With the recent introduction of the Corporate Sustainability Due Diligence Directive (CSDDD), supply chain due diligence is now directly in the spotlight. However, with supply chains becoming increasingly complex, the management of these is far from straightforward. As a result, many companies are using in-house expertise to help with supply chain assessment in order to keep up with ever-changing and increasingly more demanding requirements.
The rise in the importance of supplier due diligence and sustainable supply chains
In-house lawyers are increasingly playing a crucial role in ESG issues, with a particular focus more recently on supply chain assessment. Principally, key responsibilities revolve around risk management, compliance and governance, as well as helping to mitigate potential legal liabilities related to ESG factors in the supply chain. As ESG issues have become increasingly prominent on the business agenda, the shift from best practice and voluntary ESG standards towards regulatory compliance and legal requirements is a complex area for organisations to navigate.
Depending on the nature of your business operations, your geographical footprint and the size, structure and turnover of your organisation, you may now be required to undertake enhanced due diligence on suppliers relating to specific environmental and social issues. With increasing scrutiny now directed upon supply chains, where most of a business’ ethical risk and carbon footprint lies, it is no longer an option to disregard the importance of sourcing and your suppliers’ ESG credentials and performance.
CSDDD focuses on the performance of companies throughout their value chain and underlines the wider shift in focus beyond a business’ own activities, with enhanced human rights and environmental due diligence now essential for large companies operating in the EU.
However, ESG is a much broader topic than compliance or box ticking exercises, and entities that treat it as such have undoubtedly underestimated expectations of consumers, investors and other stakeholders on corporate responsibility. From a reputational standpoint, in-house legal teams are on the front line of defending the business and its reputation in the face of greenwashing, negative press, and poor ethical practices.
Deforestation
Deforestation links with supply chains have been well reported in recent years. Biodiversity loss has now reached unprecedent levels, and strongly correlates with deforestation rates from the world’s primary tropical forest regions of the Amazon and Congo River basins, as well as the forest systems of Malaysia and Indonesia. Biodiversity loss is increasingly being viewed as urgent as the climate crisis, and with clear links between climate change and biodiversity loss, the two are often discussed as ‘two sides of the same coin’.
Governments and policy-makers have begun to act to help reduce and, in some cases, reverse biodiversity loss in the world’s most at-risk ecosystems. The EU Deforestation Regulation (EUDR) aims to ensure that the products consumed by or created for EU citizens do not contribute to deforestation or forest degradation worldwide, and covers a range of commodities from cattle to wood to rubber, as well as some of their derived products. Any trader that places these commodities on the EU market, or exports from it, must prove that the products have not been sourced from recently deforested land or have contributed to forest degradation. It is anticipated this will create, and is already creating, enormous challenges for organisations to fulfil traceability requirements, mapping multiple forest sources and standardising data collection from suppliers.
Forced labour
Human rights issues have featured heavily in existing and developing global corporate due diligence laws in recent years, particularly modern slavery considerations surrounding forced and child labour. However, while some jurisdictions have had associated laws for some time, such as the UK’s Modern Slavery Act 2015, similar enhanced national requirements are now only just coming into force. Recent supply chain transparency acts, such as those of Germany and Norway, renew the focus on entities selling products and services in their respective markets, with many new obligations now extending to include entities such as sub-contractors throughout the value chain.
A key example is the Uyghur Forced Labour Prevention Act (UFLPA), which came into force in 2022 in the United States and was brought in to scrutinise supply chain links to Xinjiang Uyghur Autonomous Region (XUAR) and associated forced labour practices. With recent studies estimating that around 20% of the world’s cotton is produced in the region, it is essential that steps to ensure good labour practices are taken at this scale to address this significant supply chain risk for any entities that source materials from this area.
How can in-house counsel mitigate and support on supply chain risks?
As compliance with regulations becomes more challenging following the introduction of new legal requirements, this presents opportunities for in-house counsel to take on supply chain risk mitigation and advisory services. Companies with in-house counsel are far better positioned to address risks directly through advising on the creation of ESG strategies, and will be at an immediate advantage when assessing their operating footprint. Many companies have already started this process, with larger corporations often offering assistance to their suppliers through collaborations with in-house teams, or setting supplier sustainability targets.
However, compliance with regulations is built around more than just reactive regulatory compliance; it also provides business opportunities to add value to an organisation. This is not only from a risk management perspective, but also commercially with potential for added service offerings. For example, it is expected that companies without in-house legal or sustainability teams will soon be urgently seeking assistance in this area, and based on recent ESG trends, this need for help is only likely to increase over time.
How Landmark Information can help
Landmark Information has been assisting lawyers, investors and advisory firms with ESG due diligence services since 2021 through our proprietary Risk Horizon software platform. Managed-service ESG screen reports provide an ideal starting point for understanding ESG risks and opportunities by providing balanced analysis of a company’s ESG profile. Our expert consultants utilise a vast range of data, from regulatory databases and media to company disclosures and annual reports, which all measure against the IFRS’s SASB industry standards framework to identify risk and recommend appropriate next steps.
If you would like to arrange a demo to see how Landmark Information can help with your due diligence obligations, please get in touch.