Focus on: A company’s risks in a global supply chain: A preventive approach

In an export-oriented industry model, it is key to remain attentive to the regulatory changes experienced by the main trading partners. In this sense, the new regulatory challenge promoted by the European Union (hereinafter, ‘EU’) comes from Corporate Sustainability Due Diligence (hereinafter, ‘CSDD’). The EU requires its companies, and their supply chains, to implement due diligence processes with a focus on human rights and the environment. The risk is clear: Foreign companies that do not adapt to these requirements will be marginalized from European markets, which are becoming increasingly aware and demanding in terms of corporate responsibility and human rights. Whether the risk is clear, the solution is even clearer: The preventive approach to corporate risk management, through the identification, prevention and mitigation of negative human rights impacts in its operations.

Human Rights, the new regulatory challenge for companies

Existing international standards on responsible business conduct state that companies must protect human rights and address environmental protection throughout their operations and value and supply chains. The concept of Human Rights Due Diligence (hereinafter, ‘HRDD’) was embraced by the United Nations Guiding Principles on Business and Human Rights (hereinafter, ‘UNGPs’) in 2011. In turn, these principles were subsequently complemented and integrated by the Organisation for Economic Co-operation and Development (hereinafter, ‘OECD’) Guidelines for Multinational Enterprises on Responsible Business Conduct, last updated in 2024, and the International Labour Organization (hereinafter, ‘ILO’) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, last updated in 2017.

In Latin America, the issue of business and human rights has been echoed in the Inter-American System for the Promotion and Protection of Human Rights. In 2021, in the leading case Miskito Divers (Lemoth Morris et al.) v. Honduras, the Inter-American Court of Human Rights (hereinafter, ‘IACtHR’) explicitly recognized the importance of the UNGPs and declared that from the obligations established in the American Convention on Human Rights, states have a duty to prevent human rights violations by companies. Subsequently, in 2023, in Inhabitants of La Oroya v. Perú case, the Court went further: The IACtHR ordered the condemned state to ensure that the mining company responsible for the abuses shall comply with the UNGPs throughout its operations.

Moreover, some countries have sought to take the bull by the horns and have enacted in their legal systems different laws that seek to demand corporate social responsibility from companies. In this regard, some European countries, e.g. France (Loi de Vigilance, 2017), Germany (Lieferkettengesetz, 2021) and Norway (Åpenhetsloven, 2021), have enacted laws with the aim of requiring their companies and their subsidiaries to implement due diligence processes with a focus on human rights and the environment in their operations. Sanctions for offending companies vary depending on the type of law that the state has enacted. In any case, in general terms, sanctions include the imposition of heavy fines, the possibility of suing the parent company for damages, as well as the prohibition of the offending company from public procurement.

In summary, the regulatory challenge is embodied in Principle 15 of the UNGPs, which establishes a threefold obligation on companies:

1. Issue a policy commitment to meet their responsibility to respect human rights
2. Implement a human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights.
3. Create processes to enable the remediation of any adverse human rights impacts they cause or to which they contribute

The big leap: The Directive (EU) 2024/1760

The European Union took the big step in June 2024, when it enacted the new Directive (EU) 2024/1760 on Corporate Sustainability Due Diligence. This requires companies and their partners throughout the supply chain to prevent, end or reduce their negative impact on human rights and the environment. In this regard, within two years of its enactment, the member states of the EU must transpose this Directive into their national legislation.

This Directive will be applied gradually to European companies according to their size and turnover. Consequently, via contracts, it is expected that these obligations will also be enforceable on partners and the supply chain outside the EU. These reforms are ambitious, as they aim to have the requirements apply indirectly to its trading partners and the entire supply chain associated with the production of a good or service.

The due diligence process set out in Directive 2024/1760 considers the six steps established in the OECD Guidance for Responsible Business Conduct. These steps include due diligence measures for companies to identify and address adverse human rights and environmental impacts. In particular, the process includes the following steps:

1. Integrating due diligence into policies and management systems.
2. Identifying and assessing adverse human rights and environmental impacts.
3. Preventing, ceasing or minimizing actual and potential adverse human rights and environmental impacts.
4. Monitoring and assessing the effectiveness of measures
5. Communicating
6. Providing remediation.

Finally, is important to highlight that the enactment of this Directive is permeated by the sustainable development as the economic model promoted by the EU and the objectives of decarbonization through energy transition established in the Paris Agreement. In general terms, energy transition means a structural transformation on the energy matrix, which implies supply and use. This structural transformation requires investments and commodities to be successful. In this sense, a low-carbon economy will be highly dependent on mineral supply, since the so-called ‘clean energy technologies’ require more of these commodities than fossil fuels energy sources. In this scenario, Chilean industry plays an essential role as a supplier of some of the main raw materials to achieve the energy transition.

The risks faced by the company in a global supply chain: The Chilean case

Like many countries in the region, Chile has an export-focused economy and industry. According to figures provided by the Under-Secretary for International Economic Relations, the European Union is one of Chile’s main trading partners. In this sense, the main exports include minerals, seafood, and fruits.[1] Mining exports play a fundamental role in this sense, both in terms of the volume exported and their use for new technologies for the energy transition.

The challenge that these regulatory changes create for the industry should not be underestimated. European companies subject to these due diligence and reporting duties will extend these obligations to their partners and suppliers throughout their supply chain. In an export-oriented industry model, as is the case of Chile, regulatory changes in destination countries have a significant impact on economic growth.

In this sense, if Chilean companies do not comply with the regulatory requirements of the country of destination of their goods, they face a double risk.

On a first note, they become an unattractive trading partner for European companies. Whether they do not comply with the requirements, they may expose their trading partners to heavy fines or possible tort claims.

On a second note, and as a consequence of the first risk, these companies may be displaced in the market by the competitors that meet the demanding requirements. It is important to consider that there are other economies producing the main Chilean exports whose countries already have laws in this regard. An interesting example is Australia, which enacted its Modern Slavery Act in 2018, and it’s the world’s leading producer of lithium, among other commodities. For the same reason, these competitors already have experience in complying with such requirements, similar to the European ones.

The solution: A preventive approach

The scenario faced by the Chilean industry that participates in European markets invites to adopt a preventive approach in risk management and the identification of adverse impacts on human rights and the environment in their operations. In this sense, the solution is to voluntarily incorporate the requirements in Chilean companies and implement corporate sustainability due diligence. This is the strategy if they seek to remain competitive in the global market and, thus, continue and deepen their commercial ties with the European Union.

Furthermore, the proposed preventive strategy can be useful for companies for at least three reasons. The first reason is obvious and is evidenced by the new European regulatory requirements: CSDD implementation is a condition for entry into European markets. Companies that are reluctant to implement such measures will see their commercial ties with their European partners eroded. A second reason is the reputational improvement associated with the embracement of CSDD. Some industries face complex situations with the surrounding community, in this sense, the CSDD and HRDD can serve as a strategic tool for the community relations of certain companies. The third and final reason is that CSDD and HRDD serves as an instrument for risk management in industry decision-making. Implementing this due diligence process does not imply that the company needs to change its risk management model, but rather it is an invitation to adjust the system according to the protection and promotion of human rights.

Finally, the adaptation of the industry to these requirements represents an opportunity for Chilean companies to strengthen their commitment to human rights and deepen their competitiveness. It is an invitation to be part of a global change, where corporate social responsibility is seen not only as a market requirement, but also as an added value in a world that is increasingly interconnected and aware of its impact on society and the environment.

Footnote:

[1] Chile’s main exports to the European Union include: Copper, iodine, molybdenum, hazelnuts, mussels, fish oil, and avocados [Available in: https://www.subrei.gob.cl/docs/default-source/estudios-y-documentos/fichas/union-europea-anual.pdf?sfvrsn=ee329fbc_0].