Can due diligence drive change “on the ground” and work not only for companies but also for communities affected by corporate activity? This is an ongoing question for our clients, and one we had an opportunity to answer as part of a panel at the 2021 RE-SOURCING conference.
In this blog, we synthesise our main points, based on Levin Sources’ experience working with diverse clients along mineral value chains. The panel revolved around three main themes, which we will develop below:
- Are risk assessments and due diligence worth it, do they make a difference?
- What are obstacles when connecting upstream and downstream in the due diligence process, what is missing?
- What outcomes can we expect of due diligence and what role do Governments have to play in this?
Due diligence – does it make a difference?
The short answer is yes – but the impact we speak of depends on how risk is defined. “Risk” only defined as “risk to the company” (e.g. reputational risks, financial risks, etc), a lens still too often used, is less likely to have a positive impact for communities. However, if you consider “risk and impact to people and planet” along the UN Guiding Principles and the various nascent environmental due diligence frameworks being set out, then we are closer to a type of due diligence that can have positive impact.
Unfortunately, too many companies still react to identified risks or negative impacts by disengaging and avoiding specific suppliers, regions or countries which does little to eliminate the risk, and simply externalises it into someone else’s supply chain. We still hear sentences such as “we don’t buy from Africa, it’s too risky”, even though such disengagement is not considered good practice anymore.
At the other end of the impact spectrum, there is corporate philanthropy, where companies try to create positive impact by financing projects that are external to their operations and value chains - and sometimes implemented not complementary to, but instead of addressing the impacts generated through the company’s activities.
The future of impactful due diligence lies somewhere in between the two approaches, as companies conduct due diligence in their operations and value chains with the objective of taking action on the issues they find there rather than as just a tick box exercise. They understand the due diligence process is a way to help prevent, mitigate and remediate the impacts and issues that affect people and planet – meaning that they do Due Diligence not just for the purpose of risk management, but for the purpose of acting and contributing to improvements, together with other actors.
This is the direction we are heading towards as a sector and it is necessary for ensuring that the situation improves “on the ground”. Of course, this type of “lean in” due diligence is not easy, it requires time and efforts and companies face a lot of challenges. But Levin Sources sees it as an encouraging trend, especially noting that an increasing number of downstream actors (such as automotive companies or OEMs) have started raising expectations on this, which encourages those dragging their feet upstream: once the customers start demanding it, companies are more willing to change quickly.
What are the obstacles when connecting upstream and downstream in this process, what is missing?
Mineral value chains can be extremely long and complex, so engaging across one is difficult for companies that sit at the downstream end of the chain – such as a car manufacturer that has hundreds of minerals and materials in its supply chain, each coming from many tiers of suppliers across the globe. Knowing their supply chain is the first challenge for these companies, before even starting with the due diligence process.
For ease, many mid- and downstream companies are now inclined to rely on standards and audit programmes that certify their suppliers. This comes with its own set of issues:
- First: There has been a proliferation of standards, certification and audit schemes in the mineral sector– some covering individual value chain stages like mining, some covering specific materials, some covering the product, others covering the operation/company, some both. This has made it confusing for companies and their stakeholders, and there are calls for increased work on equivalency or harmonisation, or at least a common direction taking the UN Guiding Principles as the overarching framework.
- Secondly, and this is a challenge especially when we speak about having impact “on the ground”: these frameworks typically focus on assuring the existence of management systems oriented at controlling risk more than assessing the outcomes these efforts generate for impacted stakeholders. Less attention is given to assessing whether these measures and systems are effective and improve the situation for the affected people – which is harder to capture in a quantitative assessment or a short audit.
In other words, the meaningful involvement of affected people in the whole due diligence process is often missing. Ideally, those affected by a company’s actions should be involved in identifying risks and impacts, in assessing them, in designing mitigation measures, and in measuring their effectiveness. After all, affected people themselves should be the judges of whether their situation has improved or not.
FAIRPHONE IS A GOOD EXAMPLE of how companies could go about this. We recently worked with them on a project focused on their tungsten supply chain together with the mine operator (a small-scale/semi-industrial mine in Rwanda) and the smelter. They wanted to go beyond “conflict-free” and ensure they managed broader risks and achieved a positive impact for 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.
This may be more challenging for larger companies further removed from the raw material source and with a wider supplier base, but there are still a few options for companies to improve the involvement of affected stakeholders in the due diligence process:
- Integrate engagement with affected stakeholders to a larger degree when developing a standard, or when doing audits
- Work with industry associations to engage affected stakeholders or their representatives and “proxy” organisation on a sectoral level, thereby moving the role of industry associations beyond representing commercial industry interests and making them a key player in supporting due diligence and managing risks/impacts
What outcomes can we expect of due diligence? What role do Governments have to play in this?
While the way the due diligence process is conducted is key to achieving impact, we need to remain mindful of companies’ spheres of responsibility or influence. Many of the risks and issues occurring in mineral supply chains have systemic root causes such as poverty or weak governance; companies cannot reasonably solve these alone. Responsible sourcing requires an enabling and supportive “operating context” because due diligence processes and responsible sourcing programmes can only fully come to their potential if the governance and policy aspects are dealt with too.
CHILD LABOUR and the often informal nature of artisanal- and small-scale mining are examples of issues with such underlying root causes. Different company responses to this can be observed in the context of due diligence in the DRC: some companies have chosen to disengage from the DRC, others engage with industrial suppliers who have further strengthened their systems to make sure no underage person enters their premises, and several ASM-focussed initiatives have been set up to prevent children working at ASM sites and supporting their community more broadly.
However, the systemic root causes of child labour and the informal nature of ASM will not be solved by these actions alone. Government, development agencies, and civil society must take on responsibilities to improve the broader operating environment.
That said, companies can still play a role in addressing root causes and could be more ambitious about the role they play in the wider context. With regards to child labour, this could mean engaging on discussions around:
- Paying living wages and appropriate social security to employees, so that they can afford to send their children to school
- Payment of due taxes, royalties, and social contributions to ensure that the state has the means to fulfil its responsibilities in providing education,
- Engaging with the government or other partners to advocate for and support public investment into schooling, vocational skills training, etc
- Enhancing their (or their suppliers’) local content schemes to source provisions and inputs locally, thereby contributing to the diversification of the economy and job creation outside the mining sector
Through “lean in” due diligence more can be done by companies to create impact in communities “on the ground”. But it is only one piece of the puzzle and other actors, such as Governments, must also “lean in” and play their part to enable impact and transformative change.