How to Use this Tool
Red Flags in Sustainability Initiatives is a guide for how companies and investors can spot potential risks in certification and other social auditing schemes they rely upon. It is intended to facilitate more informed investor engagement with portfolio companies around the role of social initiatives in their due diligence.
Together the 14 Red Flags serve as a guide for how companies and investors can spot potential risks in sustainability initiatives that they rely upon to conduct due diligence. Each Red Flag is significant in its own right; the order does not reflect priority. When assessing companies on HREDD, investors should keep in mind that participation in a sustainability initiative is only one piece of a holistic due diligence process. While participation in a strong initiative that meets the principles in this tool is one good indicator, that alone is not sufficient to meet the full scope of HREDD expectations. Nonetheless, investors and other stakeholders must understand these weaknesses so they can recognize and account for hidden risks of a due diligence process.
The 14 Red Flags are organized by topic and each answers three questions:
What this means
This section explains the significance of the Red Flag and how it relates to an initiative’s effectiveness in protecting rights holders.
Why investors should care
From a financial materiality perspective, this section shows how the Red Flag exposes companies to risk and provides examples of outcomes – such as lawsuits for unfair and deceptive trade practices – tied to initiatives with the Red Flag.
What to look for
This section outlines how investors can spot what good looks like in relation to a specific Red Flag and highlights examples of innovative features of initiatives that offer stronger assurance of good practice. Many are emergent and not yet widely implemented.
Investors can use this guide to assess the quality of an initiative or certification and its capacity to provide assurance of effective due diligence. Investors can use the tool:
01
to assess the maturity of certifications
02
as a starting point for engagement
03
as an educational resource
04
to guide conversations with certifiers
Informed by four beta tests conducted between October 2023 and January 2024, the tool reflects investor input on anticipated uses of Sustainability Initiatives.
MSIs are just one facet of human rights due diligence. Even as investors refine their evaluation of initiatives, they should press portfolio companies to establish effective, company-level due diligence systems that go beyond certifications.
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