The summer of 2022 will be remembered for many things, from soaring temperatures to an unforgettable Women’s Euro championship. However, for supply chain professionals, it will also be remembered as a summer of environmental, social and governance (ESG) legislation.
Legislation coming into play
Last year, Germany passed its Act on Corporate Due Diligence Obligations in Supply Chains. Coming into force in January 2023, this will compel organizations to take responsibility for the entire lifecycle of their products – from raw materials to the final product. Also slated for 2023, is the EU Supply Chain Law. Again, this will introduce a range of new requirements, including a directive on non-financial reporting, which will compel companies to disclose their ESG risks and impacts.
Meanwhile, in the US, New York State revealed plans for its Fashion Sustainability and Social Accountability Act (Fashion Act) earlier this year. If passed, New York will become the first state in the country to effectively hold the biggest brands in fashion to account for their role in climate change.
Our research suggests that supply chain professionals are struggling to keep abreast of these shifts. Earlier this year, we surveyed 210 professionals from across the UK and US and found that 43% find it extremely difficult to keep track of sustainability legislation. This was before the latest raft of changes.
Against this backdrop, it’s more important than ever that supply chain professionals receive the ongoing training and support they need to succeed through this legislative storm. Here is our guidance on just a few things that businesses can start doing now to ensure smooth passage through this period:
Understand what’s coming
Companies need to get used to thinking one step ahead of legislators. Germany is an early-mover, but even organizations without activities in Germany should prepare for something similar in the years ahead, as the trend is likely to spread globally.
Interrogate supplier data
Having up-to-date, accurate data on suppliers will become increasingly critical to companies’ ability to manage their own risk. Organizations need to ensure they have a centralized repository of ordered supplier data that they can quickly access to demonstrate compliance.
Weigh up risks
Many supply chain professionals will be accustomed to prioritizing cost in decision-making. However, it’s now more important than ever for them to consider the risks associated with sourcing from high-risk countries. These include human rights violations, child labor, and environmental damage. Companies should have a system to identify and address any issues that may arise to avoid embroiling themselves in a human rights scandal.
Look beyond tier-1 suppliers
One of the biggest challenges companies face is fully understanding what’s going on in their supply chains beyond tier-1 suppliers. Supply chain professionals need to deepen their communication and coordination with suppliers to ensure they’re aligned on complying with legislation throughout their value chain and improving their ESG footprint.
Don’t boil the ocean
Professionals need to refrain from doing too much at once. It’s far more effective to focus on identifying high-risk suppliers, for example, in countries where legislation is not as robust, and combatting any issues there. It’s also important not to be guided by supplier size. Even the smallest suppliers can cause organizations huge reputational and financial harm if they engage in malpractices.
Get the legal eagles on board
Consider hiring a specialist lawyer to help decipher the upcoming changes. While this may seem like an additional expense, it’s well worth it to protect the company from penalties and fines, and to maintain a positive relationship with regulators.
Don’t try to do it all internally
Technology has revolutionized how businesses operate, and the supply chain is no exception. Several software solutions, such as EcoVadis or Achilles, can help companies manage supplier data more effectively.
With the introduction of new technologies, it’s vital that supply teams feel confident collating and evaluating high-quality data to identify risks. Training internal teams to use these tools effectively is essential to prepare for these changes.
More than just compliance
If organizations fail to comply with upcoming legislation, they will open themselves up to huge financial and reputational risk. However, several, broader business benefits come with getting their ESG houses in order. Companies that demonstrate a commitment to ESG, show that they care about more than just profits. This is an increasingly attractive trait to customers, employees, and investors, who want to engage with organizations that do right by society and the environment. What’s more, organizations may end up making tangible financial savings, through making more responsible choices, for example transitioning over to green energy suppliers. Also, risk insurance premiums may go down if organizations can show they’re taking robust steps to mitigate ESG risks.
In summary, there are many advantages to getting ahead and acting on upcoming ESG legislation now. However, supply chain professionals need to be confident in their abilities to do this.