be/publication/due-diligence-and-the-risk-of-disengagement-experiences-from-the-mineral-sector-and-a-way-forward-for-the-csddd/