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A company’s risks in a global supply chain: A preventive approach

In an export-oriented industry model, it is key to remain attentive to the regulatory changes experienced by the main trading partners. In this sense, the new regulatory challenge promoted by the European Union (hereinafter, ‘EU’) comes from Corporate Sustainability Due Diligence (hereinafter, ‘CSDD’). The EU requires its companies, and their supply chains, to implement due diligence processes with a focus on human rights and the environment. The risk is clear: Foreign companies that do not adapt to these requirements will be marginalized from European markets, which are becoming increasingly aware and demanding in terms of corporate responsibility and human rights. Whether the risk is clear, the solution is even clearer: The preventive approach to corporate risk management, through the identification, prevention and mitigation of negative human rights impacts in its operations.   Human Rights, the new regulatory challenge for companies Existing international standards on responsible business conduct state that companies must protect human rights and address environmental protection throughout their operations and value and supply chains. The concept of Human Rights Due Diligence (hereinafter, ‘HRDD’) was embraced by the United Nations Guiding Principles on Business and Human Rights (hereinafter, ‘UNGPs’) in 2011. In turn, these principles were subsequently complemented and integrated by the Organisation for Economic Co-operation and Development (hereinafter, ‘OECD’) Guidelines for Multinational Enterprises on Responsible Business Conduct, last updated in 2024, and the International Labour Organization (hereinafter, ‘ILO’) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, last updated in 2017. In Latin America, the issue of business and human rights has been echoed in the Inter-American System for the Promotion and Protection of Human Rights. In 2021, in the leading case Miskito Divers (Lemoth Morris et al.) v. Honduras, the Inter-American Court of Human Rights (hereinafter, ‘IACtHR’) explicitly recognized the importance of the UNGPs and declared that from the obligations established in the American Convention on Human Rights, states have a duty to prevent human rights violations by companies. Subsequently, in 2023, in Inhabitants of La Oroya v. Perú case, the Court went further: The IACtHR ordered the condemned state to ensure that the mining company responsible for the abuses shall comply with the UNGPs throughout its operations. Moreover, some countries have sought to take the bull by the horns and have enacted in their legal systems different laws that seek to demand corporate social responsibility from companies. In this regard, some European countries, e.g. France (Loi de Vigilance, 2017), Germany (Lieferkettengesetz, 2021) and Norway (Åpenhetsloven, 2021), have enacted laws with the aim of requiring their companies and their subsidiaries to implement due diligence processes with a focus on human rights and the environment in their operations. Sanctions for offending companies vary depending on the type of law that the state has enacted. In any case, in general terms, sanctions include the imposition of heavy fines, the possibility of suing the parent company for damages, as well as the prohibition of the offending company from public procurement. In summary, the regulatory challenge is embodied in Principle 15 of the UNGPs, which establishes a threefold obligation on companies: Issue a policy commitment to meet their responsibility to respect human rights Implement a human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights. Create processes to enable the remediation of any adverse human rights impacts they cause or to which they contribute   The big leap: The Directive (EU) 2024/1760 The European Union took the big step in June 2024, when it enacted the new Directive (EU) 2024/1760 on Corporate Sustainability Due Diligence. This requires companies and their partners throughout the supply chain to prevent, end or reduce their negative impact on human rights and the environment. In this regard, within two years of its enactment, the member states of the EU must transpose this Directive into their national legislation. This Directive will be applied gradually to European companies according to their size and turnover. Consequently, via contracts, it is expected that these obligations will also be enforceable on partners and the supply chain outside the EU. These reforms are ambitious, as they aim to have the requirements apply indirectly to its trading partners and the entire supply chain associated with the production of a good or service. The due diligence process set out in Directive 2024/1760 considers the six steps established in the OECD Guidance for Responsible Business Conduct. These steps include due diligence measures for companies to identify and address adverse human rights and environmental impacts. In particular, the process includes the following steps: Integrating due diligence into policies and management systems. Identifying and assessing adverse human rights and environmental impacts. Preventing, ceasing or minimizing actual and potential adverse human rights and environmental impacts. Monitoring and assessing the effectiveness of measures Communicating Providing remediation. Finally, is important to highlight that the enactment of this Directive is permeated by the sustainable development as the economic model promoted by the EU and the objectives of decarbonization through energy transition established in the Paris Agreement. In general terms, energy transition means a structural transformation on the energy matrix, which implies supply and use. This structural transformation requires investments and commodities to be successful. In this sense, a low-carbon economy will be highly dependent on mineral supply, since the so-called ‘clean energy technologies’ require more of these commodities than fossil fuels energy sources. In this scenario, Chilean industry plays an essential role as a supplier of some of the main raw materials to achieve the energy transition. The risks faced by the company in a global supply chain: The Chilean case Like many countries in the region, Chile has an export-focused economy and industry. According to figures provided by the Under-Secretary for International Economic Relations, the European Union is one of Chile’s main trading partners. In this sense, the main exports include minerals, seafood, and fruits.[1] Mining exports play a fundamental role in this sense, both in terms of the volume exported and their use for new technologies for the energy transition. The challenge that these regulatory changes create for the industry should not be underestimated. European companies subject to these due diligence and reporting duties will extend these obligations to their partners and suppliers throughout their supply chain. In an export-oriented industry model, as is the case of Chile, regulatory changes in destination countries have a significant impact on economic growth. In this sense, if Chilean companies do not comply with the regulatory requirements of the country of destination of their goods, they face a double risk. On a first note, they become an unattractive trading partner for European companies. Whether they do not comply with the requirements, they may expose their trading partners to heavy fines or possible tort claims. On a second note, and as a consequence of the first risk, these companies may be displaced in the market by the competitors that meet the demanding requirements. It is important to consider that there are other economies producing the main Chilean exports whose countries already have laws in this regard. An interesting example is Australia, which enacted its Modern Slavery Act in 2018, and it’s the world’s leading producer of lithium, among other commodities. For the same reason, these competitors already have experience in complying with such requirements, similar to the European ones. The solution: A preventive approach The scenario faced by the Chilean industry that participates in European markets invites to adopt a preventive approach in risk management and the identification of adverse impacts on human rights and the environment in their operations. In this sense, the solution is to voluntarily incorporate the requirements in Chilean companies and implement corporate sustainability due diligence. This is the strategy if they seek to remain competitive in the global market and, thus, continue and deepen their commercial ties with the European Union. Furthermore, the proposed preventive strategy can be useful for companies for at least three reasons. The first reason is obvious and is evidenced by the new European regulatory requirements: CSDD implementation is a condition for entry into European markets. Companies that are reluctant to implement such measures will see their commercial ties with their European partners eroded. A second reason is the reputational improvement associated with the embracement of CSDD. Some industries face complex situations with the surrounding community, in this sense, the CSDD and HRDD can serve as a strategic tool for the community relations of certain companies. The third and final reason is that CSDD and HRDD serves as an instrument for risk management in industry decision-making. Implementing this due diligence process does not imply that the company needs to change its risk management model, but rather it is an invitation to adjust the system according to the protection and promotion of human rights. Finally, the adaptation of the industry to these requirements represents an opportunity for Chilean companies to strengthen their commitment to human rights and deepen their competitiveness. It is an invitation to be part of a global change, where corporate social responsibility is seen not only as a market requirement, but also as an added value in a world that is increasingly interconnected and aware of its impact on society and the environment.   Footnote: [1] Chile’s main exports to the European Union include: Copper, iodine, molybdenum, hazelnuts, mussels, fish oil, and avocados [Available in: https://www.subrei.gob.cl/docs/default-source/estudios-y-documentos/fichas/union-europea-anual.pdf?sfvrsn=ee329fbc_0].

VGC Abogados Vergara Galindo Correa Abogados

VGC Abogados Vergara Galindo Correa Abogados (VGC Abogados) www.vgcabogados.cl has established itself as a leading firm in environmental and regulatory matters and is recognized among the most distinguished in Chile. It is a law firm with expertise advising both domestic and foreign companies and provides its services in the environmental assessment of large- and medium-scale projects and in obtaining the authorizations and permits required for the development, construction, and operation of these projects, in addition to providing advice in the oversight processes carried out by the authorities and in compliance with the established legal requirements. It also conducts litigation in cases of constitutional, administrative, civil, and criminal law, in addition to working in areas related to natural resources, mainly mining and water. VGC Abogados has more than 60 lawyers specialized in matters related to the energy & natural resources,  environment, and the regulation of economic activities. Likewise, it is one of the largest legal firms in the country dedicated to mining operations and their issues associated with natural resources and energy. Its practice areas include legal advice in issues related to environment, energy, water, sanitary law, occupational health, and safety, among others. Regulatory compliance and defense in constitutional, administrative, civil, and criminal litigation are part of its permanent practice. It is widely known that environmental law has developed greatly in recent years. VGC Abogados, was the first boutique firm  specialized in this area of practice, providing  support to important and stable clients in the Chilean market over the complete cycle of each project so that they can carry out their projects successfully. The firm provides its services to a diverse array of industries, such as mining, agribusiness, forestry, cement, energy, infrastructure and sanitary, among others. In this context, the firm has positioned itself as an undisputed leader in the adoption of emerging technologies and innovative digital practices in its various processes and legal services in the environmental sector, allowing the integration of technology into its legal work. Some of the advising and legal support provided by VGC Abogados include the following: Review and strategic support in the environmental assessment of projects, environmental management instruments, territorial planning instruments and general instructions of the Superintendency of the Environment. Contact: Javier Vergara ([email protected]), Francisca Olivares ([email protected]) Advice on preventive environmental compliance, both in the framework of internal evaluations of deviations from environmental or regulatory requirements, as well as in the framework of environmental inspection processes by the Environmental Superintendency. Contact: Cecilia Urbina ([email protected]),  Florencia Evans ([email protected]) Strategic accompaniment, legal advice and defense in sanction proceedings initiated by the Environmental Superintendency. Contact: Cecilia Urbina ([email protected]), Artemio Aguilar ([email protected]) Review of the applicability of environmental and sectoral permits for projects, constructions and infrastructure and/or existing activities, as well as support in the periodic updating of permit matrices and in strategic definitions for the processing of these permits. Contact: Javier Vergara ([email protected]), José Luis Fuenzalida ([email protected]). Processing and obtaining environmental and sectorial permits. Contact: Francisca Olivares ([email protected]), Lorna Püschel ([email protected]) Elaboration of environmental due diligence and permits. Contact: Cecilia Urbina ([email protected]), Florencia Evans ([email protected]) Advice on negotiation and conflict management processes with stakeholders, communities and community organizations. Contact: Patricio Walker ([email protected]), Mario Galindo ([email protected]) Advice and assistance in administrative and judicial litigation and Litigation at the Constitutional Court. Contact: Ignacio Mujca ([email protected]), Josefa Conget ([email protected]) Preliminary analysis of possible risks that could lead to legal and administrative proceedings. Contact: Pablo Ortiz ([email protected]), Melany Parini ([email protected]) Integral Advising on the relations generated with the organs of the State administration. Contact: Patricio Walker ([email protected]), , Mario Galindo ([email protected]). Analysis and strategic planning of water use rights in all types of projects. Contact: Winston Alburquenque ([email protected]), Solange Villarroel ([email protected]) Obtaining and perfecting water use rights before administrative and judicial agencies. Contact: Winston Alburquenque ([email protected]) , Solange Villarroel ([email protected]). Comprehensive advice on all matters related to mining, from the initial exploration phase, development, project operation, mine closures and related aspects. Contact: Winston Alburquenque ([email protected]), Mariela Garrido ([email protected]) Processing of mining property and mining lawsuits, obtaining and processing of permits and authorizations from regulatory agencies. Contact: Winston Alburquenque ([email protected]), Ignacio Maureira ([email protected]) Is important to note that VGC Abogados partners, consultants and associates regularly participate permanently  in the media through reports, columns and opinion pieces on technical issues related to their specialties, which can be referred to doctrine and jurisprudence, legislative initiatives, environmental regulation, and political, economic, environmental, and social trends that the industry must keep in mind when planning projects. In this context, Vergara Galindo Correa Abogados actively participates in the last years in discussions and dialogues regarding new regulations and their impact on their areas of expertise, as well as on current topics related to energy, natural resources, the environment, water, lithium, and others, considering their effects or implications in various industries. The aim is to provide information that supports informed decision-making by stakeholders in the environment. The excellence of VGC Abogados has been recognized in the main international directories of the legal sector such as The Legal 500, Chambers and Partners, Leaders League, Latin Lawyers among others. On the other hand, VGC Abogados is part of the Gender Alliance of the ProHUmana Foundation, which seeks to promote actions focused on gender equality, as well as to put an end to the salary gap between men and women. In this context, the legal firm has sponsored and participated in several meetings over the years.  Also, joined the Pro Bono Foundation in 2019, with the purpose of working to facilitate access to justice for people and communities in situations of social vulnerability.