Cross-Sector Collaboration is Key for Effective Due Diligence

Following the webinar on inclusive due diligence, on March 10th, CSR Europe and Levin Sources have launched a joint blog series on how to pursue progressive, inclusive due diligence.

This month’s installment focuses on corporate due diligence from the experience of Eleonora Pessina, Group Sustainability and Diversity Officer at Pirelli, and Franziska Killiches, Strategy Procurement Group/Brand, Sustainability in Supplier Relations at Volkswagen AG, interviewed by CSR Europe’s Executive Director, Stefan Crets.

Franziska Killiches.jpg — **Franziska Killiches**

*Strategy Procurement Group/Brand, Sustainability in Supplier Relations ,* ***Volkswagen AG***

Stefan Crets

*Executive Director,* **CSR Europe**

Stefan Crets CSR Europe: What is your companies’ approach to sourcing sustainable raw materials?

Franziska Killiches, Volkswagen AG: Volkswagen Group commits to its corporate human rights responsibility. Our supply chain is global, very diverse, and volatile, with tens of thousands of supplier locations, and up to 9 tiers long. We have a direct contractual relationship only with our first-tier suppliers, but we are aware that many of the most severe human rights problems occur further upstream in the supply chain at the raw materials production level.

Therefore, we have not only developed a rigorous sustainability rating for all our first-tier suppliers as part of the nomination process, but we have also set up an OECD-compliant human rights due diligence management system that focuses on human rights risks in raw material supply chains.

When it comes to responsible sourcing and in particular raw materials sourcing, we are implementing the 5 steps of the OECD’s Due Diligence Guidance for Mineral Supply Chains. This means that we continuously assess our human rights risks in order to take concrete mitigation actions with the objective to create a more measurable positive impact along our supply chains. For this purpose, in 2020 we developed a group-wide management system including reporting structure, different toolkits, a policy, and a grievance mechanism. In June 2021 we have also published our first Responsible Raw Materials Report, summarising our raw materials human rights supply chain due diligence activities and demonstrating our commitment to enhanced transparency.

Currently, we prioritize 16 high-risk raw materials that are in the focus of our human rights due diligence activities. For them, we have implemented until today more than 60 specific measures of risk identification, assessment, and mitigation. They range from the use of supplier questionnaires, audits, supplier outreach, to the implementation of corrective action plans, the use of certification programs, the contribution to in-country projects, or the setup of human rights obligations in our contracts.

One very concrete example refers to the responsible sourcing of raw materials for our EV batteries. Since last year, responsible sourcing requirements were enshrined in contracts with battery suppliers for the Group’s electric vehicles, including requirements of transparency and the implementation of due diligence requirements as laid out in the OECD Minerals Guidance targeting the entire raw material supply chain.

Eleonora Pessina, Pirelli: Similarly to what Franziska has explained, Pirelli’s model is based on the UN Guiding Principles on Business and Human Rights. This means that we are constantly engaged to improve the processes aimed at identifying, evaluating, preventing, and mitigating potential risks of human rights violations along our supply chain, promptly implementing corrective actions whenever risks were identified.

Our sustainable procurement model is compliant with the ISO 20400 standard, which also implies setting in place all the procedures necessary to evaluate and select suppliers on the basis of their level of social and environmental responsibility, as well as to request them to implement a similar management model in order to expand responsible management as far as possible along the supply chain.

Therefore, the analysis of Environment, Social, Governance (ESG) performance is fully integrated into our procurement process. ESG assessments are included right from the start when we select a potential supplier and then continue throughout the qualification stage. On-site third-party ESG Audits are performed as a pre-requisite of materials suppliers’ homologation procedure. After the supply agreement has been made, the sustainability performance of the supplier is covered by the Pirelli Annual on-site Audit Campaign.

The results of the on-site ESG Audit, together with further assessments made during the supplier’s onboarding phase, are integrated into the annual Vendor Rating process, according to which the supplier is given a rating that sums up their ESG performance, the quality of the supplies, the quality of the business relationship and the technical-scientific collaboration. The annual Audit Campaign determines the list of suppliers to be audited based on an approach that integrates materiality and risk as defined by the Group’s Purchasing and Sustainability Departments.

In addition, we also have special processes to assess any new raw materials and auxiliary products from the perspective of workers’ health and the environment. These preventive assessments take into account the requirements of the more restrictive European regulations on the management of hazardous substances, for example, the so-called REACH and CLP Regulations as well as international standards and knowledge and are valid globally where Pirelli operates.

Besides the overall management system and various sectorial specific policies, such as conflict minerals, green sourcing, cobalt, etc., we strongly believe another key element of human rights due diligence is stakeholder engagement. Involving suppliers and local communities is essential for creating environmental, social, and shared economic value. This is why we continuously organise several activities that go in this direction, such as training sessions for suppliers on sustainability matters, R&D partnerships, and regular stakeholder dialogues. In the development of our Sustainable Natural Rubber Policy, we engaged, next to regulators, customers, civil society, and suppliers including small-scale rubber farmers from Indonesia. This enriched our dialogue tremendously. A key lesson from that experience is that proximity and engagement are key drivers for a good approach to supply chain sustainability.

Stefan Crets: How do you see the contribution of sectoral and cross-sectorial collaborations to achieve the needed changes at the local level?

Eleonora Pessina, Pirelli: In my opinion, collaboration is absolutely key because no company – regardless of its size or financial turnover – can alone solve the complex issues affecting the supply chain.

Let’s take, for instance, the case of natural rubber: with the global demand expected to rise, managing the natural rubber supply chain sustainably is essential to preserve forests, biodiversity, and to enable the sustainable development of local communities and economies.

However, the natural rubber supply chain is complex and includes producers/farmers, traders, processors, distribution companies, and manufacturing facilities. Pirelli is at the end of the chain, as we do not own plantations or natural rubber processing plants. To tackle this topic, we started a long consultation process with key stakeholders that culminated with the release of our – already mentioned - “Sustainable Natural Rubber Policy” in 2017. However, we soon realised this policy was not enough and that solving the global challenge of natural rubber sustainability would require a more systemic transformation, beyond our company’s sphere of influence.

This is why Pirelli decided to play a proactive role in the creation of the Global Platform for Sustainable Natural Rubber (GPSNR), launched in Singapore in October 2018, to bring together smallholders, civil society organisations, processors, traders, tire makers, carmakers, and other downstream users to promote the sustainability of natural rubber.

The Platform is independent, based on multi-stakeholder dialogue, and aims at supporting the sustainable development of the natural rubber business globally, for the benefit of the entire value chain through shared tools and initiatives based on the respect of human and labour rights, prevention of land grabbing, respect for biodiversity and increased plant productivity, especially for small owners. All of this would have not been possible without the systematic and structured dialogue with other peers of the value chain.

Franziska Killiches, Volkswagen AG: Volkswagen Group is part of many branch and sector initiatives that specifically aim at promoting human rights due diligence in raw material supply chains. One example is Drive Sustainability, the partnership of 11 Original Equipment Manufacturers (OEM) facilitated by CSR Europe to drive sustainability throughout the automotive supply chain by promoting a common approach within the industry and by integrating sustainability in the overall procurement process.

On top of this, for us as an OEM it is also extremely important to collaborate with our upstream actors to bring a greater positive impact on the environment and people’s livelihoods. In this regard, I would like to highlight two points:

The extremely important role of our first-tier suppliers: we have contractual relationships with them which allows us to collaborate very closely on our priority issues, like human rights due diligence in raw material supply chains. Just to give you an idea of what this means: only in 2020, we organised more than 100 targeted workshops with first-tier suppliers aimed at building capacity on human rights risk management in raw material supply chains.
The implementation of risk mitigation measures through on the ground projects in raw material production regions: they are essential to bringing to life our ambitions. I can give you two examples:
- In 2020, we joined the project “Cobalt for Development” a cross-industry initiative launched by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH to improve artisanal mining working conditions as well as living conditions for surrounding communities in the Democratic Republic of the Congo.
- In 2021 we launched the “Responsible Lithium Partnership” together with BASF, Daimler AG, and Fairphone, to foster a dialogue among local stakeholders and work towards responsible natural resource management in Chile’s Salar de Atacama, a major source of lithium.

So, I completely agree with Eleonora in saying that sectorial and cross-sectorial collaboration is key and also with her statement about the necessity of proximity and engagement. Furthermore, this is also important in the framework of internal relations, to achieve greater alignment concerning environmental and human rights due diligence expectations at the global level, ensuring an international level playing field and common tools across different regions of the world.

Stefan Crets: What are in your opinion the main weaknesses and/or missing elements of the current EU approach to due diligence?

Eleonora Pessina, Pirelli: It is obviously very difficult to share thoughts on the current EU approach to due diligence without having seen the actual text of the upcoming legislative proposal.

My main hope is that this new legislative initiative will be as precise as possible in its formulation, particularly concerning the scope of responsibility, the definitions used, and the procedures that companies will have to follow, like for instance including explanations on how to conduct due diligence and materiality assessments. This is to avoid all possible grey zones that would strongly hamper a company’s capacity to correctly implement this new law.

Besides creating confusion, grey areas in the legislation might create serious risks of disengagement from high-risk areas and suppliers, as companies will probably prefer to withdraw from them rather than taking undesired risks vis-a-vis policymakers.

The exact scope of the obligations and liability of the company is also needed. As mentioned before, some value chains are highly fragmented, and ensuring a full vision of the whole supply chain is difficult. In this regard, a risk-based approach is needed.

Franziska Killiches, Volkswagen AG: It is true, we need clear definitions and precise indications of what constitutes a good enough due diligence process. In addition, EU policymakers should also make sure to not give companies responsibilities beyond their reach. Many human rights issues can only be mitigated in the long term and not by companies alone. Local governments, for example, are key actors in ensuring that human rights are protected and industry cannot replace this role.

Stefan Crets, CSR Europe: Your concerns resonate with ours. From our experience, we believe that to achieve impact at the local level, collaboration among all value chain stakeholders is needed. This is why we ask the European Commission to couple the upcoming due diligence legislation with accompanying measures, aimed at fostering the creation of collaborative projects in producing countries.

A outlined in our Reflection Paper, we propose the creation of Sector Dialogues & Alliances to develop sector guidelines, organise peer-to-peer learnings within - or across – sectors and incubate collaborative actions.

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