SOCIETÀ ITALIANA DI DIRITTO ED ECONOMIA
Silvia Ciacchi (Erasmus University Rotterdam)
Abstract
The institutionalisation of sustainability due diligence (SDD) now constitutes one of the core elements of the EU’s policy for sustainable development. The journey of SDD can be traced back to the UN Guiding Principles on Business and Human Rights and will soon culminate with the transposition of the Corporate Sustainability Due Diligence Directive by the EU Member States. SDD came on the scene as a novel concept, born out of an innovative and paradigm-shifting policy design process. Thereafter, it underwent further transformation through its translation from soft to hard law.
SDD can be broadly defined as a company’s responsibility to identify, prevent, mitigate and address human rights and environmental impacts derived from (or linked to) their business operations. The peculiarity of SDD (especially in its applications in EU policy) has to do with the extent to which “business operations” are considered to fall under the scope of the law. Namely, the obligation extends to a company’s transnational supply chains.
When transposed in hard law, SDD functionally translates to a sustainable supply chain management obligation. Given the transnational nature of many company’s supply chains, SDD laws acquire an inherent extraterritorial character. It is this aspect, together with the peculiar nature of transnational supply chain relationships, that makes the design of SDD laws especially interesting and complicated.
This paper’s focus is on SDD policy in its application as a tool for the regulation of transnational supply chains. For this purpose, supply chain sustainability due diligence (S-SDD) is hereby conceptualised as a hard-law-based instrument aimed at the internalisation of the negative (sustainability) externality of transnational supply chain production.
When evaluating the primary sources on SDD, it is possible to identify some of its underlying principles and parse out its internal logic. Some of the normative foundations of S-SDD have been relatively comprehensively translated into its hard law transpositions like, for example, the conceptualisation of due diligence as a risk-based approach to management. Other aspects have rather been overlooked.
A crucial flaw in the design of the existing hard-law-based S-SDD policies is that they fail to capture the flexible and adaptive nature of supply chain relationships and, in doing so, they overlook the central role of the notion of leverage in SDD. This paper argues that this design flaw leads to the generation of sub-optimal care level incentives in in-scope companies. The forthcoming analysis implements insights from law and economics and management literature to explore the implications of this shortcoming and deliver reasoned considerations for a possible doctrinal solution.
S-SDD obliges in-scope companies to ensure that their suppliers meet certain standards aimed at the prevention (and mitigation) of adverse sustainability impacts. In this sense, S-SDD delegates the enforcement of the public interest to its regulated targets. The idea of delegation is further expressed in the dimension of compliance since companies are expected to ensure that their first-tier suppliers enforce said standards on the second-tier and so on. In sum, S-SDD laws require the implementation of a cascading compliance mechanism.
The connotation of S-SDD as delegation and the necessity for cascading compliance assume that companies have the ability to control and influence the behaviour of their (upper- and lower-tier) suppliers and are thus in a superior position to pursue this public interest, relative to public authorities. This implicit requirement ties into the notion of leverage.
In the primary sources on SDD leverage exists “where the enterprise has the ability to effect change in the wrongful practices of an entity that causes a harm”. Its presence triggers a company’s responsibility for its business partner’s actions as well as functions as a parameter for the degree to which a company should intervene in addressing sustainability risks and harm.
From a law and economics perspective, the underlying logic of S-SDD seems built along the same conceptual lines as the cheapest cost avoider principle, seeing as “responsibility” for harm is allocated to the party in the comparatively best position to prevent it. However, importantly, “leverage” is not binary non-static, as company can hold different degrees across different business relationships, and its leverage over a given supplier can change at any given moment in time. Similarly, it is not a given that the in-scope company fulfils the cheapest cost avoider criteria at any given moment in time. As supply chains are adaptive, these equilibria can (and do) change.
In order to generate optimal incentives, the standard of care mandated by S-SDD should be fluid, and proportional to a company’s relative power in a given relationship, and at a given time.
The reason why existing S-SDD laws do not account for potential fluctuations in the distribution of power within supply chains is that there is no doctrine of liability that can fully capture the specificities of buyer-supplier relationships in supply chains. These relationships are closer, more durable, and more interdependent than occasional market transactions but, at the same time, they are not quite as interdependent as those within an integrated company group.
All of the available liability regimes employable by S-SDD laws (from individual liability to vicarious liability) are static and binary. They do not differentiate between “intermediate” degrees of corporate control and do not account for change.
What is the optimal design for a liability rule that better reflects the realities of supply chain control? Can the notion of leverage be operationalised in a doctrine of liability based on supply chain control?
This paper approaches these questions by investigating the management literature on power distribution and governance modes in transnational supply chains, seeking to derive workable parameters and indicators for the assessment of supply chain control on a case-by-case basis.
Building on this backdrop, the paper lays down the conceptual groundwork for the design of a supply chain liability doctrine based on an operationalised notion of leverage.