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Building sustainable supply chains through human rights and environmental due diligence

# August 2024

In an era of sprawling and intricate supply chains, companies are increasingly exposed to a myriad of risks. Recent years have been marked by external shocks and disruptions such as the COVID-19 pandemic, geopolitical tensions, natural disasters, and trade wars. These events have underscored the need for greater resilience and flexibility within supply chains. Additionally, these disruptions have amplified the growing demand to address human rights and environmental issues throughout companies' supply chains.

Historically, due diligence in supply chains relied heavily on weak, voluntary measures and fragmented, company-specific codes. However, the increasing focus on mitigating risks and disruptions, coupled with growing public awareness and concern over human rights, has catalyzed a significant paradigm shift. This shift has led to the rise of comprehensive regulations and global initiatives mandating stricter due diligence measures. Assessing environmental, social, and governance (ESG) risks has also become an integral part of supply chain diligence.

This surge in supply chain due diligence regulation reflects a broader movement towards more responsible and sustainable business practices, driven by a growing recognition of the interconnectedness of global supply chains and their far-reaching impacts on society and the environment.

# What is supply chain due diligence?

In the context of the Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises (MNE Guidelines) due diligence is defined as an ongoing, proactive, and reactive process through which companies can identify, prevent, mitigate, and account for how they address adverse impacts in their operations, supply chain, and business relationships. These adverse impacts could be related to different ESG risks including human rights, labor rights, the environment, bribery, corruption, and consumer interests.

The objective of due diligence is to foster sustainability, ethical business practices, and responsible corporate behavior by ensuring companies proactively identify, assess, and mitigate potential ESG risks within their supply chains and throughout their operations. This process aims to enhance transparency and accountability, ultimately contributing to better business conduct and a more sustainable and equitable global economy.

# What are the key global frameworks addressing supply chain due diligence?

Supply chain due diligence is addressed in several international frameworks. There are currently three leading frameworks recognized by the international community and referenced by policymakers when it comes to business and human rights agenda. These frameworks emphasize the importance of identifying, preventing, and mitigating adverse impacts in supply chains and promoting responsible business conduct.

The OECD Due Diligence Guidance for Responsible Business Conduct (OECD Guidance for RBC) highlights recommendations that aim to help enterprises avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers, and corporate governance that may be associated with their operations, supply chains, and other business relationships.
- It also provides plain language explanations of its due diligence recommendations and associated provisions to the adhering bodies under the OECD MNE Guidelines.
- It is the first non-sector-specific document issued by the OECD that offers general considerations for enterprises on due diligence for Responsible Business Conduct (RBC) that complements the OECD MNE Guidelines.

The United Nations Guiding Principles on Business and Human Rights (UNGPs) came as a result of several decades of UN efforts to create global human rights standards for businesses.
- While it is not formally legally binding, the UNGPs are one of the cornerstones of national human rights legislation in different jurisdictions.
- It is also used as a reference and guide for several countries’ human rights due diligence laws such as the German Supply Chain Act (LkSG), Norway’s Transparency Act, and the EU’s Corporate Sustainability Due Diligence Directive (CSDDD).

The International Labor Organization (ILO) adopted the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (ILO MNE Declaration).
- It is the only ILO instrument that provides direct guidance to enterprises on social policy and inclusive, responsible, and sustainable workplace practices. In contrast with the UNGPs and OECD Guidelines, the ILO MNE Declaration has included actors beyond states, such as industry representatives, and workers’ associations.
- While the ILO MNE Declaration is not legally binding, it establishes National Focal Points for the promotion and adoption of its principles in the national and local context of each jurisdiction.

These international frameworks are aligned in their approach and complementary in their scope and application. Based on its mandate and expertise, each of these frameworks brings its own value-added to their implementation:

OECD Guidelines – broad approach to responsible business conduct and its links to economic policies.
UNGPs – expertise in business and human rights.
ILO MNE Declaration – tripartite structure and authority on international labor standards.

# The 3 frameworks have 5 main common themes and elements:

These 3 frameworks were referenced in major regulatory developments in the EU such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Corporate Sustainability Due Diligence Directive (CSDDD). These developments aim to ensure companies act in a way that meets human rights goals.

CSRD strengthens the link between corporate reporting and responsible business conduct by aligning with and incorporating these 3 global frameworks. While CSRD is primarily focused on disclosure and transparency, it also requires companies to report on their due diligence processes and sustainability performance.
CSDDD builds upon and strengthens global frameworks for responsible business conduct. It extends due diligence requirements beyond those of the CSRD to encompass a wider range of companies and impacts, including environmental and value chain impacts. This ensures a more coherent and effective approach to due diligence, holding companies accountable for their human rights and environmental impacts.

Jurisdictions across all continents are increasingly catching up in regulating supply chain due diligence as they recognize the importance of ensuring responsible and ethical business practices throughout global supply chains. Many have developed mandatory measures, providing a clear framework for companies to follow and legal implications for non-compliance, creating a level playing field and ensuring that all businesses are held to the same standards.

# Below are key aspects of supply chain due diligence regulations

Risk assessment and mitigation – due diligence regulations often emphasize comprehensive assessment of potential risks within the supply chain, including threats to the company’s operations and reputation as well as the potential impact on human rights and stakeholder interests. This holistic approach provides a comprehensive understanding of the complex landscape of challenges and opportunities present within the supply chain.
Transparency and reporting – public disclosures are often mandated and it must include due diligence processes, identified risks, and actions taken to mitigate them.
Focus on human rights and the environment – many regulations emphasize the importance of human rights and environmental due diligence, requiring companies to respect and protect human rights and minimize their environmental impact throughout their supply chains.
Penalties and sanctions - regulations often include provisions for enforcement and penalties for non-compliance. This may involve fines, sanctions, or even exclusion from public procurement processes.

# Key regulations across jurisdictions

Country	Regulation	Scope	Status
Australia	Modern Slavery Act 2018 – companies must report annually the risks of modern slavery in their operations and supply chains and how they are addressing the risks.	Companies based or operating in Australia with annual consolidated revenue of at least AUD 100 million.	Enforced since 2019
California, USA	California Transparency in Supply Chains Act of 2010 (CTSCA) – companies must disclose their efforts to eradicate human trafficking and modern slavery in their operations.	Retail sellers or manufacturers doing business in California with annual worldwide gross receipts in excess of USD 100 million.	Enforced since 2012
Canada	Canadian Fighting Against Forced Labor and Child Labor in Supply Chains Act - requires entities to report on the measures taken to prevent and reduce the risk that forced labor or child labor is used by them or in their supply chains. The Act will also prohibit the importation of goods manufactured or produced, in whole or in part, by forced labor or child labor.	Entities producing, selling, or distributing goods in Canada or elsewhere. The Act also applies to entities importing goods into Canada as well as entities controlling an entity engaged in these activities e.g., government institutions producing, purchasing, or distributing goods in Canada.	Enforced since 2024
European Union	EU Deforestation Regulation – sets mandatory due diligence rules for operators and traders, placing certain commodities on the EU market to ensure that only deforestation-free and legal products are allowed on the EU market. The regulation covers seven key commodities: coffee, cocoa, cattle, palm oil, soy, wood, and rubber as well as derived products including leather, oil cakes, and chocolate.	All companies that place products on the market within the EU (manufacturers and importers), make them available (traders) or export them from the EU.	Enforced since 2023
European Union	EU Corporate Sustainability Due Diligence Directive (CSDDD) – mandates companies operating within the EU to identify, prevent, mitigate, and account for adverse human rights and environmental impacts throughout their supply chains. EU member states are expected to transpose CSDDD into their national law by July 26, 2026.	EU companies with more than 1,000 employees and a global turnover of EUR 450 million, and non-EU companies with a turnover of EUR 450 million generated in the EU market.	Enforced since 2024
European Union	EU Regulation on prohibiting products made with forced labor – if products are found to be produced with forced labor, authorities will order the withdrawal of the products already placed on the market and prohibit the placement of the products on the market. Companies will be required to dispose of the goods.	Covers all products made available in the EU market, meaning both products made in the EU for domestic consumption and for exports, as well as imported goods, without targeting specific companies or industries.	In the final phase of EU legislative process.
European Union	Conflict Minerals Legislation – requires the company to conduct and publish a due diligence framework.	The regulation applies to EU-based importers of tin, tantalum, tungsten, and gold, whether these are in the form of mineral ores, concentrates, or processed metals.	Enforced since 2021
France	French Corporate Duty of Vigilance Law – companies must have a due diligence plan in place that safeguards human rights and environmental impact from their supply chain operations.	Companies that have at least 5,000 employees in France or 10,000 worldwide, either directly or in their subsidiaries.	Enforced since 2017
Germany	German Supply Chain Act – requires companies to establish a risk management system to identify, prevent, or minimize the risks of human rights violations and environmental damage in their supply chains. Companies must publish an annual report outlining their due diligence efforts. The legislation also extends due diligence obligations to indirect suppliers, ensuring that risks are addressed throughout the supply chain.	Companies with more than 3,000 employees based in Germany or German-registered branches of international companies from 2023. From 2024, it also applies to companies with more than 1,000 employees based in Germany or German-registered branches of foreign companies.	Enforced since 2023
Netherlands	Child Labor Due Diligence Law – requires companies in the Netherlands to implement due diligence measures to ensure that their products were not produced with child labor.	Any company established in the Netherlands that provides goods or services to Dutch sell or supply end users.	Enforced since 2020
Netherlands	Responsible and Sustainable International Business Act – aims to require entities with known activities that have adverse human rights or environmental impacts to take all reasonable measures to prevent, mitigate, or reverse the impacts to the extent possible. In cases where necessary, the act would also require entities to enable remediation.	Dutch or other EU entities that engage in activities outside the Netherlands, or non-EU entities engaged in activities or marketing products in the Netherlands, and meet the quantitative thresholds defined by the EU Accounting Directive for the applicable fiscal year.	Under development
Norway	Transparency Act – companies must investigate whether there are any actual, or risks of, adverse impacts on human rights or decent working conditions in their operations, their supply chain, and other business relationships.	Larger enterprises that are resident in Norway and that offer goods or services in or outside Norway and larger foreign enterprises that offer goods or services in Norway, and that are liable to tax to Norway pursuant to internal Norwegian legislation.	Enforced since 2022
South Korea	Proposed Act on Human Rights and Environmental Protection for Sustainable Management of Companies – companies must establish and operate a human rights and environmental due diligence implementation system, report it to the board of directors, and implement measures against human rights and environmental risks identified. Companies must also report publicly their findings and measures taken.	The regulation would apply to South Korean companies with 500 or more employees, or with revenue equal to or greater than KRW 200 billion in the previous financial year.	Under development
Switzerland	Swiss Code of Obligations (CO) – requires companies to provide annual reporting on their supply chain activities, specifically addressing environmental issues, social issues, personnel issues, and respect for human rights.	Any company with at least 500 full-time employees and total assets of at least CHF 30 million, or revenues of CHF 40 million per year.	Enforced since 2022
Switzerland	Ordinance on Due Diligence and Transparency in relation to Minerals and Metals from Conflict-Affected Areas and Child Labor (DDTrO) – sets the due diligence requirements mandated under the CO chapter on due diligence and transparency.	Swiss-based companies are mandated to conduct due diligence and reporting on their supply chains if they deal with conflict minerals or products/services suspected of involving child labor.	Enforced since 2022
UK	Modern Slavery Act 2015 – requires companies to issue a modern slavery statement annually, reporting the steps taken to mitigate the risks of modern slavery in their supply chain.	Companies with a global turnover of over GBP 36 million and operating in the UK.	Enforced since 2015
USA	Fashioning Accountability and Building Real Institutional Change Act (FABRIC Act) – aims to restructure pay rates and provide minimum wage as a floor with productivity incentives on top and to impose penalties for workplace violations as well as establish record-keeping measures like a nationwide garment industry registry.	Fashion brands and retailers as well as American manufacturers and suppliers to the garment industry.	Under development
USA	Slave-Free Business Certification Act – aims to require disclosure of labor practices or human trafficking activities in supply chains that violate specified national or international standards and report the results to the Department of Labor.	Businesses with annual revenue greater than USD 500 million.	Under development
USA	Uyghur Forced Labor Prevention Act (UFLPA) – companies must provide clear and comprehensive evidence that all products and parts produced in Xinjiang, China, were made without any form of forced labor.	All companies that import into the USA.	Enforced since 2022

How RepRisk can support compliance with evolving supply chain regulations

Effectively managing ESG risks in supply chains starts with their identification, which requires granular, consistent, material, and timely data. RepRisk supports this critical task by offering daily-updated business conduct and ESG risk data, Framework Templates for key regulations, and Due Diligence Scores. These resources aid companies in their monitoring and compliance efforts. As the regulatory landscape continuously evolves, with new proposals and acts such as the EU Proposal for a Directive on Corporate Sustainability Due Diligence, staying informed and compliant is more crucial than ever. RepRisk provides the necessary tools and insights to navigate these changes, ensuring robust ESG risk management in supply chains.

Want to learn more about RepRisk solutions for sustainable supply chains?

Contact your Account Manager or our Client Services Team (support@reprisk.com).

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