Business in wartime. Companies decide how to better manage risks

After the start of the Russian invasion of Ukraine, many companies struggled with the questions of whether, when, and how to exit the Russian market. As of early June 2022, about 1,000 companies announced their withdrawal from Russia. Companies withdrawing from the Russian market was an important step, but a costly one. And, especially in the oil and gas industry, it came too late. Cases have also surfaced of some companies circumventing sanctions and allowing the Russian military to be armed with Western technology. There appeared to be a lack of clear guidance for companies on how to assess when their activities may be contributing to human rights violations and how to act in such situations. The EU is currently discussing the adoption of such guidance and rules under the Corporate Sustainability Due Diligence Directive (CSDDD).

‍Sustainability due diligence is a tool that gives companies guidance on how to do business responsibly - it is the process of identifying and assessing the serious potential and real impacts of business decisions on human rights and the environment. It also helps companies choose the appropriate approach to address any issues, taking into account their situation and level of involvement. In February 2022, the European Commission proposed the CSDDD, based on UN and OECD standards, to make due diligence mandatory for Europe's largest companies and companies in high-risk sectors, such as the extractive industry.

‍If the due diligence system proposed by the Commission had been in place before the Russian war in Ukraine began, European firms would have been able to respond more flexibly and at a lower cost to the Russian aggression. European firms would also avoid the risk of directly supporting the Russian regime, as due diligence requires firms to screen risks and avoid engaging in particularly risky business relationships.

Continuous evaluation, not hasty reactions

The relations with Russian state-owned companies have proven to be particularly risky, not only because of their links to the government, but also because of the environmental damage they cause.

Companies that do not want to find themselves indirectly financing a war or armed conflict need to map their suppliers and business partners and make sure that they are not linked, for example, to the maintenance of military and security apparatus, the production of weapons, or military material, etc.

In extreme cases, companies may be at risk of complicity in serious human rights violations such as war crimes. This risk is particularly relevant for companies involved in joint ventures with Russia or companies subject to sanctions. In the context of the war in Syria, the French company Lafarge has been accused of complicity in serious human rights violations, because of arrangements with the Islamic State and several other armed groups to keep its cement factory plant open and running.

During the Russian war in Ukraine, the case of the French company Thales came to light. According to the findings of the investigative group Disclose, the company supplied Russia with components for the production of military equipment despite sanctions after 2014. Due diligence facilitates responsible business conduct, which implies that companies should not be involved in arming a regime under sanctions. At the same time, they would be held accountable for such behaviour under the due diligence system.

Due diligence also guides companies to build their business relations in risky areas and situations in a way that allows them to maximize their influence. This enables them to respond more effectively when they are indirectly involved in supporting war through their business partnerships. Companies can extricate themselves from problematic relationships at a lower cost or can discontinue their operations in Russia while minimising negative impacts. In this regard, due diligence provides companies with clear principles against which they can evaluate:

Under what circumstances they should take such steps;

What they should take into account in doing so;
And how to proceed to minimise negative impacts on their stakeholders - communities, employees, and consumers.

Russia's war in Ukraine has shown that companies need to learn how to use due diligence so that they can assess the risks of their activities and know how to act in situations of conflict. Therefore, it has highlighted the need to introduce due diligence obligations into European legislation.

Good practice examples

The due diligence process is not only relevant to Russia. It is particularly crucial for companies relying on manufacturing outside of the European Union, especially in high-risk geographies and industries such as textile manufacturing in Southeast Asia.

China, for example, is a typically risky region associated with several human rights violations, particularly in Xinjiang, where the Chinese Government is carrying out mass persecution of the Uighurs, considered by many to be an act of genocide. Companies doing business in China need to use a due diligence process to effectively prevent and address the negative human rights impacts of their business. An example of such a company is the Swedish telecommunications provider Ericsson. The process through which the company deals with the risks of doing business in China was described in a Frank Bold webinar by corporate responsibility expert Théo Jaekel.

For Ericsson, a thorough mapping of the supply chain proved crucial. It enabled the company to quickly refute claims that it was working with a supplier from the Xinjiang province accused of using forced labour. Because of the due diligence process in place, the company was soon able to establish that it had never done business with the supplier in question.

Due diligence also helped Ericsson to respond more quickly and effectively to the military coup in Myanmar. Before entering the Myanmar market, Ericsson conducted a human rights risk assessment, which subsequently helped Ericsson build relationships with local stakeholders. After the coup in 2021, the company was thus able to quickly engage stakeholders to better understand the new situation, its impacts on Ericsson, the possible human rights implications of Ericsson's withdrawal from the country, and so on.

‍"Without due diligence, we would have been forced to start from scratch, which would have been very time-consuming and probably still left us with a lot of work to do," Jaekel said.