We need to talk about the disincentive to disclose risk or adverse impacts.
All the new due diligence laws require some degree of disclosure of risk by companies, and yet the incentive to disclose is lacking. These know-and-show laws require companies to employ a double materiality test to identify the human rights and environmental risks they buy-in through their procurement and sourcing and the impacts they cause or contribute to in their business activities. Companies that fall within the scope of the CSRD, EUDR and CSDDD are passing these disclosure requirements on to their business partners and suppliers and asking them for the necessary information and data regarding risks and adverse impacts. This is where things get complicated.
In-scope companies are reluctant to include serious human rights issues in their materiality analysis and other reporting because they know that enforcement agencies, investors, banks, business partners, stakeholders and customers will punish them if they do. Many would calculate that it’s safer to be coy about the risks they face and ask for forgiveness in the unlikely event that they are confronted about them later.
The business partners, suppliers, miners and farmers feeding into the finished products of in-scope companies face the same dilemma. Why would a coffee farmer volunteer information about a child labour risk or harm? The result of such a disclosure would almost certainly be exclusion from the sourcing lists of traders and roasters. An apparel maker disclosing sexual harassment in their factory would be condemned by brands, retailers, civil society and consumers.
Frankly, every economic actor between the raw material and the finished product has risks that they probably should disclose, but won’t, because there is no assurance that the information will not be used against them.
We have been here before. When brand name companies started adopting codes of conduct in the 1990’s and enforcing them with social audits, their suppliers around the world found that the new requirements were costly and confusing. Worse, they were enforced in a unilateral, top-down manner that shifted the risk and responsibility solely onto the supplier. Suppliers responded by gaming the system and faking compliance. Some buyers realised this and looked the other way, some were fooled, and a few tried to work with their suppliers to achieve compliance. The bottom line is that social auditing provoked a massive industry of fake documents backed by coerced worker testimony.
Due diligence laws could have the unintended consequence of incentivising concealment over disclosure, much as social audits did in the CSR era. This would transform the CSRD, EUDR, CSDDD and other due diligence laws into yet another paper trail designed to dissimulate rather than disclose the truth.
What can we do to prevent it?
We have to talk about the consequences of disclosure. Non-disclosure must not become an open secret that everyone plays along with.
We must acknowledge that there is a lack of trust in global value chains that discourages transparency.
Companies that disclose human rights and environmental risks or impacts must be provided safe harbour in order to prevent, mitigate or remediate the harm.
The laudable language in the Corporate Sustainability Due Diligence Directive about buyers ensuring that the compliance demands placed on suppliers are reasonable and doable, and providing support to suppliers that need it, must be backed by enforcement measures. Right now, there is no guidance in the CSDDD about how buyers should assess those needs, and no way of determining whether the support offered is appropriate or sufficient. There is no instance or entity charged with the responsibility of ensuring that demands are reasonable and support adequate.
In the short term we need the Office of the Human Rights Council, the Working Group on Business and Human Rights, or the European Parliament, to convene consultations on the problem of disclosure and its unintended consequences.
In the longer term, we need to restore trust in business relationships. The dominant model of transactional sourcing has shredded trust and produced a zero-sum game that is simply not sustainable.
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