The EU Green Deal, published by the European Commission in 2019, was a political breakthrough regarding sustainability. It lays the foundation for a transformation of the economy towards sustainability. Indeed, the number of EU legal acts to protect human rights and environmental standards is increasing significantly. Compliance with these rules not only informs ethical responsibility but also offers businesses a strategic advantage in today’s competitive markets.
Unprecedented legislative efforts to regulate supply chains
At European level, the topic of sustainable supply chains is gaining regulatory momentum: The EU Timber Regulation, the EU Rough Diamonds Regulation and the EU Conflict Minerals Regulation have already entered into force. Proposals have been put forward for a EU Directive on Corporate Sustainability Due Diligence, a regulation banning products produced by forced labour on the EU market (EU Forced Labour Regulation) as well as for a EU Regulation on Deforestation-Free Supply Chains.
All these legislative initiatives generally refer fully or partially to the observance of human rights or environmental standards. Some take a clear product-related approach, while others focus on the supply chain and protected legal positions, e. g. the prohibition of child labour and slavery.
What is required from companies operating within the EU or doing business with the EU?
These legislative initiatives can be divided into three broad categories: First, they establish due diligence obligations, second, they include documentation and reporting obligations and third, they contain import and export prohibitions that must be observed.
A major difference between the mentioned initiatives is the scope of the obligations. This concerns in particular the question of whether obligations are only limited to the supply chain from the source to production to the company (upstream supply chain) or whether obligations must be observed all the way to the end consumer (downstream supply chain).
The draft of the EU Directive on Corporate Sustainability Due Diligence limits the obligations to the upstream supply chain, although EU Parliament has proposed an extension to the downstream supply chain. The proposal for an EU regulation on deforestation-free supply chains follows other product-related EU legal acts but will go beyond this and also focus on the downstream supply chain. In this regard, both the EU Timber Regulation and the proposal for an EU Forced Labour Regulation aim at a comprehensive ban on the placing on the market of affected products for the entire supply chain – regardless of any trade level.
Many of the outlined adopted and proposed regulations and directives have in common that they demand detailed due diligence obligations from the companies. All of them require the establishment of a risk management system consisting of risk analysis, and preventive and remedial measures. Differences exist, for example, in the required complaints procedure and the form of the reporting obligations. The central instrument is documentation and the obligation to report to the competent authorities.
What steps can companies take to ensure compliance?
For businesses seeking to navigate these new rules successfully, there are several key steps to take:
Comprehensive Due Diligence: It is important to start by identifying the various stages of their supply chain and the countries or regions where e. g. deforestation is a known issue. This includes engaging with suppliers to gather information about the origin of the products they source.
Mitigation Measures: If high-risk areas are identified within their supply chain, businesses should work with suppliers to develop and implement measures to mitigate risks. This involves changing suppliers, adopting sustainable sourcing practices, or supporting sustainable projects such as reforestation efforts.
Stakeholders: Businesses should actively engage with stakeholders, including non-governmental organizations (NGOs), industry associations, and government bodies, to stay informed about emerging sustainability trends and best practices.
Communication and Transparency: Preparation for transparent communication of sustainability efforts to consumers and investors is key, while a commitment to responsible sourcing and ethical practices should be seen as competitive advantage.
Monitoring and Continuous Improvement: Businesses should regularly monitor their supply chain for compliance with sustainability standards and rules to continuously seek opportunities for improvement and innovation.
Reality check of the current practical challenges regarding sustainability
The implementation of sustainability in supply chains comes with a variety of challenges, each contributing to the complexity of achieving environmental, social, and governance (ESG) goals. Many companies struggle with a lack of internal knowledge regarding sustainable practices, hindering them in making well-informed decisions. Additionally, sustainability processes are often initiated too late and take too much time to be effectively implemented, leading to rushed work and insufficient solutions. Moreover, the absence of comprehensive documentation and data makes it challenging to track and report progress accurately. The lack of control measures further compounds these problems.
Tackling these hurdles is imperative for organizations aiming to contribute to a sustainable development and build resilient and responsible supply chains. The EU’s initiatives on supply chains and due diligence do not resolve all these issues, but they can be seen as the first steps towards providing legal certainty and a level playing field for companies that wish to contribute to sustainability.
Seizing the Competitive Edge: Embracing EU legislation for a better future
The legislative initiatives aim to increase the transparency of the supply chain. In particular, the new EU legislative initiatives on deforestation and supply chains signal a significant shift towards greater accountability and sustainability in business practices. While these initiatives present challenges for companies, they also offer opportunities for those willing to embrace sustainable supply chain management. By conducting due diligence, implementing mitigation measures, and engaging with stakeholders, businesses can not only ensure compliance but also contribute to a more environmentally and socially responsible future.
In the end, it's not just about following the law; in my opinion, it's about being part of a broader movement towards greener and more ethical global supply chains. Companies that take proactive steps to address deforestation and promote sustainability are not only meeting legal requirements but also aligning themselves with the values of an increasingly conscientious consumer base. In doing so, they position themselves for success in a world that demands responsible and sustainable business practices.