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Due Diligence: Duty of Care Obligations and Compliance in Procurement
Procurement Glossary
By Tacto
Procurement glossary
Due Diligence: Duty of Care Obligations and Compliance in Procurement
Due diligence refers to the required level of care in the review and monitoring of business partners, suppliers, and investments. In procurement, due diligence includes the systematic assessment of supplier risks, compliance requirements, and sustainable business practices. Below, learn what due diligence means, which legal obligations apply, and how companies can successfully implement due diligence obligations.
Key Facts
- Due diligence is a legal and ethical duty of care for risk assessment
- Includes supplier evaluation, compliance review, and sustainability analysis
- Legal foundations through LkSG, CSRD, and EU Taxonomy
- Continuous process with documentation and reporting obligations
- Significantly reduces reputational, legal, and business risks
What is due diligence? Definition and legal classification
Due diligence describes the appropriate level of care that companies must exercise in business decisions.
Core elements of due diligence
The duty of care includes several essential components:
- Systematic risk identification and assessment
- Preventive measures to minimize risk
- Continuous monitoring and control
- Transparent documentation and reporting
Due diligence vs. compliance
While Procurement Compliance ensures adherence to existing regulations, due diligence goes beyond that. It requires proactive care and forward-looking risk analysis, even without explicit legal requirements.
Importance of due diligence in procurement
In procurement, due diligence extends across the entire supply chain. The Supply Chain Due Diligence Act obliges companies to systematically review human rights and environmental risks among business partners.
Implementation, obligations, and documentation
The practical implementation of due diligence requires structured processes and clear responsibilities.
Implementation of due diligence obligations
Successful due diligence processes are based on systematic approaches:
- Development of a Corporate Sustainability Due Diligence (CSDDD) strategy
- Establishment of risk management systems
- Integration into existing procurement processes
- Employee training and awareness-building
Supplier evaluation and monitoring
The evaluation of business partners takes place in multiple stages. EcoVadis Rating and Supplier Code of Conduct support systematic supplier assessment and continuous monitoring.
Documentation and recordkeeping
Legally compliant due diligence requires complete documentation. Companies must document review steps, assessment results, and corrective actions in a traceable manner and report regularly on their due diligence obligations.
Compliance metrics and ratios for due diligence
Measurable metrics enable the evaluation and management of due diligence activities.
Supplier compliance metrics
Key metrics for supplier evaluation include:
- Share of reviewed suppliers in total procurement volume
- Average ESG Risk Rating of the supplier base
- Number of identified and remedied compliance violations
- Time required to remediate critical risks
Sustainability and environmental metrics
Environmental due diligence is measured using specific indicators. Product Carbon Footprint (PCF) and Recycling Rate document the sustainability performance of the supply chain.
Process efficiency indicators
The effectiveness of due diligence processes is assessed based on cycle times, completeness of documentation, and cost per reviewed supplier. GRI Standards provide a structured framework for reporting.
Compliance risks and controls related to due diligence
Insufficient due diligence can lead to significant legal, financial, and reputational damage.
Legal and financial risks
Violations of due diligence obligations result in substantial sanctions:
- Fines of up to 2% of global annual revenue
- Exclusion from public tenders
- Civil liability claims
- Increased scrutiny by authorities
Reputational and business risks
Breaches of due diligence obligations can cause lasting damage to a company's image. Whistleblowing and media attention increase transparency and raise pressure on companies.
Operational control measures
Effective risk controls include regular Supplier Energy Audit, Child Labor Risk Assessment, and the implementation of Whistleblower Reporting System for early risk detection.
Current developments and impacts
Due diligence is continuously evolving and is shaped by new technologies and regulations.
Digitalization of due diligence obligations
Artificial intelligence is revolutionizing due diligence processes through automated risk analyses and real-time monitoring. AI-based systems can analyze large volumes of data and identify risk indicators at an early stage, significantly improving the efficiency and accuracy of due diligence reviews.
Expanded regulatory landscape
The Corporate Sustainability Reporting Directive (CSRD) and the planned Corporate Sustainability Due Diligence Directive (CSDDD) tighten the requirements. Companies must expand their due diligence obligations and report in greater detail.
Focus on climate risks
Environmental and climate aspects are becoming increasingly important. EU Taxonomy and Scope 3 Emissions are becoming central elements of due diligence reviews in the supply chain.
Practical example
An automotive manufacturer implements due diligence for its battery supply chain. The company carries out systematic reviews of cobalt suppliers to prevent child labor and environmental damage. On-site audits, certification reviews, and continuous monitoring are combined for this purpose.
- Risk analysis of raw material origin and identification of critical suppliers
- Implementation of monitoring systems and regular audits
- Development of corrective measures and alternative sourcing options
Conclusion
Due diligence is evolving from a voluntary duty of care into a legal necessity in modern procurement. Companies that implement systematic due diligence processes not only reduce compliance risks but also create sustainable competitive advantages. The integration of technology and the focus on sustainability will shape the future of due diligence obligations.
Contact
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Florian Findeis
