“Stand strong together for human rights”
In June 2021, the German Bundestag passed the Act on Corporate Due Diligence in Supply Chains, which will apply from January 1, 2023, to companies with at least 3,000 employees. What does this act change?
Dorothée Baumann-Pauly: First of all, this German legislation is very welcome because it increases companies’ awareness of the issue – human rights in the supply chain have probably never been so high on the agenda. On the other hand, many questions about implementation remain unanswered. For instance, the act only affects a company’s direct suppliers, but often the biggest risks lie much further down the supply chain. I also worry that the due diligence obligations arising from this legislation will be shunted completely to companies’ legal departments when they should actually be rooted in their core business, in the directly affected divisions and departments, and should be seen by companies as an opportunity to take on more responsibility for the entire supply chain.
A brief introduction to the interviewees
What is the Audi position on this act?
Marco Philippi: We expressly welcome the fact that a binding legal framework has now been established. The act is derived from the United Nations Guiding Principles on Business and Human Rights, with which we have already increasingly aligned our business practices – so the content comes as no surprise to us. We’re currently reviewing which due diligence obligations we already fulfill and where we still need to make adjustments. We’ve also already engaged in constructive, multi-stakeholder discussions on aspects of practical implementation as part of the German government’s Industry Dialogue, which grew out of the National Action Plan for Business and Human Rights. But yes, there are still questions to be answered.
Can you briefly explain which ones?
Philippi: It’s still unclear which criteria the responsible authority will use to check for compliance with individual legal requirements. To address Baumann-Pauly’s point: We will not be leaving the implementation of further requirements solely to Compliance and the legal department. At Audi, operational implementation is the responsibility of the specialist departments, for example here in Procurement. Our legal department serves as our sparring partner here.
As far as the act’s focus on direct suppliers is concerned, it’s true that the most serious risks arise primarily in lower levels of the supply chain. To stand strong together for human rights there as well, we’re already engaging with suppliers further down the chain, prioritized according to the level of risk – for example through transparency projects or targeted collaboration on initiatives with various stakeholders. However, there is still some risk with regard to our more than 14,000 direct suppliers, but here we can exert much greater influence on the basis of our contractual relationship. We do this in a variety of ways, such as by incorporating certain obligations – including those in relation to human rights – into our contracts in the form of the Code of Conduct for Business Partners of the Volkswagen Group or by using our Audi Sustainability Rating. A business relationship with Audi is only possible if the rating is positive.
The act in brief
Overview of the new Act on Corporate Due Diligence in Supply Chains
Applies from January 1, 2023, to companies based in Germany with 3,000 or more employees and from 2024 to companies with 1,000 or more employees.
Governs compliance with human rights and environmental obligations in the upstream and downstream value chains as well as in the company’s own business operations.
Punishes violations with fines and penalties (up to 2 percent of consolidated annual sales) and exclusion from public contract awards.
Baumann-Pauly, you have been doing research on human rights along the supply chain for a long time. Where do you see the most urgent challenges for companies like Audi?
Baumann-Pauly: One of the main problems is that globally operating companies sometimes have to deal with nation states where it is almost impossible to enforce the rule of law. This gap must be closed – especially when it comes to indirect suppliers who extract raw materials locally. In the automotive sector, that applies above all to the basic materials needed to produce batteries for electric cars, namely nickel, lithium, copper and cobalt. I have done extensive research on cobalt, more than two-thirds of which currently comes from the Democratic Republic of the Congo. The conditions there are very difficult: great poverty, widespread corruption, regional conflicts and many regulatory loopholes. In small-scale mining, which accounts for about 30 percent of production in the Congo, miners dig deep tunnels with their hands or very simple tools to get to the cobalt – and these tunnels often collapse. In some areas, children also help with the mining. Nobody can solve such serious problems alone. In other words, when companies source raw materials from these areas, they must act in concert and develop universal standards together with civil society representatives. We’re currently developing one such standard under the Cobalt Action Partnership, which is an initiative of the Global Battery Alliance (GBA) co-founded by Audi. The aim here is to establish clear, binding rules for small-scale cobalt mining in the Congo. These kinds of rules create greater security – for investors and customers, too.
Wouldn’t one solution be to simply replace problematic raw materials?
Baumann-Pauly: In the medium term, surely not all of the raw materials with a problematic mining background can be replaced; doing so would only shift the problems elsewhere. Lithium-ion batteries and their components will certainly be the key to electric mobility over the next 10 years, I would say. We should accept that and also see the opportunity it presents, for example, for the socioeconomic development of countries like the Congo. Above all, we need to create more transparent indicators for investors – for instance, the issue of trust should play a more important role in partnerships between companies and suppliers. The scientific community can make an important contribution to the development of appropriate metrics.
What approach would you suggest to achieve maximum human rights standards in the supply chain?
Baumann-Pauly: Engaging in dialogue with all stakeholders in a spirit of partnership. If the relationship between manufacturer and suppliers is close, there is much more leverage for mutually agreeable solutions. And yes: Trust plays a key role. In this respect, car companies have a major advantage because, unlike companies in other industries, they usually have long-standing relationships with their suppliers. By making targeted use of these relationships and all pulling together, they can achieve far more than through polarized debates with associations and NGOs.
Philippi: I think all the stakeholders are making good progress here. We have recognized the leverage we have as a company for integrating ESG criteria along the supply chain, and we will make greater use of this leverage in the future. ESG is embedded in our corporate strategy and is therefore an integral part of all our products and services. We already have a number of experts in the Group who focus exclusively on the issue of sustainability in the supply chain, and we will build on this. The aim is to establish ESG as an integral decision-making criterion in all minds and processes.
Mr. Philippi, what specific steps is Audi taking to ensure that human rights are also respected in the raw materials supply chains?
Philippi: Raw materials are incredibly important for the automotive industry. To put it loosely, we install almost half the periodic table into our vehicles. That’s why the most efficient approach is to prioritize according to the level of risk. To this end, we have produced an objective analysis through the “Drive Sustainability” initiative showing which raw materials in which manufacturing areas pose the highest risks. The Volkswagen Group has used this as a basis for prioritizing 16 raw materials and developing a clear system for how we deal with them within the Group, with different measures depending on the raw material in question.
In the Volkswagen Group, Audi is responsible for due diligence with respect to aluminum. How do you go about this?
Philippi: Our responsibility for aluminum fits in well with our history: Ever since the Audi Space Frame at the latest, this light metal has played a major role in our car bodies. A good example of our approach is our involvement in the Aluminium Stewardship Initiative (ASI). Since the initiative was founded, we have helped develop a global standard for more sustainable aluminum and successfully implemented it at Audi. This standard requires, for example, that mining companies pay close attention to ecological, social and governance criteria when mining the aluminum ore bauxite – and thus also consider the concerns of local residents living near the mines. This is one of the reasons why representatives of indigenous peoples are an integral part of the organizational structure of the ASI. Our Audi production locations around the world are gradually being certified by external auditing companies in accordance with the ASI standard. This ensures that compliance with the standard is monitored effectively – one reason why we were the first car manufacturer to receive the “ASI Performance Standard” and “Chain of Custody” certificates from the initiative. We’ve also made good progress in the area of recycling: Our Ingolstadt, Neckarsulm and Győr sites and the multi-brand site in Bratislava have all established the Aluminium Closed Loop, with more sites to follow. By increasing the share of recycled aluminum, we avoid the energy-intensive production of new aluminum. This enabled us to reduce our net carbon1 emissions by more than 195,000 metric tons in 2021. Examples like these show that the responsible use of raw materials is a highly complex task. We need specific solutions for each raw material and each region.
Initiatives like the Aluminium Stewardship Initiative and the Global Battery Alliance are designed to help ensure more effective due diligence in raw materials sourcing. What can such platforms achieve?
Baumann-Pauly: I’m a big fan of these initiatives. They’re the ideal places to discuss questions like: What should apply specifically to our industrial sector? What can we all agree on? That’s why all stakeholders need to be heard there, including civil society groups, scientists and government representatives. If they all work together effectively, they will produce robust standards that can be put into practice.
Complaint mechanisms are considered an early warning system in supply chain management. What’s Audi’s approach here?
Philippi: Our complaint mechanism is a very important tool for us, taking transparency into consideration as well. Employees and third parties can use it at any time to actively draw attention to potential violations at partner companies. We have established various channels for this purpose. In addition to the Audi Whistleblower System, we also have the Speak-up email address that can be used to report potential violations by suppliers. We investigate all hints and work together with a multidisciplinary team of Audi experts and the affected partner companies to swiftly correct violations. If the violations are persistent and serious, we will ultimately stop working with the supplier companies concerned. However, our focus is clearly on preventing and improving: We regularly sensitize and train our employees and business partners, and we’re increasingly relying on technology-assisted risk monitoring.
Human rights & Audi – Commitment to sustainability is more important than ever for companies and capital market players – especially when it comes to compliance with social and human rights standards. This not only benefits people and the environment, but also increases economic resilience. Globalization and different legal requirements around the world increase the level of complexity. That is another reason why Audi gives such high priority to consistently and continuously integrating ESG standards. Given that Audi works with more than 14,000 direct supplier companies from over 60 countries, this is a complex and global task.
By this you probably also mean artificial intelligence (AI), which is expected to play a key role in the future – how exactly?
Philippi: For example, we have joined Porsche and Volkswagen in using technology from the Austrian start-up Prewave. The system collects publicly available news items in more than 50 languages from around 150 countries and evaluates them using AI. Here, too, we apply a risk-based approach. We’re notified of any potential sustainability risks so that we can check the facts and take action if necessary. My experience over the last few years shows that standards have little value without effective monitoring. And AI-assisted monitoring enhances their effectiveness enormously.
So AI is one focal point of your work. But in 2022, you’re also directing your attention to more diversity in business relationships. What strategy are you pursuing with this?
Philippi: With our “Supplier Diversity & Inclusion@Audi” initiative, we are promoting greater variety and openness and placing a stronger focus on diversity among our partners. For us, diverse means (small) companies whose purpose is to solve social and environmental problems, as well as companies that are owned or managed to at least 51 percent by members of underrepresented groups – for example, women, people with disabilities, BIPoC2 or members of the LGBT_IQ3 community. Recent studies show that a more diverse supplier structure not only makes for more creativity, but can also improve competitiveness and product quality, thus bringing clear business advantages for us. In other words, it is important to gain a better understanding of diversity and inclusion as performance drivers. We therefore hold workshops to familiarize our employees with processes, structures and possible levers for identifying the potential of diverse suppliers. Measures like these not only reflect our vision of a fairer, more sustainable and successful future; they also make us more attractive as an employer. And civil society as well increasingly wants companies to actively acknowledge and pursue their social responsibility.
Baumann-Pauly: I see this at the university every day. My classes are full. Students want to learn more about human rights as part of their management program; they have much broader interests today than cost optimization and technical accounting skills, for example. They want to be part of the solution.