Sustainable Initiatives and Due Diligence in the EU Supply Chain

Tesis de Máster , 2022 , 139 Páginas , Calificación: A

Economía de las empresas - Aprovisionamiento, producción, logística

Using primary data gathered from both virtual semi-structured interviews and a quantitative survey, a triangular approach was used to investigate how firms work with different initiatives regarding sustainability in supply chains - both in terms of environmental and social sustainability. Furthermore, reactions to recently enacted and upcoming supply chain legislation was documented. The quantitative data was mainly used to supplement findings from the qualitative interviews. Selected respondents were featured through mini-cases that highlighted firm sustainability initiatives pertaining to supply chain management.

From the analyzed data, four distinct propositions-each with circumstantial sub-propositions- were developed that highlight four interlinked themes concerning sustainability and supply chain management: leverage, information exchange, visibility, and supplier upgrading. The propositions can be used by business managers as a source of direction while designing, implementing, and managing sustainability initiatives in their respective supply chains in response to increasing due diligence requirements. Furthermore, legislators may review respondent concerns as well as the developed propositions to address externalities stemming from global value chains and update the legislation accordingly.

Numerous government bodies have begun enacting increased due diligence requirements on business supply chains to curb harmful externalities that affect global sustainability initiatives. At the international level, the EU has recently proposed mandatory human rights due diligence (MHRDD) for global value chains, which is a mandated form of corporate social responsibility (CSR). Traditionally, due diligence and CSR have been voluntary tools to appease stakeholders. However, these voluntary approaches have been unsuccessful at curbing unsustainable business practices.

Research combining sustainability and supply chain management has been increasing in recent years, as well as evolving to include themes found outside management research. Furthermore, the research environment has identified tools that explain how to manage global value chains in a sustainable way, but hasn't specifically addressed the changing legal environment, nor how to manage greater due diligence requirements.

Overall, our findings contribute to the growing field of sustainable supply chain management and may easily be tested and expanded upon by future research.

Table of Contents

1. INTRODUCTION
1.1 SUSTAINABILITY IN THE LEGAL ENVIRONMENT
1.2 SUSTAINABILITY AND SUPPLY CHAIN MANAGEMENT
1.3 STUDY SCOPE

2. STUDY CONTEXT
2.1 HISTORY OF SUSTAINABLE DEVELOPMENT AND DUE DILIGENCE
2.1.1 A Brief History of International Sustainable Development
2.1.2 History of Due Diligence
2.2 REGULATORY REVIEW OF DUE DILIGENCE
2.2.1 Voluntary Due Diligence Reporting
2.3 DUE DILIGENCE TRENDS AND UPCOMING LEGISLATION
2.4 DUE DILIGENCE REPORTING AT THE NATIONAL LEVEL IN EU MEMBER STATES

3. LITERATURE REVIEW AND THEORETICAL BASIS
3.1 Socio-Ecological Systems
3.1.1 Panarchy Theory and Adaptive Cycles
3.1.2 What is Resilience? The difference between Ecological and Socio-Ecological Systems
3.2 ADAPTIVE AND TRANSFORMATIVE GOVERNANCE OF SYSTEMS
3.3 THE INDUSTRY STRUCTURE VIEW, RESOURCE-BASED VIEW, AND RELATIONAL VIEW OF THE FIRM
3.4 AN ANALYSIS OF SUSTAINABILITY AND ITS EFFECT ON FIRM PERFORMANCE
3.4.1 Sustainability in the Research Environment
3.4.2 Effects of Sustainability on firm performance
3.5. SUSTAINABILITY REPORTING
3.5.1 CSR Reporting and Due Diligence
3.5.2 Greenwashing
3.6 SUSTAINABLE PROCUREMENT

4. PROBLEM ANALYSIS

5. RESEARCH METHODOLOGY
5.1 METHODOLOGICAL APPROACH
5.1.1 Primary data collection
5.1.2 Triangular approach
5.1.3 Qualitative Semi-structured Interviews
5.1.4 Quantitative Survey
5.1.5 Ethical issues in research - anonymity and privacy
5.2 METHODS OF DATA COLLECTION AND TARGET GROUP
5.3 METHODS OF ANALYSIS
5.3.1 Qualitative: Thematic analysis
5.3.2 Quantitative: Descriptive statistics
5.3.3 Content and keyword analysis
5.3.4 Case selection
5.3.5 Designing propositions

6. RESULTS
6.1 COMMON INTERVIEW THEMES
6.1.1 Global Concerns: Margins, Logistics, and Asia
6.1.2 Supplier Relationships: Upgrading, Visibility, and Leverage
6.1.3 Information Exchange
6.1.4 A message to the Legal Environment
6.2 SURVEY RESULTS
6.3. MINI-CASES

7. DISCUSSION
7.1 SCM AND SUSTAINABILITY PATTERNS (RESEARCH PROPOSITIONS)
7.1.1 Leverage
7.1.2 Information Exchange
7.1.3 Visibility
7.1.4 Supplier Relationships and Upgrading
7.1.5 Summary of Propositions and Findings
7.2 SUSTAINABLE SCM WITH AN EYE TOWARDS THE FUTURE
7.2.1 A message to the legal environment
7.2.2 Sustainable procurement and supply chain management: application and benefits

8. CONCLUSION AND RECOMMENDATIONS FOR FUTURE RESEARCH IN THE FIELD

REFERENCES

Abstract

Numerous government bodies have begun enacting increased due diligence requirements on business supply chains to curb harmful externalities that affect global sustainability initiatives. At the international level the EU has recently proposed mandatory human rights due diligence (MHRDD) for global value chains, which is a mandated form of corporate social responsibility (CSR). Traditionally, due diligence and CSR have been voluntary tools to appease stakeholders. However, these voluntary approaches have been unsuccessful at curbing unsustainable business practices.

Research combining sustainability and supply chain management has been increasing in recent years, as well as evolving to include themes found outside management research. Furthermore, the research environment has identified tools that explain how to manage global value chains in a sustainable way—e.g., reliable audits, visibility initiatives, intra-industry collaborations— but hasn’t specifically addressed the changing legal environment, nor how to manage greater due diligence requirements.

Using primary data gathered from both virtual semi-structured interviews and a quantitative survey, a triangular approach was used to investigate how firms work with different initiatives regarding sustainability in supply chains—both in terms of environmental and social sustainability. Furthermore, reactions to recently enacted and upcoming supply chain legislation was documented. The quantitative data was mainly used to supplement findings from the qualitative interviews. Selected respondents were featured through mini-cases that highlighted firm sustainability initiatives pertaining to supply chain management.

From the analyzed data, four distinct propositions—each with circumstantial sub­propositions—were developed that highlight four interlinked themes concerning sustainability and supply chain management: leverage, information exchange, visibility, and supplier upgrading. The propositions can be used by business managers as a source of direction while designing, implementing, and managing sustainability initiatives in their respective supply chains in response to increasing due diligence requirements. Furthermore, legislators may review respondent concerns as well as the developed propositions to address externalities stemming from global value chains and update the legislation accordingly. Overall, our findings contribute to the growing field of sustainable supply chain management and may easily be tested and expanded upon by future research.

Acknowledgements

On behalf of both authors:

We would like to express our gratitude to our supervisor, Dr. Andreas Wieland, for his valuable input. His extensive theoretical knowledge and encouragement throughout the process guided us, and the thesis would not have been same without his assistance. Further, we would like to thank all survey and interview participants for their time and effort. The thesis was made possible through their extensive contributions. Finally, we also want to acknowledge the department of International Economics, Government and Business at Copenhagen Business School. Throughout the Master’s program, we have extended our analytical toolbox to gain a deeper understating of the complex area of International Business that will guide us in our future careers.

Thank you.

On behalf of Hans Brunk:

I’d like to thank my Swedish research partner, my German advisor, my French girlfriend, my American and Italian roommates, and my Danish university for supporting me throughout the writing of this report, and making my International Business MSc degree feel truly ‘international.’ My parents in rural Colorado will never believe me...

On behalf of Kristian Prior:

I’d like to thank Bistro 63 for staying open all those late nights—especially during the pandemic. It has truly been a place of continuous inspiration and joy. Most importantly, it has been a place to exchange thoughts and fill my stomach. Thank you, chefs. Tack kompis.

1. Introduction

The growth of international supply chains has brought enormous benefits—notably, increasing global economic efficiency for both producing and consuming nations—but has also created negative externalities in the areas of human rights and environmental degradation. Multinational companies (MNCs) and their respective supply chains have gained unprecedented power, which has led to asymmetries between the corporate and political environment(s), especially in developing countries (Zamfir, 2020).

The coronavirus crisis showcased a global value chain that was seriously disrupted due to lockdowns and travel restrictions. Factories suspended operations and geographically distant supply chains were considerably delayed, which led to world shortages for critical medical equipment. As a result, many jobs were lost—especially in developing countries—as pressure on worker safety forced companies to cut ties with non-critical personnel. A vicious circle followed: first, personal protective equipment (PPE) was delayed; then, either health benefits tied to employment were forfeited, or worker health and safety was compromised; finally, hospitals received more patients, which furthered the demand for PPE (Zamfir, 2020).

Indeed, a global market that has been overemphasizing economic growth over ethical regulation may be overdue for a correction as catastrophic externalities have revealed growing fragilities. For decades, multinationals have been encouraged to take greater responsibility for their supply chains. However, CSR and due diligence has traditionally been something companies do voluntarily to appease stakeholders and differentiate themselves from competition. Nevertheless, the voluntary approach has seen little success. Environmental degradation and international human rights stand out as two areas where greater legislation is necessary and forthcoming. Recently, governments are becoming more comfortable to reign in these powerful companies with increasing amounts, and frequency, of regulation concerning global value chains (Zamfir, 2020).

At the EU level, there have been developments towards a mandatory due diligence system. A recently completed EU-sponsored study showed that voluntary due diligence is insufficient, and over 100 high-profile companies and associations released a joint statement urging swift legislation on mandatory human rights and environmental due diligence (BHRRC, 2022a; Torres-Cortés et al., 2020). In February 2022, the EU Commission adopted a proposal for a Directive on corporate sustainability due diligence (European Commission, 2022a; European Commission, 2022b). The proposal should foster increased awareness for human rights and environment due diligence in global value chains, as well as provide more transparency for consumers and legislators.

1.1 Sustainability in the Legal Environment

In March of 2021, the EU parliament created a proposal for mandatory due diligence affecting larger supply chains. The document is based on three core elements: first, companies should assess the risks of violations in their supply chains; second, act with stakeholders to address threats; third, offer a system to remedy the violations (Jarvela, 2021). Similar issues have been discussed on the country-level of most EU governments. For example, the French Due Diligence Reporting Act, and the UK Modern Slavery Act address corporate accountability deficits. Moreover, the German Corporate Due Diligence Act, and the Norwegian due diligence Act have both been recently drafted to address violations in international supply chains (Alleweldt et al., 2020). Thus, there is a clear pattern towards more regulation in supply chains, regardless if the EU proposal is finalized tomorrow, or in the near future.

Additionally, there have been talks towards regulated CSR not only within Europe, but also globally. In the US, human rights due diligence legislation has advanced both on the state and federal levels. President Biden signed the Uyghur Force Labor Prevention Act into law, and New York Senators introduced legislation that sets sustainability mandates for the fashion industry. Both acts will place increased sustainability obligations on many companies around the world. Therefore, it seems there is a globally growing trend for increased sustainability and supply chain legislation. Alongside the ongoing EU legislation and individual country developments, companies need to reflect on their knowledge of their own supply chains— especially pertaining to human rights and environmental risks. Whether through increased due diligence or a reduction of non-host company risk, managers need to prepare themselves for increased reporting obligations (Gibson Dunn, 2022).

1.2 Sustainability and Supply Chain Management

Stemming from strategic sourcing, supply chain management has evolved over the years to incorporate a variety of different business activities—e.g., operations, sales, logistics (Mentzer et al., 2001). Over time, most research solely focuses on creating ‘lean operations’, with the goal of reducing the cost of labor, resources, and time. Unfortunately, global supply chains have solely focused on efficiency over redundancies and have, therefore, become increasingly cost-efficient and vulnerable to negative externalities (Wieland & Durach, 2021). Furthermore, research has shown that fragility increases when systems grow (Taleb, 2012). Therefore, pressures from globalization have only increased pressures for supply chain efficiencies— resulting in increasing vulnerabilities.

As a result of current global catastrophes and supply chain shortages, both the research environment and business environment have transitioned to systems thinking for managing global supply chains. Traditional research identified that firms do not operate in an individual setting, but rather in a network of global value chains (GVCs) (Forrester, 1958). However, newer research has focused more on the connections between domains and identified that firms affect and influence their external environment(s) (Wieland, 2021). For example, the label sustainable supply chain management has been growing in research journals in recent years (Taticchi et al., 2015). As defined by the International Journal of Production Research (IJPR), sustainable supply chain management is the “interaction among organizations in a supply chain that yield environmental or social benefits holistically to the entire supply chain” (Taylor & Vachon, 2018). This definition includes both the sustainable impact of an individual firm as well as an entire chain. Furthermore, global supply chains are often linked to political, economic and environmental events that occur locally and disrupt interconnected and dynamic cycles—i.e. supply chain systems (Wieland, 2021).

Implementing desired sustainability actions on a firm level is not always straightforward and implementing them on a supply chain level may be extremely difficult. Research has shown that supply chains are bound by a ‘visible horizon’, characterized by direct suppliers and customers. This visible horizon is subject to attenuation, with greater distance resulting in weaker observations. Since supply chains continue beyond individual visible horizons and may be influenced in inconsistent directions—upstream, or downstream—it may be difficult for lead firms to successfully manage and communicate with distanced firms (Carter et al., 2015). Furthermore, research has shown that most large companies fail to sufficiently audit lower­tiered suppliers. As a result, lower-tiered companies often violate supply chain sustainability standards due to a lack of firm oversight, which may expose leading firms to both financial and social risks (Villena & Gioia, 2020). Moreover, sufficiently auditing lower-tired suppliers does not guarantee sustainable business practice. Research has shown that audit teams are prone to numerous mistakes that alter the authenticity of the reports—especially when the audits are paid for by the audited supplier (Short et al., 2016). Thus, visibility in the supply chain is necessary for sustainable initiatives to permeate the greater value chain; however, even numerous audits and grand initiatives does not guarantee sustainable practices.

1.3 Study Scope

In order to examine company initiatives that concern the due diligence of supply chains, this study will attempt to provide a detailed examination of existing and upcoming due diligence regulations that concern sustainable development—i.e., environmental impact and human rights. A focus will be placed on individual firm initiatives and how they are extended to business relationships in supply chains. Thus, this report will attempt to analyze how firms define and implement due diligence activities to prevent, identify, and correct adverse environmental impacts and human rights violations at varying stages in the global value chain. Different legal systems within the EU have different terminology to address due diligence, which may create confusion. For example, terms such as—duty to respect, duty to prevent, duty to meet a certain standard, duty to implement, duty to report, and duty of care—are often used interchangeably depending on legal system. Furthermore, even when the terms are not used, different legal systems may still place an intent of risk assessment extending to firm business partners within their guidelines. Thus, the legal system may be both directly and indirectly increasing company obligation to perform due diligence. This section will define common terminology that will help the reader comprehend the changing legal environment.

2. Study Context

The purpose of this chapter is to give context to the terms of sustainable development and due diligence, while giving the reader an overview of important legal requirements concerning the areas. The chapter will be divided into four sections, each with their own sub-sections. First, the history of sustainable development and due diligence will be reviewed. Second, a regulatory review of due diligence is presented. Third, trends and upcoming legislation concerning due diligence is described. Finally, due diligence legislation at selected national level governments is highlighted. For research validity, direct quotes from legal documentation are included.

2.1 History of Sustainable Development and Due Diligence

This section elaborates on the history of sustainable development and due diligence, which underpins current governmental efforts to increase due diligence in greater supply chains. Over the past 50 years, governments, NGOs, businesses, and general society have increasingly recognized sustainable development as a guiding force to improve global stakeholders. Sustainable development is widely known as the convergence between three pillars—economic development, social equity, and environmental protection—and addressing problems concerning sustainable development requires overcoming tradeoffs between the three pillars. There is a large gap between the international and national governmental agendas concerning sustainable development; with many international bodies emphasizing broad collective action, and national governments appealing to domestic economic incentives. To address these imbalances, governments have begun drafting legislation that concerns the due diligence of industry supply chains—which oftentimes extends across geographic boundaries. This will push businesses to identify and eliminate destructive business practices, which hinder sustainable growth. In the first subsection, governmental sustainable development will be defined and traced from its origin through to large initiatives today. In the second subsection, the evolving concept of due diligence will be clarified from a historical perspective.

2.1.1 A Brief History of International Sustainable Development

The governmental original of ‘sustainable development’ may be traced to an official document from 1969. The International Union for Conservation of Nature (IUCN) coined the term in a document signed by 33 African countries (Uribe et al., 2018). However, it was between 1970 and 1990 that the concept took the shape that we recognize today by evolving through a series of international conferences and initiatives. The first major international gathering to discuss sustainability on a global scale was held in Stockholm in 1972 at the UN Conference on the Human Environment. In 1983, the Brundtland Commission—also known as the World Commission on Environment and Development (WCED)—was organized by the UN to unite countries in pursuit of sustainable development. Shortly thereafter, the group published the most used definition of sustainability: “development that meets the needs of current generations without comprising the ability of future generations to meet their own needs” (WCED, 1987).

In 1992, the Rio Summit laid the foundation for institutional sustainable development, while outlining a global plan of action containing 27 principles on sustainable development. Furthermore, the Rio Summit resulted in the establishment of the UN Framework Convention on Climate Change (UNFCCC), the Convention on Biological Diversity (CBD), and the Statement of Forest Principles. It may be argued that the Rio Summit, was the first conference to garner the world’s attention on sustainability. After 1990, several international conferences have been held concerning sustainability—e.g., 1997 Earth Summit+5, 2002 World Summit on Sustainable Development (WSSD), 2005 Mauritius Strategy of Implementation (MSI), 2012 United Nations Conference on Sustainable Development (UNCSD) Rio+20. Nonetheless, the initial Rio Summit garnered world attention around the unifying theme of climate change (Drexhage & Murphy, 2010).

Over the years, progress has been made on sustainable development metrics, by research from governments, universities, and environmental organizations—e.g., Human Development Index, Gross National Happiness indicator, WWF’s Nature Living Planet Index, Happy Planet Index, etc. (Drexhage & Murphy, 2010). Created in 2015, the UN’s Sustainable Development Goals (SDGs) have become the leading actionable targets for world governments. As a result, the ‘green economy,’ has been receiving increasing attention with many of the world’s leading economies heavily subsidizing sustainable initiatives. Many incentives are designed to position countries to be competitive in the carbon-constrained global economy. For example, the US provided a stimulus program coined as the ‘Green New Deal,’ with the goal of creating economic opportunity alongside sustainable development (United Nations Environment Programme, 2009). Nevertheless, research shows that countries have had varying levels of success with their green stimulus programs—stemming from firms competing for short-term subsidies. The countries that have shown success were the ones with strong policy incentives and commercial frameworks that orient towards long-term incentive structures (Goldberger & Ladislaw, 2010).

The current media environment tends to highlight the environmental pillar of sustainability, with an increasing number of movements being organized by the younger generation. However, sustainable development is inherently tied to much more than the green economy. For example, human rights and the 2030 UN SDGs are tied together in a mutually reinforcing way with more than 90% of the 169 targets reflecting international human rights and labor standards (Danish Institute for Human Rights, 2018). Furthermore, the UN has claimed that human rights create the essential conditions for sustainable development (United Nations, n.d.). Since wasteful economic growth increases environmental degradation and leads to accelerated 11 climate change, oftentimes the poorest people living in places with inadequate human rights pay the highest price—e.g., health, water and sanitation, food, housing, etc. Thus, despite the sometimes-overemphasized focus on environmental harm, sustainable development and human rights go hand in hand.

The concept of sustainable development is widely accepted by both the governmental and business environments, but the implementation and subsequent monitoring of metrics has been largely unsuccessful. Moreover, there has been little progress in implementing correct policies to fix these issues. These difficulties ultimately stem from high-level meetings that may be applied vaguely to different industries and environments—with governments weary to trade economic growth for sustainable development. Furthermore, unfavorable terms-of-trade and low technological advancements plague developing countries and their ability to implement sustainable development initiatives. Thus, it is not surprising to see the richest and most advanced countries routinely ranking towards the top in sustainable metrics (Drexhage & Murphy, 2010). In sum, sustainable development routinely begins at the political level, but permeates into corporate cultures and industry systems. To properly extend sustainable development initiatives, cross-sectoral buy-in will be necessary.

2.1.2 History of Due Diligence

The concept of due diligence originates as a standard of care from Roman law, and means ‘reasonable care to avoid harm to others or their property’ (Merriam-Webster, 2022). It was used as an objective standard, where wrongdoers were held accountable for circumstantial negligence and could be legally pursued by aggrieved individuals. In ancient times, most legal systems were based on the principle of collective responsibility where members of the same community could be liable for other members. Two notable examples occur in ancient Roman and Greek law: first, concerning the responsibility of slaves should their master be murdered in Rome; second, the transferring of punishment to members of a family, and descendants in Greece. The transferring of guilt was seemingly common in ancient times—even to the controlling state. For example, Hammurabi’s Code in ancient Mesopotamia allowed individuals to seek retribution from a city in which a crime took place. One explanation for the usage of collective responsibility in ancient law was the lack of an effective government for extreme enforcement—which meant that a victim needed to rely on community members for retaliation. However, the basic premise that individuals must exercise reasonable care so that their actions do not negatively harm others has become a common theme in much international law today (Monnheimer, 2021).

The concept of shared responsibility only began to fade during the sovereign rule that dictated the seventeenth century—i.e., the monarchy had responsibility over all subjects of the nation.

Should a member of one nation perform harmful action against another nation, the individual monarchy was often blamed. Thus, a transfer away from collective responsibility and towards individual responsibility began at the national level. After the decline of monarchs, the state was no longer responsible as an individual, but rather as an entity looking to prevent wrongful private conduct and punish it should it occur. This made the responsibility of the state very different from the responsibility of the individual—i.e., a disciplinary entity. Thus, the responsibility shifted to the private individual at a local level, with a focus on monitoring at the state level. Today, due diligence at the national level follows this premise—i.e., whether the state has taken reasonable steps to prevent or mitigate harmful, or illegal, conduct at the local level (Miceli, 2019).

The concept of due diligence—as businesses are familiar with today—became a specialized legal term due to Section 11 of the United States Securities Act of 1933. The purpose of the act was to ensure buyers of financial securities accurate information before they invest. In the legislation, the company, the underwriter, and anyone signing the registration statement are strictly liable—regardless of intent—for misinformation. As a result, the financial community quickly adopted the term ‘due diligence,’ and businesses began to exercise extreme carefulness to not be found liable for fraud (Sjostrom, 2006). The significant Act was the first federal legislation to regulate the stock market, and brought due diligence to the forefront of common business terminology (Lin, 2011).

2.2 Regulatory Review of Due Diligence

International legislators are taking notice of cross-sectoral synergies across industry systems and have begun creating legislation to address layering sustainability issues. There is growing consensus to hold corporations responsible for not only internal operations, but also the externalities that may be traced through supply chains. This section will review the regulatory framework applicable to due diligence in the EU, as well as selected nations. However, to understand the unfolding legal environment, this section will start with a definition of due diligence. This will be followed by a brief history of EU-level guidance, country-level implementations, and finally the linkages to the concept of sustainability.

2.2.1 Voluntary Due Diligence Reporting

As part of increased globalization supply chains are becoming more and more complex around the world. Companies seek to cut costs and increase margins wherever possible, which usually means sourcing materials and labor resources in developing countries. By sourcing from lower cost countries, companies create thousands of jobs, and many firms drive sustainable work in the countries from where they source materials. However, this is not always the case and many scandals—such as the Rana Plaza collapse in Bangladesh in 2013 where over 1000 people were killed—have emerged. There are several risks that must be managed to defend not only the environment but also human and labor rights. Previously, companies have been strongly encouraged to be transparent and disclose their due diligence reporting; it has been voluntary to do so. Many believe that firms are conscious enough to understand that scandals in the supply chain will hurt its’ reputation to an extent where they simply cannot risk it. Hence, they will disclose as much information as possible. To facilitate the reporting, several standards and guiding frameworks have been set up to gain awareness and to understand where companies need to improve (Zamfir, 2020).

Equator Principles

One of the first sectors to act was the financial sector, who adopted the Equator Principles in 2003. The Equator Principles is a private project that started with the objective of developing a risk management tool that monitors and ensures that both human rights and environmental goals are met and followed in development initiatives. The cornerstone of the principles is that only projects that meet the requirements should get financing, and other projects should be ignored until compliance is reached. As of today, the principles have been adopted in 37 countries and major international banks are involved. The Equator Principles are continuously being adapted and developed to keep up with changes in the world, and the fourth edition is effective from October 2020. This iteration highlights that it is mandatory for every project to assess potential adverse human rights impacts. To successfully assess it, external independent consultants will monitor projects. In the event of failure to meet the principles all stakeholders in the project will work together to comply with the rules. If no improvement is achieved, the financial institution may exercise the right to default on the project (Van Thyne & Leroy, 2021).

The UNGPs

The concept of due diligence—as is referred to in the business environment today—was popularized by the UN Guiding Principles on Business and Human Rights (UNGPs) with Guiding Principle 17:

“In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence... potential impacts should be addressed through prevention or mitigation, while actual impacts — those that have already occurred — should he a subject for remediation” (United Nations, 2011).

The UNGPs are an instrument of principles with the framework to “Protect, Respect and Remedy” the issues developed by transnational corporations and the greater business environment. The principles were developed by the Special Representative on Business and Human Rights, John Ruggie. In 2011, the United Nations Human Rights Council endorsed the UNGPs. The principles are built on three pillars: (1) the state duty to protect human rights; (2) the corporate responsibility to respect human rights; (3) Access to remedy for victims of business-related abuses. Furthermore, the UNGPs identify four parts to due diligence:

“The process should include [1] assessing actual and potential human rights impacts, [2] integrating and acting upon the findings, [3] tracking responses, and [4] communicating how impacts are addressed” (United Nations, 2011).

Principle 13 mentions that businesses should mitigate adverse effects linked to their business relationships even if they have not contributed to those impacts. Therefore, it may be inferred the UNGPs expect companies to perform due diligence and take responsibility for indirect operations—including suppliers—which may be either upstream or downstream in the value chain. When the enterprise lacks the leverage to end a relationship with a noncompliant business partner, the enterprise should attempt to mitigate the damages attached to the relationship to the best of its ability. As such, companies are expected to demonstrate ongoing efforts to mitigate the impact of detrimental consequences (United Nations, 2011).

The ILO

In sum, the UNGPs have been met with widespread adoption, and the concepts have been incorporated into standards such as the OECD Guidelines, and the International Labour Organization (ILO) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (MNE Declaration). For example, the ILO (2017) MNE Declaration references a similar definition of due diligence:

“Enterprises, including multinational enterprises, should carry out due diligence to identify, prevent, mitigate and account for how they address their actual and potential adverse impacts that relate to internationally recognized human rights, understood, at a minimum, as those expressed in the International Bill of Human Rights and the principles concerning fundamental rights set out in the ILO Declaration on Fundamental Principles and Rights at Work.” (ILO, 2017).

G20 and G7 Forums

Moreover, the principles have influenced global lawmakers concerning the topics of sustainable supply chains and greater due diligence. As a part of discussions at the G20 and G7 forums in recent years, due diligence of global supply chains was highlighted as a key topic:

“To enhance supply chain transparency and accountability, we encourage enterprises active or headquartered in our countries to implement due diligence procedures regarding their supply chains, e.g., voluntary due diligence plans or guides” (OECD, n.da.; European Council, 2017).

The OECD Guidelines and OECD Due Diligence Guidance

The OECD Guidelines for Multinational Enterprises, revised in 2011, also set voluntary standards for company due diligence. The Guidelines are vast recommendations addressed by 44 governments to multinational companies. Consistent with global standards and the international legal environment, they provide non-binding principles and standards for responsible business conduct. Each adhering country is required to setup a National Contact Point (NCP), which is responsible for promotion on a national level. Following, complaints may be registered at NCPs if a company breaches OECD Guidelines. Unlike the UNGPS, the OECD Guidelines provides a plethora of tools with detailed guidelines for responsible business conduct in a variety of industries, such as: minerals, agricultural, garment and footwear, and financial sectors (Zamfir, 2020; OECD, 2011; OECD, 2018; OECD 2021)

Adopted in 2018, the OECD Due Diligence Guidance for Responsible Business Conduct provides support to enterprises through clear explanations of implementing best due diligence practice, in accordance with the OECD Guidelines and the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy. Since due diligence can indirectly influence other areas, the OECD Due Diligence Guidance report was developed through a multi-stakeholder approach that includes representatives from both OECD and non­OECD countries (OECD, 2018).

The OECD Guidelines are relevant for this report since they extend the concept of due diligence to all major areas of business ethics—including, but not limited to, the areas environment and climate change. Both the OECD Guidelines and the OECD Due Diligence Guidance describe that businesses influence sustainable development throughout their supply chains. They describe that the purpose of due diligence is to limit risk in a variety of areas—ESG being a field of concern:

“An enterprise can also carry out due diligence to help it meet legal requirements pertaining to specific RBC issues, such as local labour, environmental, corporate governance, criminal or anti-bribery laws” (OECD, 2018).

Which in turn:

“helps enterprises avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers and corporate governance that may be associated with their operations, supply chains and other business relationships” (OECD, 2018).

More importantly, the OECD Due Diligence Guidance provide recommendations for how businesses and supply chains can behave responsibly towards the climate, address biodiversity­loss, limit pollution, and work towards achieving a circular economy—thereby, supporting the OECD Guidelines (OECD, 2018). The Guidance has a goal to:

"Devise, adopt and disseminate a combination of policies on RBC issues that articulate the enterprise ’s commitments to the principles and standards contained in the OECD Guidelines for MNEs and its plans for implementing due diligence, which will be relevant for the enterprise ’s own operations, its supply chain and other business relationships.” (OECD, 2018).

EU GREEN DEAL

Both the OECD Guidelines and the OECD Due Diligence Guidance support the EU Green Deal, which aims to prepare the EU for climate neutrality by 2050. The EU Green Deal was created to achieve the UN’s Sustainable Development Goals (SDGs), and highlights combatting environment degradation and climate-change as key tasks for this generation— only achievable by decoupling economic growth and resource usage (European Commission, 2019). Further, the Green Deal emphasizes a need to transform global value chains:

“Achieving a climate neutral and circular economy requires the full mobilization of industry. It takes 25 years - a generation - to transform an industrial sector and all the value chains. To be ready in 2050, decisions and actions need to be taken in the next five years. ” (European Commission, 2019).

UN SDGs

The UN recognizes the importance of due diligence to achieve the SDGs. In the UN’s December 2017 Report of the Secretary-General due diligence standardization is highlighted as a need to advance the 2030 agenda:

“[T]he Organization [UnitedNations] must do better to manage risks and ensure oversight in a manner that protects its values and yet allows space for innovation and expanded partnership arrangements. Due diligence standards and procedures are highly heterogeneous across the United Nations system and need to be streamlined. ” (United Nations, 2017).

In response, the UN Sustainable Development Group published a common approach and reiterated its necessity alongside sustainability:

“Due diligence and associated process should not be viewed as a deterrence to partnerships, but as an enabling function that helps an organization to identify the most strategic opportunities, while at the same time better calculating risk ... In addition to gaining intelligence on the profile of the prospect partner and the sector they work in, an assessment of their Environmental, Social and Governance (ESG) performance will be at the core of the risk analysis.” (United Nations, 2020).

In sum, the themes of due diligence and value chain transformation supplement key international environment policies—OECD Guidelines, OECD Due Diligence Guidance, EU Green Deal and UN SDGs.

2.3 Due Diligence Trends and Upcoming Legislation

There have been recent policy initiatives at the EU level promoting responsible business conduct and due diligence, culminating with the Proposal for Mandatory Due Diligence— underpinning the legal basis for this study. Over the years, academia together with other research institutions and civil society organizations have proven that voluntary measures are taken advantage of, and that some firms continuously violate standards and laws with their own best interests in mind (Zamfir, 2020). By not following standards and frameworks, multinational companies have not been successful in ending forced labour, child labour, deforestation, pollution, land grabbing and corruption. In some cases, unethical practices are taking place even though companies encourage sustainable development and state that they are following the guidelines—but fail to do so in reality (CBI, 2020). This section will review policy trends in due diligence with references to both published and upcoming legislation.

Financial: EU Non-Financial Reporting Directive (NFRD)

The EU Non-Financial Reporting Directive (NFRD) is a vital component to the EUs sustainable finance strategy. In April 2019, the EU adopted a regulation for sustainability­disclosure in the financial sector, which introduces transparency rules on sustainability risks and impacts (European Council, 2019). Further, the regulation includes a necessity to report on due diligence as recognized by international standards—and advises stakeholders to reference the OECD Guidelines (ESA, 2021). The milestone is significant, as it urges the financial sector to acknowledge and report upon sustainability risks and impacts. The regulation entered into force in December 2019, and became applicable to the business environment in March 2021 (OECD, 2019; ESA, 2021). In 2020, the EU proposed a revision to the NFRD in the Green Deal, to clarify sustainability reporting alongside the broader financial legal framework (European Comission, 2019; European Commission, 2021a). The proposal aims to ensure publicly available information about sustainability and human rights risks coming from individual companies. Notably, the Directive requires large companies to publish information on non-financial issues that may be linked with a company’s internal operations, as well as business relationships. Large companies are defined as those with 500 employees or more; though Denmark and Sweden extend the directive to include companies with 250 employees or more. This is significant as it emphasized impact from business relationships, which may occur outside of a company’s internal operations. The Directive creates a general sustainability reporting requirement, but does not require companies to undertake due diligence—with a section allowing companies to instead explain their due diligence mechanisms. Once again, the OECD RBC documents are highlighted as tools for usage and implementation (European Commission, 2021a; European Union, 2014).

Environmental: EU Timber Regulation, EU Conflict Minerals, and Taxonomy

The world is moving more and more towards a circular economy and many companies are expected to address environmental issues seriously, but lack guidance in how to do so. As part of the Green Deal that was put in place in 2019, the EU set a target to reduce the climate footprint in the economic union by 55% in 2030 and to be a fully climate neutral economy by 2050. Consequently, common tools that concern environmental issues to be used as a framework for businesses are needed.

The EU has highlighted a need for greater due diligence requirements in the industries concerning timber and conflict minerals—and has indicated that it will take regulatory measures to reduce the importation of products linked to deforestation and armed conflict. First, in March 2013 the EU Timber Regulation entered into force as a part of a broad set of deforestation aimed initiatives. The regulation requires companies sourcing timber to develop a due diligence system surrounding the origin, trade, and labor associated with the wood. Notably, this regulation was the first legal instrument requiring mandatory due diligence for a product. Second, in January 2021 the EU Conflict Minerals Regulation came into force requiring importers of tin, tantalum, tungsten, and gold to report on supply chain due diligence. The new Regulation targets minerals originating from conflict-areas, and is significant since it extends mandatory due diligence to supply chain labor practices (Halleux, 2022; European Commission, n.d).

The EU Taxanomy was put in place with the goal of raising awareness and encouraging investors to include sustainable aspects in their investment processes, and to support sustainable finance. The EU Taxanomy incorporates and translates the EU’s green targets into criteria that should be followed when conducting business. The cornerstone of the Taxanomy is to inform and educate, with the intention that all companies should know what it means to not do harm and to substantially contribute to achieving climate goals. The actual tool focuses on transparency and makes it mandatory for certain companies and investors to reveal their operations regarding Taxanomy. By revealing the information through a common tool, investors can easily compare the impact of different companies regarding climate change. As a result, investment decisions shall become less complicated, and it will be easier to invest sustainably. The sectors that are affected by the Taxanomy are those that have been deemed to be most important in reaching climate neutrality and are currently energy, forestry, manufacturing, transport, and buildings. However, the Taxanomy is not a mandatory tool to use for investors, and it does not include any requirements on firms to lower their climate footprint, but instead promote a change towards a more sustainable future and enforce transparency to facilitate the same (European Commission, 2021b).

Mandatory: Proposal for mandatory Due Diligence (MHRDD)

The European Parliament has long been advocating for legislation to make companies take greater responsibility for their supply chains in terms of human rights and environmental sustainability. In October 2020, the EU announced a briefing introducing the concept of mandatory rules for companies to perform human rights and environmental due diligence (MHRDD) (Zamfir, 2020). This document describes a need for legislation and even gives an outline of what possible legislation could look like. In March 2021, the European Parliament called on the Commission to submit a legislative proposal on mandatory due diligence (European Parliament, 2021). Notably, corporate due diligence was extended to include the term corporate accountability—which focuses on non-financial areas such as social responsibility and sustainability. Thereafter in February 2022, the European Commission published the long-awaited Proposal on Corporate Sustainability Due Diligence, which has been the most recent official piece of documentation released as of the writing of this report (European Commission, 2022b).

The draft legislation requires large EU companies, and large non-European companies doing business within Europe, to evaluate the human rights and environmental impact of their internal operations and supply chains. Firms will have to integrate due diligence in their overall supply chain strategy. As the legislation does not only concern direct suppliers but also subcontractors, certain demands are put in place for sub-suppliers. For all suppliers, this means providing documents that ensure adequate human rights practices and could, for instance, take the form of contractual clauses, or code of conducts together with auditing. Companies that do not perform adequate due diligence and miss potential issues within their supply chains will face significant penalties and civil liability. The directive will apply to companies that meet any of the following criteria: (1) at least 500 employees and a net turnover of over 150M EUR; (2) EU companies working in sectors deemed high risk, with at least 250 employees and a net turnover of 40M EUR; (3) non-EU companies with a net turnover of at least 150M EUR, or only 40M EUR if operating in a high-risk sector. The scope of the Proposal is very broad in terms of possible abuses, albeit narrow in regard to industry application—only 1% of all EU companies are assumed to meet the aforementioned criteria (Zamfir, 2020). The EU Parliament and Council have announced that the new proposal will be linked to the Green Deal, and based on the OECD Guidelines and OECD RBC Due Diligence Recommendations—as environmental due diligence is a vital component of sustainability (European Commission, 2019). Many countries have announced support for the Proposal, with many governments recently adopting corporate accountability and due diligence legislation into their national action plans. A forthcoming section will describe highlighted legal initiatives. In short, the draft legislation represents an important first step towards universal due diligence for both EU and non-EU firms operating within global value chains.

2.4 Due Diligence Reporting at the National Level in EU Member States

The following section will highlight enacted and upcoming legislation from EU Member States. Selected country reports were chosen from the following criteria: first, recently enacted or upcoming legislation needs to be significant in time exposure and pertain to due diligence; second, the country needs to be represented by the study respondents' company origin. As such, significant campaigns for due diligence may have been missed as they were either not represented by firm-origin, or will be implemented too far in the future. For example, campaigns that are taking place in Austria, Belgium, Denmark, Finland, Sweden, and Luxembourg were not chosen (Alleweldt et al., 2020).

French Duty of Vigilance Law

The French Duty of Vigilance Law from 2017 requires large companies—employing 5000 in France, or 10,000 globally—to publish due diligence plans. Companies will be held accountable for vigilance plans, which shall contain measures such as: risk-mapping, risk­mitigation and prevention actions, alert mechanisms, and monitoring tactics. Notably, it was one of the first national laws to impose mandatory due diligence for human rights and environmental impact that extends monitoring through supply chains (Alleweldt et al., 2020).

French Anti-Wastage & Circular Economy Law

The French Anti-Wastage and Circular Economy Law from 2020 aims to transform production and consumption habits while transitioning France towards a circular economy. The legislation is at the forefront of pushing sustainable requirements and requires companies to inform customers about the recyclability of their products, while increasing producer responsibilities. For example, the law stipulates a ban on single-use plastics and food waste. Rather than fill a landfill or incinerate unsold goods, companies need to reuse, donate, or recycle unsold products, while promoting better resource management through the entire value chain (European Union, 2020).

German Due Diligence Act

In 2021, Germany passed The Supply Chain Due Diligence Act, which will come into force January 2023. The draft law aims to improve the protection of the environment and international human rights with binding standards for large company operations, as well as for their direct suppliers. Furthermore, indirect suppliers may circumstantially count as direct suppliers in the event a large firm attempts to circumnavigate requirements. The fulfilment of due diligence requirements needs to be documented in a published annual report (BHRRC, 2022b).

German Raw Materials Strategy

The German Raw Material Strategy, revised from 2020, attempts to address challenges surrounding the sourcing of critical raw materials (CRMs) with an emphasis on greater transparency. It is an extensive of the German Raw Material Strategy from 2010 and the revision is much more ambitious in addressing the entire value chain—including end-of-life. With a focus on recycling CRMs, Germany can work towards a circular economy. The Strategy follows EU activities and initiatives, such as the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD, n.db).

UK Modern Slavery Act

In 2015, the UK created the Modern Slavery Act to combat slavery and human trafficking. Whilst not all of the document is related to supply chains, Part 6 /Section 54 “Transparency in Supply Chains” requires large businesses to disclose the action they have taken to ensure there is no slavery in their direct operations or supply chains (UK Government, 2015). However, there is a lack of standardization pertaining to what constitutes a “human trafficking statement,” and does not offer clear guidelines for risk mitigation. Nonetheless, the Act was a crucial step towards greater due diligence in the labor sector of supply chains.

UK Proposal on Due Diligence on Forest Risk Commodities

In 2020, the UK introduced provisions on due diligence on forest risk commodities, which recently finished consultation—as of authoring this report. The provision aims to eliminate illegal deforestation in UK supply chains. It will mandate supply chain due diligence referencing, but not limited to, the following deforestation-linked commodities: cattle, cocoa, coffee, maize, rubber, palm oil, and soy. Secondary legislation is necessary for further guidance on business implementation and monitoring (UK Government, 2020).

Dutch Child Labour Due Diligence Act

In 2019, the Netherlands introduced the Child Labour Due Diligence Act, mandating companies to perform supply chain due diligence on child labor and create a resolution plan should issues be found. Should an issue be found in the supply chain, companies need to create a resolution plan and may be subject to significant penalties and fines. Notably, the Dutch Act regards the scope of all subsidiaries of the companies, as well as supply chain members, thereby significantly expanding the scope of due diligence obligations. This law should come into force as soon as mid-2022—giving companies a grace period to investigate their supply chains (Spears, 2020).

Dutch Bill on Responsible and Sustainable International Business Conduct

The 2021 Dutch Bill on Responsible and Sustainable International Business Conduct follows and may eventually replace the 2019 Dutch Child Labour Due Diligence Act by extending duty of care to include climate change and affect all companies that do business in the Dutch market. Furthermore, the Bill is not limited solely to large multinationals—as much earlier legislation was. It requires companies to pursue due diligence in accordance to OECD guidelines if a company fulfills two of the following three criteria: (1) at least 250 employees; (2) a balance sheet of more than 20M EUR; or (3) a net turnover of more than 40M EUR. Thus, the Bill seeks to extend due diligence to the greater industry environment in order to prevent negative impacts on human rights and the environment (Alleweldt et al., 2020).

The Norwegian Transparency Act

In 2021, Norway passed the Transparency Act, which requires companies to carry out due diligence in accordance with the OECD Guidelines for Multinational Enterprises on their operations and entire supply chain, including business partners. The Act aims to ensure human rights and decent work conditions in company operations and supply chains. Notably, the Act applies to a large range of companies—including those selling in Norway—that meet at least two of the following three criteria: (1) at least 50 full-time employees; (2) an annual turnover of at least 70M NOK; (3) a balance sheet of at least 35M NOK. These requirements are much lower than previous initiatives—such as the Dutch Bill—thereby, including a much larger number of firms. Furthermore, the Act states that companies need to provide information within a reasonable time and no later than three weeks after a request for information is received (Barne- og familiedepartementet, 2021). In sum, Norway has proposed one of the toughest due diligence laws, in comparison to the aforementioned cases.

3. Literature Review and Theoretical Basis

The purpose of this chapter is to review theories pertaining to socio-ecological systems, views of the firm, sustainability’s impact on performance, and supply chain management. The theoretical review forms the foundation for the upcoming discussion and will help the reader get a comprehensive overview of the subject. This chapter will be divided into six parts, each concerning a different research theme relevant to the study. For selected research, visuals will be presented for greater reader comprehension.

3.1 Socio-Ecological Systems

C.S. Holling (2001) was one of the first researchers to discuss the unpredictability of ecology in an article on managed ecosystems. He describes the resilience of ecosystems as their ability to absorb change and persist. A later article coauthored by Gunderson & Holling (2002) sets forth the theory of panarchy—which attempts to integrate economic, ecological and institutional systems into a concise and evolving framework. As a result, the concepts of resilience and adaptive cycles have been applied to a variety of both ecological and social sciences (Wieland, 2021; Davoudi et al., 2012; Chaffin et al., 2016).

3.1.1 Panarchy Theory and Adaptive Cycles

Gunderson and Holling (2002) claim that panarchy theory provides structure for understanding how complex systems manage the uncertainties inherent to themselves by following movements of so-called adaptive cycles (See Figure 1). These cycles vary in scales of time, space, and meaning, and are often interconnected with other dynamic cycles (See Figure 2). They are characterized by changing levels of growth, collapse, reorganization, renewal, and re­establishment (Holling, 2003). This pattern of rapid growth, followed by slowing growth, destruction, and then reformation has been observed in many ecological systems such as forest development, fish dynamics in the sea, reef formation, and other natural habitats (Chaffin et al., 2016). For example, a forest may be subject to wildfires, windstorms, floods, or droughts, but may subsequently regrow even stronger—especially when the forest is made up of a diverse flora (Schäfer & Vanderklein, 2018).

An adaptive cycle consists of four consecutive phases: exploitation, conservation, release, and reorganization (Gunderson & Holling, 2002), (See Figure 1). The initial phase—first loop—is characterized by rises in connectivity and complexity; whereas the next phase—second loop— is characterized by rigidity and vulnerability, which eventually leads to a system release or collapse. Moreover, the first loop occurs much faster than the second loop. Following a collapse, the system begins anew in the first loop with a reorganization and new system configuration. The new trajectory can be like the prior system, or completely different. Notably, the level of resilience changes throughout the adaptive cycle depending on the phase.

Figure 1 The adaptive cycle (From Wieland 2021, Based on Holling 1986, 2001)

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Figure 2 Panarchy with two Cross-Level Linkages (From Wieland, 2021. Based on Gunderson & Holling, 2002)

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3.1.2 What is Resilience? The difference between Ecological and Socio-Ecological Systems.

Resilience may be defined as a measure of the amount of disturbance a system can absorb while maintaining structure and processes (Chaffin et al., 2016). Resilience is therefore influenced by the dynamics of adaptive cycles. Despite influencing each other, ecological and socio- ecological systems are not the same. Therefore, the way they adapt and transform in light of environmental triggers—i.e., resilience—is not the same.

Ecological studies have shown that optimizing a system to a specific set of controlled and stable conditions should be avoided because this reduces a system’s ability to adapt to triggers in the environment (Evans, 2011; Gunderson et al., 1995). Furthermore, over-managed systems tend to be vulnerable to large and in-frequent shocks due to a lack of adaptability, which may compound in other linked systems. For example, although humans are routinely seen as the drivers of global environmental change, humanity is not in control of planetary forces, and is not the only driving force of large ecological change. Large catastrophes such as hurricanes in the Gulf of Mexico, and tsunamis in the Pacific Ocean offer a glimpse of large, unpredictable and ecological shifts that may not be forecasted—i.e. occur outside of human interference and perception (Taleb, 2007; Taleb, 2012). Thus, what must be noted is the focus on an inability to control ecological systems.

On the contrary, the involvement of human ingenuity in social-ecological systems means that these systems can respond, adapt, and transform to triggers advanced by human guidance. Wieland (2021) describes this transformation as “dancing”, where humans can foresee the next steps and are required to experiment and innovate. Thus, humans are not only shaped by their environment—ecological-systems—but also shape their environment—socio-ecological systems (Wieland, 2021; Francis & Bekera 2014). However, the largest difficulty is deciding and enacting on the appropriate level of interference. For example, humans have developed elaborate storm water drains that reroute excess rainwater, up to a point, in urban areas prone to flooding. When large catastrophes occur that disrupt entire systems—such as a hurricane— a reorganization and upgrading of the entire socio-ecological system—e.g., storm drainage— is needed to combat future floods. Also stated, humans cannot control hurricanes, but can reroute rainwater up to a breakeven point. Therefore, socio-ecological systems reflect a highly interconnected relationship between society and planetary ecosystems (Francis & Bekera 2014).

Another way to clarify the differences between systems is through the following analogy: A socio-ecological system is a 100-meter race where each participant finishes at varying times due to their innate ability to adapt to stressors created before, or during the event—i.e., some participants run faster than others. On the other hand, an ecological system would be a race without a start, finish, nor lines for direction. Finally, an over-managed and engineered system would be a 100-meter race where every participant finishes exactly at the same time or in a precisely predictable manner. In short, ecological systems are chaotic; socio-ecological systems have varying levels of rules and patterns; engineered systems are strictly controlled.

3.2 Adaptive and Transformative Governance of Systems

The recognition and application of resilience in systems has come from a renewed attempt by the academic community in the early 2000s to link social and biological systems in research due to an increasing focus on humans’ effect on the environment. Any attempt to separate these two systems ignores their intertwined and dynamic nature of the current global ecosystem— and negates any option to combat both current and future environmental crises (Chaffin et al., 2016). Thus, researchers have been looking towards areas such as transformative governance, and sustainable supply chain management as fields to address the interconnectivity of the global markets.

The concept of transformative governance has evolved from adaptive governance, which has emerged from scholars studying community-based collaborations surrounding resource pools with a focus on resilience. Research claims that adaptive governance is an emergent configuration of environmental governance mechanisms that addresses societal needs. Also stated, adaptive governance has the goal of maintaining larger-scale system dynamics that preserve—instead of transform—the structure and processes of socio-ecological systems (SESs) (Chaffin et al., 2016). Therefore, adaptive governance maintains the status quo and desired regime of a system.

On the other hand, transformative governance has a higher focus on system transitions instead of system resilience (See Figure 3). While adaptive governance strategies are associated with maintaining current regimes, transitional governance focuses on systematic change as the entry for research and analysis (Chaffin et al., 2016). Also stated, adaptive governance addresses the resilience of system 1 from end point X to end point Y, without addressing the evolution of system 1 towards system 2. Furthermore, transformative governance may be proactive or reactive. With proactive governance, stakeholders act on the best available information while recognizing a needed regime shift—e.g., Tesla providing a competitive electric vehicle in response to growing widespread environmental concern. In reactive governance, a regime shift has already occurred, and stakeholders are left to alter and guide the system towards a more desirable outcome—e.g., traditional automakers rushing to develop electric vehicles in response to Tesla’s growing market share and growing emission regulations. In both instances of transformative governance, the characteristics and stages are similar; however, the timing and degree of change could differ substantially (Chaffin et al., 2016).

Figure 3 Transformative governance within an adaptive cycle of a social ecological system (From Chaffin et al., 2016)

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3.3 Industry Structure View, Resource-Based View, and Relational View of the Firm

This section describes the evolution of strategic management literature through three distinct periods and themes over the course of the last 40 years: first, the industry structure view of the firm (IS) (Porter, 1980); next, the resource-based view of the firm (RBV) (Rumelt, 1984; Rumelt 1991; Wernerfelt, 1984; Barney, 1991); and finally, the relational view of the firm (Dyer & Singh, 1998; Lavie, 2006; Mesquita et al., 2008). Throughout this evolution, research has described industry, firm, and network effects as sources of competitive advantage.

Industry Structure View of the Firm (IS)

The industry structure view of the firm (IS) claims that an individual firm’s competitive advantage(s) results from favorable industry characteristics (Porter, 1980). The groundbreaking research changed the academic sphere within strategic management and is today used extensively in higher education throughout the world (Grundly, 2006). Porter (1980) describes the need to develop a defendable position compared to other competitors in a similar industry through balancing five forces collectively acting upon the individual firm. These five forces being: the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products or services, and rivalry among existing firms— all of which affect the competition within an industry, depending on their collective strength (Porter, 1980). In sum, some firms perform better because they are members of favorable industries according to the industry structure view of the firm (IS). Thus, the industry is the relevant unit of analysis. Since the inception of the model, many attempts have been made to develop it further. While the framework has many advantages—such as simplifying micro­economic theory to five major components—critics state that it also contains several drawbacks. For instance, one cannot simplify the value chain analysis too much, and it does not provide any guidance on how one should act if, for instance, a firm performs poorly in one of the five forces (Grundly, 2006).

Resource-Based View of the Firm (RBV)

One of the most well-known theories on how one should gain sustainable competitive advantage is the Resource Based View of the Firm, that has gained significant recognition in the field of management theory. In contrast to theories that evaluate industries as one unit, the resource-based view focuses on the individual firm and emphasizes that a firm must also assess their competitive position within the industry (Barney, 1991). The resource-based view of the firm (RBV) claims that firm performance results from firm heterogeneity in resource accumulation (Rumelt, 1984; Rumelt 1991; Wererfelt, 1984; Barney, 1991).

Firms that can collect favorable resources and capabilities—i.e., rare, valuable, and non- substitutable—that are difficult to imitate will routinely possess competitive advantages. A valuable resource can only be so when it enables a firm to actualize a process that will improve its’ efficiency. In contrast to this, environmental models focus on exploring opportunities and mitigating risks instead of gaining sustainable competitive advantage through greater effectiveness. Furthermore, a resource cannot be valuable if many firms possess the same resource. This stems from the fact that if many firms possess the same resource that initially was deemed valuable, then multiple firms could implement similar strategies centralized around the resource. As such, the resource will not give the individual firm a competitive advantage. Therefore, a valuable resource must also be rare. However, it is challenging to determine how rare a resource must be. Ideally for a firm that possesses such a resource, no one else will also have access to it. On the other hand, this is tough to realize, since it is highly unlikely that a single firm has a unique resource that no other firm can come close to. Instead, a resource can also be deemed rare if only a few players on the market utilize the resource. Once a firm holds such a rare resource, competitors will follow and try to imitate it as much as possible to obtain the same resources. However, it is not always possible to do so, as certain resources can be non-substitutable (Barney, 1991).

Dierickx and Cool (1989) describe that such imperfectly imitable resources can be obtained for three reasons, either as standalones or together. The first way to gain such resources is through unique historical conditions, that determine the firms' strategic decisions. Hence, the most important evaluation tool should not be where the firm is in the industry today, but instead how the firm got there through its’ history. Given a situation where a firm obtained valuable and rare resources through unique actions earlier, no firm will be able to duplicate the processes, and the firm can shape and implement its’ own unique strategy (Arthur et al., 1984). Secondly, a firm can also gain non-imitable resources through casual ambiguity. Casual ambiguity occurs when a firm possesses certain resources that correlates with sustained competitive advantage, but companies fail to understand why, which makes it difficult to duplicate successful strategies. Lastly, socially complex resources might also be a source of non-imitable resources. In this case, the ability to imitate resources is very limited for other firms. Socially complex resources could take many forms, such as long-lasting relationships with vendors, good reputation among customers, company culture and managerial relationships (Hambrick, 1987; Porter 1980; Barney 1986; Klein & Leffler, 1981). In summary, the RBV views the firm as the primary unit of analysis.

Relational View of the Firm

The relational-based view of the firm claims that critical resources are not contingent to a specific firm, but across a network of interfirm resources and routines (Dyer & Singh, 1998; Lavie, 2006; Mesquita et al., 2008). The concept has been called relational rent. Relational rent is defined as an abnormally large profit that derives from joint contributions from alliance partners. Moreover, those profits could not have been possible by either firm in isolation (Dyer & Singh, 1998). Thus, idiosyncratic interfirm linkages are the source of competitive advantage and the primary unit of analysis in the relational view of the firm.

Dyer and Singh (1998) describe four potential sources of these interorganizational competitive advantages. Firstly, relation-specific assets refer to specialized assets that are of interest to multiple firms within the network. The larger the investments from the firms within the networks are towards relation specific assets, the greater is the opportunity to achieve relational rent. Furthermore, for relation specific assets it is crucial to defend from opportunism when some companies try to take advantage of the assets without carefully assessing the consequences. Additionally, it is auspicious if the volume of exchange between partners is high, which will increase the likelihood of obtaining relational rent.

Secondly, knowledge sharing routines are vital (Dyer & Singh, 1998). Von Hippel (1988) argues that in networks where knowledge sharing is superior, there is a much greater possibility of outperforming other dyads, who will perform poorly due to lack of knowledge exchange. Knowledge sharing is not limited to firm-to-firm but can also happen through supplier and customer suggestions that are extended to other firms in the network. Further, a firm must also possess the ability to recognize the value of new information. Hence, it is not enough to simply obtain the information, one must know how to put it into practice. It should also be noted that a prerequisite for knowledge sharing to function effectively is well arranged incentives. Such incentives could for instance be one firm holding equity stake in another firm within the network, which has been proven to be more effective than contractual agreements (Kogut, 1988; Mowery et al., 1996).

Thirdly, relational rent can be achieved via leveraging complementary resources and capabilities from alliance firms. The cornerstone of leveraging resources from other firms is synergies. If firms can effectively identify where they are the strongest, and in what areas they would benefit from capabilities outside of the core firm, one is able to create a win-win situation where both firms will be successful. Experience is central in this case, where firms who have done well in the past are more likely to gain positive synergies. Additionally, the ability of companies in a network to be effective in obtaining synergies starts with its own operations and is determined by how compatible its’ internal processes and organizational systems are (Dyer & Singh, 1998).

Lastly, the final key component in creating and utilizing relational rents is effective governance. As firms within a network develop certain processes to minimize transaction costs, they become more efficient and value creating, which facilitates opportunities for relational rents. Moreover, if the dyads can create systems for relying on trust or hostages instead of legal contracts, many costs can be avoided and more value can be created (Dyer & Singh, 1998). In conclusion, firms could achieve abnormal positive returns by utilizing a strong network and benefit from long lasting relationships according to the relational view of the firm.

Comparisons

As summarized in Table 1, based on Dyer and Singh (1998), the three schools of thought differ regarding the unit of analysis, the source of returns, the mechanisms that preserve profits, and the ownership of processes. Notably, the relational view considers networks as the unit of analysis; whereas the IV, and RBV focus on industry characteristics and firm specifics, respectively. In summary, the RBV focuses on how individual firms generate profits based on their use of resources and capabilities within the firm. However, the relational view considers all resources and capabilities shared by a network of firms to be the source of profits. On the contrary, the IS considers forces outside the walls of a specific firm, but solely focuses on a firm’s position in an industry—and not the connections within that industry. Furthermore, firm­level strategies differ between the three views. The RBV holds that firms should attempt to conceal valuable knowledge to prevent spillovers that may eliminate a competitive moat. However, the relational-view does not see knowledge spillovers as a zero-sum-game and encourages knowledge sharing between partners within a network. The IS dictates that firms should try and increase the number of their suppliers to increase what Porter (1980) calls ‘bargaining power.’ On the other hand, the relational view does not consider the total number of partnerships, but rather the strength of relationships—i.e., it is better to have a few strong dependencies, than many weak ones. Taken together, all these contradictions suggest that the older themes of IS and RBV are not equipped to explain the effects of inter-organizational— and socio-ecological—systems that permeate the business environment.

Table 1 Comparison of the Industry Structure, Resource-Based, and Relational views of competitive advantage (Based on Dyer & Singh, 1998).

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3.4 An analysis of Sustainability and its Effect on Firm Performance

Since sustainability is a growing trend in the business environment, researching the effect of sustainable initiatives on firm and supply chain performance is vital for business continuity. The research environment is fragmented regarding the magnitude of effect, but tend to agree that involvement in socially responsible and sustainable initiatives has a positive effect on firm performance. Furthermore, the sustainability research environment has shifted—moving from principles and policy towards practice and performance—over the last 20 years (Kordestani et al., 2015) (see Figure 4). Therefore, investigating the effects of sustainable initiatives on business performance is vital for increasing firm incentive to engage in sustainable business practice.

3.4.1 Sustainability in the Research Environment

Sustainability lies at the intersection between environmental, economic, and social issues (Elkington, 1998). Although the practice of sustainability can go back more than 200 years, the recent recognition of sustainability in the business environment only started in the early 1990s (Wiersum, 1995). This came as a result of increasing demand from a variety of stakeholders for sustainable development across the broader business environments (Golicic & Smith, 2013). Thus, the research environment has not had time to unify. Moreover, there is limited consensus among the research environment for theories explaining and defining sustainability issues, with many theories being used to explain different issues concerning sustainability (Mitchell et al., 1997; Starik & Kanashiro, 2013) Nonetheless, research on sustainability has tended to focus on the three themes of economic prosperity, environmental integrity, and social equity from firms, supply chains, and consumers (Kordestani et al., 2015).

Trends, themes, and concepts in sustainable research have shifted over the years to be focused more on specific firm implementations, instead of greater governmental action. In the 1990s, the research environment focused on government policies, waste management, preserving ecological resources, and environmental awareness. Since the 2000s, firms have shown more motivation to accept sustainable initiatives as a part of core business processes and a tool for competitive advantage (Kordestani et al., 2015). Thus, businesses have been finding value in addressing sustainability concerns outside of governmental pressures and policies. This follows new-age concepts such as ‘creating shared-value’ between the firm and society, where companies can move beyond the minimum requirements of sustainability and CSR while gaining competitive advantages in their respective strategies (Porter & Kramer, 2011).

Figure 4 The progression of focus in sustainability research (Based on Kordestani et al., 2015)

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3.4.2 Effects of Sustainability on Firm Performance

This section covers the effect of sustainable initiatives on firm performance, gathered from studies using a variety of circumstances, markets, and indicators. Much of the research environment has shown a positive correlation between sustainability and firm performance; however, contradictions have also been found. Likewise, the magnitude of effect has been disputed by researchers arguing the relationship is too complex to determine. Furthermore, the relationship between sustainable initiatives and economic performance has not been observed in a vacuum, but rather has shown significance over time (Giannarkis et al., 2016; Kempf & Osthoff, 2007).

Positive Effect

Corporate sustainable performance has been shown to repeatedly correlate to heightened firm performance in developed markets, such as the US (Wagner, 2010; Maletic et al., 2016; Giannarakis et al., 2016; Lopez et al., 2007; Eccles et al., 2014; Montabon et al., 2007). Research on the linkage between corporate sustainability, innovation and economic performance finds a positive association between corporate sustainability performance and economic performance (Wagner, 2010; Maletic et al., 2016). Wagner (2010) found that firms with high levels of sustainable differentiation—which may be subject to so-called greenwashing—display higher levels of economic performance. Maletic and co-authors (2016) show that when innovation is tied to a firm’s sustainability strategy, there is a positive correlation to organizational performance for companies in the EU. Also stated, a greater focus on sustainability initiatives leads to increased innovation performance, which then improves firm financial performance (Maletic, et al., 2016). A study performed by Giannarkis and co­authors (2016) found statistical significance between firm performance and sustainable performance while using companies listed on the S&P 500 index as a sample. Moreover, Lopez and co-authors (2007) found a similar correlation using the Dow Jones Sustainability Index (DJSI). In a joint study between Harvard Business School and London Business School, Eccles et al., (2014) found that companies who implement sustainable practices outperform competitors in the long term. Notably, the study found that voluntarily implemented sustainable practices had significantly outperformed mandated companies (Eccles et al., 2014). Montabon et al., (2007) found a correlation between wide-ranging environmental management practices (EMPs) and firm performance, as measure by ROI and sales. Therefore, a variety of managerial practices may lead to sustainable business practices and subsequent higher firm performance.

In developing markets, the correlation between sustainable performance and firm performance shows mixed results depending on the market (Kapoor & Sandhu, 2010; Amouzesh et al., 2011; Pan et al., 2014; Rahim, 2017). Authors Kapoor and Sandhu (2010) confirmed a positive correlation between sustainable performance and a variety of indicators—ROA, ROS, ROE— but saw insignificant impact on growth for firms located in the Indian market. Moreover, Amouzesh and co-authors (2011) found that firms listed in the Iran market showed a deviation between sustainable growth and firm performance, as measured with ROA and P/B ratios. On the contrary, Pan and co-authors (2014) found that Chinese firms showed a positive correlation between sustainability and firm performance, as measured by ROA, ROE, and EPS. Additionally, Rahim (2017) found similar results while measuring sustainable impact on Malaysian firm performance, as measured by debt ratio, equity ratio, and asset turnover (Pham et al., 2021). In sum, much research has shown a positive relationship between sustainable performance and firm performance in both developed and developing markets.

Negative Effect

Most research has agreed on the positive correlation between firm performance and sustainable initiatives, but negative correlations have been found (Friedman, 1970; Jensen, 2002; Walley & Whitehead, 1994; Ho & Taylor 2007; Lopez et al., 2007). On the theoretical side, Friedman (1970) first argued that the only social responsibility of a business is to itself and by maximizing profits. Further, Jensen (2002) claimed that business managers who focus on sustainability interfere with firm value maximization. In a Harvard Business Review article by Walley and Whitehead (1994), the authors argue that easy short-term resource issues have already been solved, and that sustainable initiatives are acts of greenwashing. The pair claim that long-term issues are unable to be solved by the corporate environment, leading to wasted resources and a negative association between corporate CSR and firm performance (Walley & Whitehead, 1994). Empirically, Ho and Taylor (2007) found that triple bottom line (TBL) reporting decreased firm profitability as measured by ROA. Moreover, research conducted by Lopez and co-authors (2007) observed a negative short-term correlation between corporate social responsibility (CSR) and firm performance, as measured by profit before tax (PBT) (Pham et al., 2021). In sum, contradictory negative externalities exist between sustainability and firm performance—albeit the most prominent negative research is older.

Magnitude of Effect

The research environment is mixed regarding the magnitude of effect from sustainable initiatives on firm performance (Aupperle et al., 1985; Berman et al., 1999; Hussain et al., 2018; Nunes et al., 2012; Singh et al., 2017; Teoh et al., 1999). In developed markets, research performed by Berman and co-authors (1999) found that a limited amount of stakeholder variables effected firm performance and that the relationship is complex—with researchers questioning the causality of the relationship. Aupperle and co-authors (1985) showed no significance between sustainable development and financial performance. More specifically, the authors did not find significance for any level of social orientation and long-term firm performance. Nunes and co-authors (2012) found no significance between sustainable companies and competitors when analyzing the environmentally challenged energy sector, as measured by ROA, ROE, and asset turnover. Hussain and co-authors (2018) found no correlation between ESG parameters—a popular reporting tool—and financial performance for US-firms. In the developing markets, Singh and co-authors (2017) found limited significance between sustainable performance and firm performance regarding firm from Hong Kong and mainland China. They found that only two of six researched CSR dimensions were significant predictors of firm performance (Singh et al., 2017). In a study performed by Teoh and co­authors (1999), the relationship between corporate CSR and firm performance was deemed insignificant for South African firms. In sum, the relationship between sustainability and firm performance may be deemed to be complex.

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• Universidad: Copenhagen Business School
• Calificación: A
• Autores: Kristian Prior (Autor), Hans Brunk (Autor)
• Año de publicación: 2022
• Páginas: 139
• No. de catálogo: V1256114
• ISBN (PDF): 9783346700827
• ISBN (Libro): 9783346700834
• Idioma: Inglés
• Etiqueta: sustainable, initiatives, diligence, supply, chain