Setting up a due diligence system: a step-by-step guide

Sometimes a due diligence system is mandatory. For example, because legislation such as the deforestation law (EUDR) imposes sustainability rules on your business. Or because your product requires you to show a due diligence declaration at Customs. But even if those rules do not apply, you can set up a due diligence system. This will give you more knowledge about your supply chain. And allows you to assess what the risks of your product are, for example, in terms of human rights or the environment.

What is a due diligence system?

Due diligence, or due care, means trying to reduce the risks and negative impacts on people and the environment in your business and your chain. You do this by setting clear rules for yourself and the other businesses you work with. The way you organise this is called a due diligence system. This system consists of a few key steps, such as gathering information and taking measures to limit your negative impact.

In practice, the form and content of due diligence systems may differ. For example, because sustainability rules for metal are different from rules for wood products.

Do I need a due diligence system?

Whether you need a due diligence system depends on the legislation that applies to your product or business. Business.gov.nl has a complete overview of laws and regulations for businesses. Check which rules apply to your industry. For example, do you have to prove that your products do not contribute to deforestation? Then you need a due diligence system.

How to set up a due diligence system

A due diligence system is made up of 6 steps:

• Step 1: lay the foundation
• Step 2: collect information
• Step 3: assess the risks
• Step 4: stop or limit negative impact
• Step 5: record and keep your proof
• Step 6: improve the process

Step 1: lay the foundation

Look at the organisational structure of your business. Which processes and tasks will you change and who will do it?

Provide a due diligence officer

Do you use high-risk raw materials that are not yet on the market and which fall under EUDR? Then you are obliged under the deforestation law to make someone within your business responsible for due diligence. But even if this obligation does not apply to you, it is smart to have a due diligence officer. That way, due diligence requirements and the tasks that go with them will be properly regulated.

Arrange training for your staff

The staff member responsible for due diligence must know how a due diligence system works. Give this employee regular opportunities to attend training courses.

Examine your processes

Look at which processes in your business are affected by due diligence requirements. What do you need to change to meet the requirements?

Example:

Sandy runs her own coffee roastery and imports beans from Ethiopia. She appoints colleague Ahmed as due diligence officer. Sandy thereby makes Ahmed responsible for setting up a system. This allows him to check where each batch of beans comes from and the route the beans have taken: from coffee farmer to roastery. Ahmed takes a course on due diligence to learn this. He looks at the business processes and sees he needs to adjust the procurement planning, so he has more time to check raw materials and suppliers.

Step 2: Collect information

You now have the basis for your due diligence system. The next step is to understand where your product or raw material comes from, and which parties are involved.

Contact your supplier

Contact your supplier to find out as many details about production as possible. Just knowing the production location is not enough. For example, ask your supplier about the intermediate stages of your product. That way, you can find out where raw materials come from, where they are processed, and what materials and chemicals were added.

Use existing documents

Your supplier may already have an environmental policy, sustainability label, or certificate. In that case, you do not have to search for all the information yourself. Certificates such as the FSC certificate already have extensive information about the production processes and materials used. You can also ask for the product passport. This is a digital document with information about a product's entire chain. Such as where the product comes from, how it is made, and what effect the product has on the environment.

If you must have a due diligence system, note that some information is legally mandatory. For example, the deforestation law requires you to report the exact production location including GPS coordinates, production date, and production period. You must also collect information showing that your products are deforestation-free.

Example:

The coffee bean supplier promises not to cut down forests for their plantations. Using satellite images, Ahmed wants to check whether this is true. Problem: He does not know the GPS coordinates of one of the coffee plantations. He must now look for other ways to gather evidence, such as a location check.

Step 3: Assess the risks

Now that you know who is involved in your chain, investigate where the risks lie. For example, in the area of human rights or environmental pollution. You do this by carrying out a risk analysis. In doing so, investigate the following, for example:

• Are the workers in the chain paid fairly?
• Are there poor working conditions, or is child labour involved?
• Is there damage to the environment through, for example, deforestation or water pollution?

Write down the possible risks for each intermediate stage of your product. For each risk, determine how likely it is to happen and what the consequences are.

Example:

Doing an on-site check takes time. So, Ahmed cannot yet determine with certainty whether the site is deforestation-free. His conclusion: deforestation is a social risk for the coffee roastery. He cannot take that risk. The coffee roaster may even be fined if the imported beans come from deforested areas.

Step 4: Stop or limit negative impact

In this step you take measures to stop or limit the risks and negative impact. Check the overview of the risks and see what you can do to eliminate them as much as possible.

Example:

Ahmed doubts whether a supplier is really working sustainably. If there is a high risk of deforestation in the production area, he may cancel the purchase and look for another supplier. Ahmed may choose a supplier with a seal of approval, such as the Rainforest Alliance.

Step 5: Record and keep your proof

The deforestation law requires you to keep proof for 5 years. Proof is anything that shows you are reducing risks.

Example:

Ahmed keeps everything he arranges for the due diligence system digitally. He stores satellite images of his new supplier's production site. The images prove that no deforestation has taken place at those sites. He also keeps track of what due diligence trainings he or colleagues attend, and records the certificates of these trainings. Even minutes of meetings where the coffee roaster's due diligence measures were discussed are part of the evidence.

Step 6: Improve the process

Regularly assess the measures you take and see what works well and where improvements are needed. Does legislation change or do you receive new information about your supplier? If so, adjust your working methods accordingly right away. The due diligence system is never finished. Laws and regulations can change, and you keep learning more about your chain. This is how you keep reducing social risks in your chain.

Example:

Sandy and Ahmed discuss together how to improve supplier monitoring. They are thinking of asking the supplier for regular updates on the sustainability of the products and sending proof along for this.