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  • Writer's pictureChristine Nikander

What role does due diligence play in a just transition?

An introduction to the just transition, human rights due diligence, and key EU regulations.



 

The importance of a just transition


The production of renewable energy technologies and batteries can bring an array of environmental and human rights issues with it. One example of this are the child labour and human rights violations sometimes found in cobalt mining operations. Cobalt is used in batteries and the demand for it has increased in light of the energy transition.[i] More broadly, access to and costs for renewable energy are also areas where issues can arise.

 

While a rapid and largescale transition over to renewable energy is urgently needed, steps must be taken to make sure communities, workers, and consumers are not left behind. Failing to do so can lead to resistance, community opposition, an “erosion of public support”, and even conflict. All of these can significantly impede both the progress and the pace of individual energy projects and the energy transition as a whole.[ii]

 

To achieve a just transition, the private sector, investors, and governments must ensure that corporate human rights due diligence is carried out well, that fair negotiations are held with impacted communities, and that measures are put into place to make sure the energy transition “delivers shared prosperity”.[iii]


 

Voluntary social compliance is missing the mark


The UN Guiding Principles on Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct provide companies with guidance on how to implement human rights due diligence throughout their supply chains and global operations. Despite being non-binding, both documents generally enjoy quite broad acceptance. This alone, however, has not been enough to prevent larger human rights issues from arising in corporations.

 

For example, the Business & Human Rights Resource Centre and Amnesty International USA have said that “leading venture capital (VC) firms are failing in their responsibility to respect human rights”. Their research shows that many “[l]eading VC firms have not implemented basic human rights due diligence processes to ensure the companies and technologies they fund are rights-respecting, as mandated by the UN Guiding Principles on Business and Human Rights”.[iv]

 

Social compliance audits are an $80 billion global industry. Over the past two decades, audits have been used as evidence by companies “that they have eliminated abuses in their supply chains”. Yet, an analysis of 40 000 audits by the Cornell professor, Sarosh Kuruvilla, in 2021 “found that nearly half had relied on forged or dubious documents”. Moreover, a recent New York Times “review of confidential audits conducted by several large firms shows that they have consistently missed child labor”. According to the New York Times, “[c]hildren were overlooked by auditors who were moving quickly, leaving early or simply not sent to the part of the supply chain where minors were working”. A key problem is that “[a]uditors typically start their inspections in the morning and stay for about seven hours, even at 3,000-person factories that operate around the clock”. Consequently, the “late afternoon and night shifts, where child labor violations most often occur, are almost never seen”.[v]


 

New due diligence requirements in the EU


To address issues arising in the business and human rights – and more broadly the corporate sustainability – space, the European Union (EU) has put together new regulations around due diligence. Two quite notable new regulations are the Corporate Sustainability Due Diligence Directive (CSDDD) and the Forced Labour Regulation (FLR).

 

With the CSDDD, the EU is “requiring firms to mitigate their negative impact on human rights and the environment”. The rules will apply to both EU and non-EU companies that have over 1000 employees and a yearly turnover of EUR 450 million. They also apply to “franchises with a turnover of more than 80 million euro if at least 22.5 million was generated by royalties”. Companies falling within the scope of the directive are obliged “to alleviate the adverse impact their activities have on human rights and the environment, including slavery, child labour, labour exploitation, biodiversity loss, pollution and destruction of natural heritage”. They must also set up a “transition plan making their business model compatible with the global warming limit of 1.5°C under the Paris Agreement”. The obligation to “prevent, end or mitigate their negative effects” notably also falls on “upstream partners working in design, manufacture, transport and supply, and downstream partners, including those dealing with distribution, transport and storage”. These partners could also be companies that do not fall within the scope of the directive themselves. Each EU Member State must task a national supervisory authority with “monitoring, investigating and imposing penalties”. Companies that fail to comply with the rules will be held liable and they “will have to fully compensate their victims”. They may also be fined up to 5% of their global net turnover. If formally adopted, the new rules are expected to begin to apply in roughly 2 years for EU companies and 4 years for non-EU companies.[vi]

 

With the FLR, the EU aims to “ban products made with forced labour from the EU market”. Under the regulation, the European Commission will compile “a list of specific economic sectors in specific geographical areas where state-imposed forced labour exists”. The European Commission may also flag particular products or product groups to EU customs, meaning that importers and exporters would have to submit extra information on, for example, the manufacturer and suppliers to customs. The national authorities of EU Member States or the EU Commission will investigate cases of suspected use of forced labour within companies’ supply chains. Companies that fail to comply with the rules may be fined and their goods may be confiscated at the border or withdrawn from the EU market, as well as online marketplaces in the EU. The new rules will begin to apply in roughly 3 years.[vii]

 

Given the complexity of global supply chains, companies should be taking ongoing steps towards compliance. Concretely, this means that companies should already be assessing the potential negative impacts of their supply chains and business operations. They should also already be taking measures to prevent and mitigate these impacts. Moreover, companies should be monitoring their efforts on an ongoing basis and be ready to make necessary adjustments to their supply chains and business operations.


 

Ways forward


If we want the energy transition to be just, local communities, civil society, government, and the private sector must collaborate. We need effective participation of all key stakeholders and solid due diligence by investors and corporate actors. The risks to human rights must be continuously assessed, monitored, and addressed throughout all relevant supply chains. We will also need to address issues that arise in the context of energy justice, as well as more broadly in climate and environmental justice. Ultimately, we will also need to shift over to a circular economy.[viii]

 

Over the course of the following three newsletters, Christine Nikander and Saskia Tykkyläinen will be exploring the importance of sustainable design for a just transition. If you want to be notified when the newsletters come out, please subscribe to our mailing list.


 

About the author

Christine Nikander is the founder of the environmental and social sustainability consultancy, Palsa & Pulk. She studied law at the universities of Columbia (New York), Edinburgh (Scotland), and Leiden (the Netherlands). Christine has been doing scholarly research into the legal and policy framework surrounding global supply chains, and particularly e-waste, since 2015. She has been writing The E-Waste Column weekly since 2022.



 

About Palsa & Pulk

Palsa & Pulk is an environmental and social sustainability consultancy. It provides compliance, governance, policy, and strategic advice to its clients. The consultancy’s work is mostly focused on supply chain governance, the just transition, circular economy, and human rights.



 

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