This chapter introduces due diligence as a tool and explains why a risk‑based due diligence approach is critical when addressing environmental risks and adverse impacts in businesses own operations and global supply chains.
Handbook on Environmental Due Diligence in Mineral Supply Chains
3. Due diligence as a tool
Abstract
Risk-based due diligence to address environmental risks and adverse impacts
Risk-based due diligence expects enterprises to identify, prevent, mitigate and account for how they address actual and potential impacts to people, society and the planet. As it will often not be possible for enterprises to identify and respond to all risks and impacts related to their activities and business relationships simultaneously and with the same degree of attention, the MNE Guidelines encourage them to prioritise their most significant (i.e. severe1 and likely) risks and impacts, and to dedicate attention and resources accordingly. In this way, risk-based due diligence is concerned with making progress on the most significant impacts to people, planet and society.
Contextual factors, such as resource availability, availability of data and technologies, firm size, the degree of leverage an enterprise has over a particular supplier, where risks or impacts occur in the supply chain may influence what actions are appropriate in a specific context. The size or resource capacity of an enterprise and the degree of leverage it has over a particular supplier does not change its responsibility to conduct due diligence commensurate with the risk but may affect how an enterprise carries out its due diligence.
Adverse environmental impacts are often closely inter-linked with other matters covered by the MNE Guidelines such as human rights, impacts to workers and communities, access to livelihoods and land tenure rights. In this respect, it is important for enterprises to assess and address social impacts in the context of their environmental management and due diligence activities; including as part of their risk prioritisation processes.
Risk-based due diligence not only helps ensure that the most significant adverse impacts are addressed first, it also helps ensure that due diligence is practically implementable for businesses. Given the widespread and dispersed nature of environmental impacts in mineral supply chains, enterprises will not be able to identify and respond to every adverse impact, monitor and track every business partner or trace every product simultaneously. As such, a risk-based approach does not expect perfect results or risk-free value chains and does not penalize businesses for the presence of risks or adverse impacts in their supply chains. Instead, it expects enterprises to prioritise appropriately, target their highest risk operations and business relationships and demonstrate meaningful and measurable progress over time against specific, time‑bound targets and indicators.
Despite the flexibility provided in the risk-based approach, enterprises are not expected to decide arbitrarily what is and is not important in a specific context. Instead, OECD RBC standards set important parameters for how businesses should prioritise. Demonstrating credible prioritisation processes and progress against outcome‑oriented and time‑bound targets helps to ensure that businesses arrive at decisions about allocating resources and time in a way that is efficient, effective and aligned with international standards.
Due diligence should also be adapted to the nature, severity and likelihood of the adverse impact. When the likelihood and severity of a risk or impact is high, due diligence should be more extensive. This also involves tailoring approaches to specific risks and impacts.
The expectation that businesses prioritise risks and impacts based on severity and likelihood applies to the entire six-step due diligence process –starting with the high-level scoping of risk issues that then informs the deeper-dive assessments on higher-risk business relationships, through to how an enterprise responds to actual or potential adverse impacts. It also shapes how businesses are expected to track and report on their due diligence.2
Target audience and responsibility for due diligence
Due diligence is a whole‑of-supply chain process and applies to all business relationships, including those relationships beyond contractual, ‘first tier’ or immediate relationships (OECD, 2023[16]). Accordingly, all businesses along the minerals supply chain, from the point of extraction to end-user, have a role to play. The nature of due diligence, however, can be affected by a business’ position in the supply chain. In supply chains with key points of transformation like smelters and refiners in the minerals sector, OECD standards on RBC recognise the unique role played by such entities as “control points”. Downstream enterprises, for example, can make use of control points’ leverage and visibility over other suppliers by checking to make sure that control points are conducting due diligence themselves, in order to identify, prevent and mitigate risks at more remote tiers of their supply chain further upstream.
The concept of control points helps delineate responsibilities between upstream entities (miners, local traders and exporters, international concentrate traders, smelters, refiners and recyclers) and downstream entities (metal traders and exchanges, component manufacturers, product manufacturers, original equipment manufacturers and retailers) in many mineral supply chains. The position of control points between downstream enterprises and suppliers further upstream can also influence enterprises’ relationships to adverse impacts and thus where the primary responsibility for addressing the impact lies (see Figure 1).
Since this Handbook addresses adverse environmental impacts in the minerals sector from the point of extraction through to key points of transformation, downstream enterprises can use the Handbook both to: (a) evaluate the due diligence practices of control points on environmental risks and impacts further upstream; and (b) identify and assess impacts at the control point. Control points like smelters and refiners, and other upstream entities should, in turn, exercise leverage over their suppliers to address environmental risks and impacts, in addition to addressing impacts they themselves cause or contribute to.
This Handbook is therefore addressed to all enterprises in mineral supply chains which may be causing, contributing or directly linked to actual or potential adverse environmental impacts. However, it will likely be most useful for enterprises who determine that they are either contributing to or directly linked to environmental risks or impacts in the supply chain. Figure 1 illustrates how entities along mineral supply chains should take account of these concepts in determining the nature of their due diligence. Enterprises using this Handbook are encouraged to bear this in mind and to adapt their due diligence to their position in the supply chain. In addition, the section on integrating environmental considerations into each due diligence step provides several examples of ways in which an entity’s position in the mineral supply chain and its relationship to an adverse impact may affect their due diligence.
The OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (“OECD MNE Guidelines”) set out expectations on how enterprises should avoid and address adverse environmental impacts related to an enterprise’s operations, products and services. An enterprise’s relationship to the impact (causing, contributing to, or being directly linked to it) will determine how an enterprise should respond to identified risks. While many of the risks and mitigation measures in this handbook will be relevant for enterprises seeking to address adverse impacts they cause, this document focusses primarily on due diligence of environmental risks in mineral supply chains, with an emphasis, accordingly, on relationships of contributing or being directly linked to adverse environmental impacts. Figure 1 illustrates how these relationships may pertain to a typical mineral supply chain. The diagram also reflects the unique role of smelters and refiners as a control point in mineral supply chains, with practical implications for the respective roles of downstream entities and upstream entities based on the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
Figure 1. Addressing environmental impacts in mineral supply chains
This Handbook may also be useful for other parties, such as sector-wide and multi-stakeholder initiatives that facilitate collaboration on due diligence activities, and for workers, trade unions and workers’ representatives, and civil society organisations, including environmental human rights defenders.
Box 3. Cause, contribute and directly linked in the context of environmental impacts
The cause, contribute and directly linked concepts, established in the RBC Guidance, provide a framework for understanding a business relationship to an actual or potential impact to determine the appropriate responses.
The MNE Guidelines set out expectations on how enterprises should avoid and address adverse environmental impacts and contribute to reaching the goals of climate change mitigation and adaptation; the conservation, restoration, and sustainable use of biological diversity; the sustainable, efficient and lawful use of land, resources and energy; sustainable consumption and production including through promotion of circular economy approaches; and pollution prevention, reduction and control.
The Guidelines define adverse environmental impacts as “significant changes in the environment or biota which have harmful effects on the composition, resilience, productivity or carrying capacity of natural and managed ecosystems, or on the operation of socio‑economic systems or on people” and note that environmental impacts should be assessed in light of best available science.
Under the MNE Guidelines an enterprise “causes” an adverse environmental impact if its activities on their own are sufficient to result in the adverse impact. An enterprise “contributes to” an adverse environmental impact if its activities, in combination with the activities of other entities cause the impact, or if the activities of the enterprise cause, facilitate or incentivise another entity to cause an adverse impact. Adverse environmental impacts can also be “directly linked” to an enterprise’s business operations, products or services by a business relationship, even if they do not contribute to those impacts”. Under OECD RBC standards, contribution must be substantial, meaning that it does not include minor or trivial contributions. The RBC Guidance provides additional guidance on these terms.
Environmental impacts can be collective and interlinked or isolated; they can also be localised or transboundary in nature. While some environmental impacts are well understood, the extent, nature and cause of others may be less well understood, evolving, or even unknown. Therefore, while in some instances it will be possible to assess, based on available science and information, to what extent an enterprise is contributing to an adverse environmental impact, in other instances such an assessment may be challenging. In the context of the latter situation, for the purposes of the MNE Guidelines, the assessment of an enterprise’s contribution to adverse impacts should consider the extent to which its activities are consistent with widely recognised standards, environmental management processes and safeguards regarding good environmental practice; benchmarks and standards established in applicable environmental rules and regulatory frameworks; and relevant international agreements.
Source: OECD (2023[16]), OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, https://doi.org/10.1787/81f92357-en.
This Handbook demonstrates how existing OECD instruments, namely the Due Diligence Guidance for Responsible Business Conduct (RBC Guidance) and the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (Minerals Guidance), can be used to address environmental risks and impacts in the minerals sector. It does so by situating existing recommendations in a relevant context, providing examples of how they can be applied and directing users to related resources. It does not provide new recommendations or risk management expectations.
Figure 2. How to use OECD instruments on RBC together
The OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (MNE Guidelines) are the only comprehensive set of government-backed expectations on how business address adverse impacts on people and the environment. The OECD has developed specific due diligence guidance covering different sectors of the economy (e.g. in mineral, garment and agriculture supply chains) and on specific issues like stakeholder engagement in the extractive sector. In 2018, the OECD developed the sector-agnostic Guidance for RBC that draws from and builds on sector specific guidance but applies to businesses in all sectors of the economy. Figure 2 provides illustrates how various OECD instruments on RBC can be used together.
Notes
← 1. Under OECD RBC standards, the severity of a risk or impact is determined according to its scale, scope and irremediable character. See RBC Guidance, Annex, Question 3, p. 42.
← 2. For a deeper analysis on the risk-based approach, readers can refer to the Background note on Regulatory Developments concerning Due Diligence for Responsible Business Conduct and the background note on Translating a risk-based due diligence approach into law, developed by the OECD Secretariat.