14 indicators of a sustainability initiative’s strengths and weaknesses
Tailor-made for investors and developed with investor input, this tool is structured as a set of 14 Red Flags that provide warning signs that a sustainability initiative may not be a reliable indicator of corporate performance. It includes a checklist to help investors assess whether a sustainability initiative is effectively designed to reduce supply chain environmental and social risks, and to support investor engagement with portfolio companies.
What is a sustainability initiative?
Sustainability initiatives are voluntary certification schemes, multi-stakeholder standards, and industry-led frameworks that companies use to demonstrate responsible practices across their supply chains and operations. As sustainability initiatives are increasingly incorporated into binding legislation, the quality and rigor of these frameworks is becoming a matter of regulatory consequence. For example, the Corporate Sustainability Due Diligence Directive (CSDDD) explicitly recognizes them as a mechanism for demonstrating due diligence compliance; Article 20 “Accompanying measures” states that “companies may participate in industry and multi-stakeholder initiatives to support the implementation of the obligations referred to in Articles 7 to 16 to the extent that such initiatives are appropriate to support the fulfilment of those obligations.” The EU Battery Regulation, which applies a similar definition, will extend similar recognition by 2027.
While this tool can be applied to all such initiatives, the examples within the tool draw from multi-stakeholder initiatives (MSIs) — both those that offer certifications and those that do not.
The 14 Red Flags
Click any flag to explore what it means, why it matters to investors, and what to look for. Initiatives need to be screened for all Red Flags for effective HREDD.
Alignment with International Standards
Scope
Audits
Grievance Mechanisms
Governance & Accountability
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.
