The COP27 conference saw a key success in creating a new loss and damage fund for countries most impacted by climate change. Yet, talks failed to deliver any meaningful progress on emissions reduction and human rights issues. As governments struggle to make real headway, companies have a critical role to play, taking action into their own hands and reducing environmental impacts across their value chains, says Andrew Probert, regional managing director of growth and head of ESG Advisory at Kroll.

Businesses are already taking significant steps in the right direction. For COP27, more than 100 CEOs and senior executive members of The Alliance of CEO Climate Leaders issued a joint letter calling on governments and businesses to join a collective initiative aimed at accelerating the transition to net zero.

In the UK, 47 companies, investors, business associations and initiatives also recently issued a statement to the UK Government, calling on it to "introduce a new legal requirement for companies and investors to carry out human rights and environmental due diligence."

In some sense, this drive towards action by business isn't altogether surprising. Firms including asset managers have for a long time now set a trend by investing in sustainable businesses and renewable energy companies.

Meanwhile, many organisations around the world are increasingly taking a proactive stance on environmental, social and governance (ESG) issues, driven largely by their organisational values, governance frameworks and risk management strategies. 

When it comes to issues like human rights due diligence, for instance, many companies already understand that this is a key ESG factor to incorporate into business practices and to maintain strong brand reputation and value. 

ESG examples around the world

Across Europe, regulators are starting to move into ESG due diligence, with compulsory human rights and environmental due diligence legislation already introduced or under discussion in several jurisdictions—gaining substantial public support in the process. 

For example, the Bundestag, the German Parliament, adopted the "Act on Corporate Due Diligence in Supply Chains" ('the Act') on 11 June 2021. For the first time, the Act imposes a binding obligation on companies to establish, implement and update due diligence procedures to not only enhance their compliance with core human rights but also to improve their environmental protection measures within their supply chains.

For regions or sectors where lawmakers have been slower, companies are taking matters into their own hands. For example, many are reinforcing due diligence processes in line with the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises.

The joint statement by UK businesses also went one step further and called on "more companies … to assess, act and report on their potential and actual impacts on human rights and the environment." Indeed, Kroll's recent research also shows an increase in companies incorporating human rights factors into compliance programs, rising 11% globally from 24% in 2021 to 35% in 2022. 

This highlights the need for measures to surpass the existing guidelines, and mandate thorough due diligence processes to establish a common standard for supply chains, while also creating a starting point from which progress can be measured moving forward. 

Thinking ahead to ensure success

There's no doubt in the current economic environment, particularly in the UK, that the cost involved in tightening up supply chains will be a factor in any considerations around going one step further than current regulations suggest.

However, doing nothing and waiting for a risk to become material can be a costly and reputationally damaging strategy. Investors are also increasingly demanding greater transparency and risk mitigation before they commit funds. 

Any response to supply chain risks and regulation will also need to be built into a business' long-term practices. Companies must be proactive in conducting thorough due diligence checks to ensure that any human rights issues or environmental failings are monitored as part of a continual review process, rather than a one-time fix to put a sticking plaster on the problem. Companies are also increasingly combining artificial intelligence with human intelligence to identify, manage and respond to risks effectively and efficiently. 

Regulation in this area is only moving in one direction so tackling these issues now can help businesses become future-proof. In the likely event that the regulation requiring more stringent human rights due diligence be carried out throughout the entire supply chain is widely brought into force, businesses that have acted early will be prepared.

Investing in strong ESG policies and making sure these are properly implemented throughout the company is no longer a "nice to have" but a necessity. Businesses must put forward a genuine argument to leaders to get on board with ESG to counter any risks to the reputation and value of their brand, and reinforce the view that purposeful and value-driven investment will deliver stronger benefits to both the companies and the broader society. 

By Andrew Probert, Regional Managing Director of Growth and Head of ESG Advisory at Kroll