Top Regulations to Monitor for Ethical Supply Chains
The modern business world is getting more complex, and regulations are becoming increasingly stringent to drive transparency and ethical sourcing. Companies need to now consider their entire supply chain to make sure that ethical and sustainable practices are being implemented ‚Äì from raw material sourcing and production to end-of-life processes.
Let’s look at some key regulations companies must know when managing their supply chains.
In recent years, governments and consumers have become more aware of the prevalence of modern slavery and unethical labor practices in global supply chains. To address this issue, lawmakers created regulations, such as the Modern Slavery Act and the California Supply Chain Transparency Act, to report on the steps they are taking to identify, address, and prevent potential risks in their supply chains.
UK Modern Slavery Act
The UK Modern Slavery Act requires companies with a global turnover of ¬£36 million or more to publish an annual statement outlining their efforts to prevent slavery and human trafficking in their supply chains. Although no criminal sanctions exist for non-compliance, the Secretary of State can file injunctions to compel companies to comply with the Act.
California Transparency in Supply Chains Act
The California Supply Chain Transparency Act requires certain companies doing business in California to disclose their efforts in eradicating slavery and human trafficking from their supply chains. Businesses are required to publish information about their verification processes and supplier compliance measures to ensure their products are produced ethically.
Disclosure + Due Diligence Regulations
While disclosure regulations focus exclusively on the need for companies to openly disclose their policies and procedures, due diligence regulations take it a step further by requiring companies to actively monitor and act on any potential risks in their supply chains.
EU Corporate Sustainability Due Diligence (CSDD)
The European Commission’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) is an important step towards ensuring responsible corporate behavior, as it requires companies to integrate human rights and environmental considerations into their operations and governance. This covers both EU and non-EU companies, mandating due diligence for any adverse impacts across their operations and value chains. In addition, large companies must align their strategies with the Paris Agreement’s climate goals.
The directive also puts the onus of oversight and implementation of due diligence onto company directors, who are tasked with considering human rights and environmental consequences when making decisions. It will be enforced through a combination of administrative supervision and civil liability, allowing both companies and citizens to benefit from improved human rights protection, environmental health, transparency, and stakeholder awareness.
French Vigilance Law
The French Corporate Duty of Vigilance Law holds large companies accountable for identifying and preventing human rights and environmental risks stemming from their operations, suppliers, and subsidiaries. These firms must create public vigilance plans to cultivate corporate social responsibility and help victims seeking justice. The law applies to companies that employ at least 5,000 employees, including subsidiaries (or 10,000 if not in France).
Companies not located in France but have supply chains running through the country must also comply. Those obliged to follow the law must create and publish vigilance plans annually, which outline risk mitigation measures, supply chain assessment, risk collection, action plans, and monitoring. Failure to comply could lead to fines of up to 10 million euros after a three-month grace period.
Dutch Due Diligence Act
The Dutch Child Labor Due Diligence Act aims to hold companies accountable for unethical supply chain practices, even if registered outside the Netherlands. This law requires companies to investigate any possible involvement of child labor and issue due diligence statements that outline their action plans should any suspicions arise. Non-compliance subjects companies to administrative fines and criminal penalties. This pioneering law demonstrates the Netherlands’ commitment to eliminating child labor and promoting ethical business behavior. It serves as an important reminder that companies must be aware of their supply chain practices to uphold human rights and meet legal obligations.
German Supply Chain Due Diligence Act
The German Supply Chain Due Diligence Act imposes stringent regulations on companies operating in Germany with over 3,000 employees (dropping to 1,000 in 2024). This law mandates that businesses assess, monitor and mitigate risks associated with human rights and environmental violations within their supply chains. Companies must create a risk management system along with a designated human rights position responsible for regular risk analyses and developing a human rights strategy.
Additionally, businesses must take preventive measures such as ensuring their indirect suppliers are included in the due diligence process and have an established protocol for handling violations. Organizations that do not comply with the law face fines of up to two percent of their annual turnover. This legislation is indicative of Germany’s commitment to ethical business practices, responsible global supply chains, and protecting the environment from human rights abuses.
Border Controls and Traceability
As the global apparel retail landscape transforms, countries are increasingly implementing border controls and regulations to protect their national economies. A recent example is the Uyghur Forced Labor Act (UFLPA), which bars importing goods made using Uyghur forced labor into the United States. This signifies a pivotal shift towards enhancing traceability and accountability in the supply chain.
The Uyghur Forced Labor Act (UFLPA)
The UFLPA came into effect on June 21, 2022. According to the law, the United States Customs and Border Protection (CBP) requires companies to conduct due diligence and certify that their goods have not been produced with any form of forced labor or human rights abuses. Businesses must demonstrate that they have tight procedures and protocols in place for monitoring supply chains, including checks and auditing. If companies are found to be violating the law, they face serious penalties, such as being banned from doing business in the U.S. and expensive fines.
To fully comply with the UFLPA, companies need to know where their products are coming from and who is involved in their supply chain ‚Äì from raw materials to the finished product. This means that companies must actively engage in supplier management, both from a legal and ethical standpoint.
A powerful traceability solution provides companies with the necessary tools to monitor their supply chains, identify areas of risk and make informed decisions about sourcing ‚Äì a critical step for staying on the right side of the law.
Greenwashing and Transparency
With 46% of consumers looking to buy products from companies that are actively trying to reduce their environmental impact, businesses must ensure that they are transparent about their sustainability initiatives.
Greenwashing, the process of using deceptive marketing to make a company or product appear environmentally friendly, is a pervasive issue that can damage customers’ trust in a brand and even lead to legal action.
The European Union Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy for Sustainable Finance are two initiatives designed to increase transparency in corporate sustainability reporting, helping to safeguard final customers from misleading claims in corporate communications.
European Union Corporate Sustainability Reporting Directive (CSRD)
The CSRD is an EU directive that has global implications as organizations’ supply chains often span across the globe. Companies are expected to provide a full overview of their own activities and those of their subsidiaries and suppliers they have control over globally ‚Äì even if the activity is outside the EU.
The EU Taxonomy is an initiative designed to help investors and businesses identify sustainable projects. It provides them with a common language that can be used to describe, compare and measure sustainable activities. This makes it easier for companies to track the impact of their investments on sustainability goals across different sectors.
The regulatory landscape is expanding and evolving constantly. To succeed in a sustainable environment, global companies should develop a comprehensive system to collect, report on, and verify climate data to ensure full compliance with the new regulations and be prepared for any future ones. With the right technology, businesses can easily track their progress towards meeting sustainability goals and adapt quickly to changing regulations. Transparent reporting of this data is key to gaining customers‚Äô trust and can also be used as a marketing tool to demonstrate a brand‚Äôs commitment to sustainability.
For more information on global market regulations and how they affect brands and retailers, check out Global Market Access: A Regulatory Guide for Apparel Brands & Retailers.