By Allen Campbell, Founder and CEO McAlan
Have you heard about Expected European Union Mandatory Due Diligence (EUMDD)?
Based on high-minded ethical principles, impending EUMDD legislation will be revolutionary. It will introduce new compliance burdens, and also provide new opportunities for business success.
Obligations and Sanctions
EUMDD will require companies to identify, cease, prevent or mitigate material potential or actual adverse impacts on:
the environment – touching such matters as production of waste, sustainable use of natural resources, pollution, greenhouse gas emissions, deforestation, biodiversity, and ecosystems,
human rights – to protect social, trade union, and labor rights, and
good governance – to prevent bribery, corruption, and illegal campaign contributions.
(In combination, the above three are commonly referred to as “ESG”, standing for Environmental, Social and Governance factors.)
Companies that are subject to the law will have to perform “due diligence” on companies in their “value chains” – notably including their supply chains – to uncover problems and fix them as stated above.
To ensure compliance, EUMDD contemplates extraordinary enforcement mechanisms:
sanctions in the form of
large fines,
being barred from government contracts, and
import bans,
extra-judicial remedies, and
civil liabilities.
EUMDD will empower a range of government agencies and private parties to enforce it.
Who will be affected?
EUMDD will affect companies in two ways:
Direct obligations – imposed on companies that; (i) do business in the European Union and (ii) meet certain criteria: sufficiently big (as defined by three criteria), publicly held ownership or “risky” nature.
Indirect obligations – meaning that, as a practical matter, a directly affected company will require companies in its value chain to be in compliance with its “due diligence” policies. For indirectly affected companies. EUMDD compliance will be another cost of doing business.
Many companies outside the EU will be surprised to learn that EUMDD will indirectly affect them. For example, if a United States supplier delivers goods in the U.S. to a U.S. customer that happens to be “directly affected”, that customer will be forced to conduct “due diligence” on the supplier.
Here is a hypothetical supply chain example: Assume that a “directly affected” company, an Italian car manufacturer, buys leather from a supply chain in which a tannery employs child labor in inhumane working conditions to process hides from cattle raised on deforested land, perhaps in the Amazon region. EUMDD would require the Italian company to investigate carefully and take appropriate action.
To help the Italian company solve its problem, every company in its supply chain should support appropriate changes. You can see the opportunity for a creative company that wants into a supply chain – and thereby gain a new source of revenues. It can help the Italian company cease, prevent or mitigate the adverse effects – and become a long-term, trusted value chain “partner”.
How to Get Ready
The time to begin is now. EUMDD will probably become law as early as 2023 and not later than 2025. Expect it as an impending certainty – not merely a possibility.
Begin by giving this matter your high-level attention. Reach a preliminary judgment whether your company will be affected by EUMDD.
If you think your company will not be affected, then rest easy, but stay alert, just to be sure.
If you think your company will be affected, then be proactive to get EUMDD taken seriously by your firm’s senior management, including company directors.
Your company will benefit from support from the top. Experience shows that, to be successful, risk and compliance programs need C-suite and board level buy-in and engagement. The same will be true for EUMDD.
If a company will be affected, it can choose one of two strategic options: (i) a “Minimum Strategy” or (ii) an “Opportunity Strategy” – both my terms. A Minimum Strategy does the least that is required by the letter of the law. An Opportunity Strategy uses compliance not just for protection, but to gain an edge. You and your company can become EUMDD leaders for the benefit of the entire value chain.
Whichever strategy your company chooses, “Minimum” or “Opportunity”, coping with EUMDD will require solid planning, careful budgeting and diligent execution. Merely getting the plan in place will likely take at least a few months. For a big or complicated company, implementation may take years.
EUMDD should be managed with digital tools. Your company may already have risk and compliance management programs and/or departments in place. If so, EUMDD management should be coordinated with them, and, ideally, integrated with them. If not, EUMDD can be the catalyst to putting such systems in place.
I suggest approaching EUMDD with an open mind and a positive attitude, rather than anger or dread. It may prove to be a blessing – for you – and for your company.
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ABOUT THE AUTHOR: Allen Campbell earned his law degree from Columbia University School of Law and his MBA from the University of Chicago Booth School of Business. He has broad experience as a practicing lawyer, investment banker, consultant and entrepreneur. His company, McAlan LC, provides Governance, Risk and Compliance (GRC) and ESG information and solutions. McAlan is available to help companies at every stage of their EUMDD journeys. To learn more, see www.McAlan.com.
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