Introduction
Many large corporations and brands work with international suppliers, creating jobs and opportunities in developing countries. However, no mandatory rules and regulations exist that hold companies accountable for the negative impact they have on human rights, the environment, and good governance.
Even prior to the pandemic, there were no mandatory due diligence regulations in place. However, the COVID-19 pandemic in particular highlighted the issues that exist in supply chains when brands cancelled orders worth billions of dollars and left many factories in distress and employees without jobs. It showed the disconnect between best practises and reality. The crisis further stressed the need for a mandatory directive to ensure the necessary due diligence was occurring in supply chains and the integration of digital tools for increased transparency into processes.
The Challenges
Although there are guidelines and frameworks in place that businesses can follow, such as the Guiding Principles on Business and Human Rights established by the United Nations, many organisations neglect to follow them. The 2019 Corporate Human Rights Benchmark discovered that 200 of the largest corporations in apparel and agriculture scored poorly on these guiding principles. Additionally, the European Commission found that only 1 in 3 businesses were performing the due diligence needed in their supply chains.
Businesses that conduct the necessary due diligence on a voluntary basis may find themselves at a disadvantage compared to their peers who are not doing the same. Often, those negatively impacted by the unregulated business practices of large corporations fail to get justice for the harm caused.
The New EU Supply Chain Law
As supply-chain due diligence was not being done effectively on a voluntary basis, the EU is introducing a new supply-chain law that will come into effect by 2023. The mandate will ensure that businesses have a due diligence strategy in place across their entire value chain, even for suppliers based outside of the EU. A study by Navex Global discovered that 63% of respondents were planning to increase spending in social, environmental, and governance areas this year.
The directive will apply to large corporations operating in the EU with over 250 employees or revenues of at least 50 million euros. Additionally, it will also be applicable to high-risk small and medium-sized public corporations. Companies will need to take preemptive preventative measures and risk assessments to ensure they don’t negatively impact human rights, the environment, or good governance.
The mandatory legislative framework would bring various benefits to businesses and allow equal opportunity for all players operating in the EU, as all companies would be required to follow the same set of guidelines. Organizations would be more inclined to follow the directive as it is enforced by authorities, and disregarding it would lead to penalties such as hefty fines and import bans. Additionally, companies will be forced to address the adverse impact they have, and the mandate will ensure they get justice.
Future Outlook
As the EU moves forward to introduce mandatory requirements for supply-chain due diligence in the coming years, brands need to start reinventing their value chains and integrating digital solutions that can help increase visibility and help businesses do their due diligence across the value chain.
Triple Tree’s CSR solutions, VeRA and VMAN, enable businesses to get a seamless insight into a factory’s environmental, social, and economic position in real-time on one holistic and easy-to-use platform.