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IntegrityNext discusses how to navigate complex regulatory landscapes when it comes to supply chain due diligence, with advice on how businesses can attain guidance on the subject
Key take-aways
- Continuous monitoring of legislative trends helps to identify and forestall risks before they materialise;
- Regulatory developments in the EU offer a glimpse into what may come in other markets and can help multinational companies prepare accordingly;
- There is a wide spectrum of due diligence initiatives across jurisdictions with varying obligations for companies;
- Several measures are available to companies to cascade sustainability throughout their supply chains;
- Effective supply chain due diligence can be a key differentiator, enhance efficiency and boost innovation
Supply chain due diligence – The basics
Companies are faced with an ever-growing patchwork of ESG regulations that put their compliance programmes and sustainability credentials to the test. Supply chain due diligence is a continuous process that is meant to manage third-party risks and meet a wide range of legal obligations.
It typically occurs at three stages:
- Initial due diligence prior to a contractual relationship
- Ongoing due diligence throughout a contractual relationship
- Event-driven due diligence
Policy-makers are now paying attention to a much greater array of issues than in the past. While there is still a preponderance of legislative regimes that focus on human and labour rights, environmental topics are gaining momentum quickly. Some policy interventions are rather broad in their application, i.e. sector- and activity-agnostic, whereas others address very specific topics, such as the procurement of conflict minerals. Some rules regulate supply chains based on where companies are registered, whereas others relate to goods moving across borders.
Many due diligence initiatives also draw on international standards or soft laws and therefore resemble one another across different jurisdictions. Some regulatory approaches pursue similar goals, for instance modern slavery legislation and forced labour import bans, but they can differ significantly in how they are implemented.
It can therefore be helpful to classify due diligence regimes along the following parameters to gauge the main impacts on a business.
Key legislative initiatives around the globe
It is imperative that companies keep up to speed with ongoing developments in the regulatory landscape. In doing so, they should aim to set up a framework to systematically track ESG drivers and legislative trends. They can do so in-house, provided the required expertise is available, or hire external ESG policy experts. Continuous monitoring helps to identify and forestall regulatory risks before they materialise, giving companies more time to deploy the necessary resources.
The European Union (EU) is at the forefront of regulatory ESG developments around the globe. Legislative decisions taken by the EU tend to have ripple effects far beyond its borders. They often spur similar policies in other jurisdictions and therefore serve as a harbinger of what is to come in other markets.
Table 2 below provides an overview of key due diligence regimes and other regulatory initiatives from the EU that impinge on supply chain sustainability and strive to stamp out controversial practices. Please note that sector-specific regulations are not addressed.
To view the full report, including an overview of supply chain-related due diligence initiatives in North America and Asia Pacific, download the full white paper for free here.
In Asia, countries such as India and China are taking initial steps towards relevant policy interventions, focusing primarily on ESG disclosure requirements for the time being. In China, industry associations such as the China Electronics Standardization Association (CESA), the China International Contractors Association (CHINCA) and the China National Textile and Apparel Council (CNTAC) are also increasingly developing their own sustainability guidelines. China has published Due Diligence Guidelines for Responsible Mineral Supply Chains in 2015, but compliance is not yet mandatory.
Best practices in supply chain due diligence
Adherence to soft laws, as already outlined in Part I of this white paper, can provide a solid foundation for compliance with certain due diligence regimes. But, as shown above, many legislative initiatives go much further and call for comprehensive and systematic approaches to risk management.
It is generally advisable to consider adopting the most stringent due diligence standard a company is exposed to and maintain that level of ambition across all jurisdictions. The USMCA Free Trade Agreement and diverging forced labour provisions in the US, Mexico and Canada are a case in point. Some businesses operating in North America have thus decided to use existing US obligations as a reference framework and first step for compliance with the Canadian and Mexican requirements.
Governance also plays a pivotal role in effective due diligence. While it should essentially be led from the top, it is also a cross-functional effort and should involve all relevant departments, including sustainability, procurement, compliance, product, legal, sales and HR. They all need to pull in the same direction, pursue aligned or converging goals when dealing with suppliers, and receive sufficient sustainability training. In this regard, it can be useful to convene and empower cross-departmental working groups that include representatives from all relevant departments.
Supply chains are only as robust as their weakest links
Many companies attempt to catalyse the adoption of sustainability standards further down the supply chain via the dissemination of supplier codes of conduct, audits and other top-down measures. However, a study by the Harvard Business Review has pointed to poor success rates of such approaches, even among companies with outstanding sustainability credentials. Especially lower tier suppliers are typically the riskiest links in companies’ supply networks.
These businesses often operate with very little oversight and tend to disclose no or only scant information on their sustainability practices. Frequently, they are also ill-equipped to meet demanding sustainability standards and generally have little incentive to do so. All this entails a host of risks. It is therefore imperative that companies include not only direct business partners but also lower tier suppliers in their efforts and amplify good sustainability practices across as many tiers as possible. Ambitious measures are required that go beyond the mere cascading of supplier codes of conduct.
Due diligence is an intricate task that requires a holistic view of supply chains and the ability to collect and analyse vast amounts of data. Companies should develop a systematic process (scope, information to be collected, analytical framework) and cadence for due diligence and strive for continuous improvement. Automated technical solutions that are easy to use for companies and suppliers alike can go a long way in driving progress and facilitating the management of huge data sets.
Enhanced visibility is a key prerequisite for supply chain sustainability. In the end, high levels of transparency and traceability generally result in better due diligence.
Ultimately, companies can and should view regulatory developments through the lens of opportunity. They allow them to differentiate themselves from competitors, tap into new markets or customer segments, optimise efficiency, achieve cost savings and boost innovation.
READ MORE:
Supply chain due diligence – Environmental, social and governance
Paint companies adapt to tightening environmental legislation
The state of play of the Corporate Sustainability Due Diligence Directive (CSDDD)
The CSDDD is likely to become the most extensive piece of due diligence legislation yet and may serve as a global reference point for initiatives elsewhere. It is closely intertwined with other EU policies, such as the Corporate Sustainability Reporting Directive (CSRD), the Regulation on Deforestation-Free Products or the Forced Labor Regulation.
However, as of end of July 2023, trilogue negotiations between the European Commission, the European Parliament and the Council of the EU are ongoing. The positions of the three institutions have exposed major fault lines. Some of the issues still to be resolved include:
- Inclusion of the finance industry;
- Minimum threshold of applicability: 250 versus 500 employees Oversight responsibilities of executive directors;
- Linkage of variable compensation to due diligence obligations;
- Focus on supply chains versus entire value chains;
- Role of civil liability and access to justice.
The EU intends to finalise the CSDDD ahead of the upcoming European Parliament elections in June 2024 and ideally already by the end of 2023. The member states then have two years to transpose the directive into national law.
How IntegrityNext can help
Regulators around the world continue to raise the bar on ESG compliance and hold companies accountable for misconduct in their operations and supply chains. Comprehensive risk management has therefore become a strategic necessity for most businesses.
At IntegrityNext we keep a close eye on the key regulatory developments around the globe. Our platform helps to enhance visibility into your supply chain and provides the insights needed to meet increasingly demanding supply chain due diligence obligations across different jurisdictions. We provide targeted solutions for policy frameworks such as the: German Supply Chain Act; Swiss Supply Chain Act; Norwegian Transparency Act, and lend critical support for countless others.
Our processes are highly automated and allow you to significantly scale your procurement initiatives and impacts with minimal effort.
Integrity Next GmbH Schillerstraße 23A 80336 Munich Germany
Email: contact@integritynext.com
Tel: +49 89 21540-5250
Copyright © 2023 Integrity Next GmbH. All rights reserved. Integrity Next GmbH Confidential Information
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