person holding a green plant

New Law Forces Ethical Practices on Supply Chains

Logistics and Supply Chain News

By Mahalakshmi Ganesan, Consulting, GEP, a leading provider of procurement and supply chain solutions to Fortune 500 companies

In June, Germany passed the “Supply Chain Due Diligence Act” to hold large (over 3,000 employees) companies accountable for human rights and environmental obligations across their global supply chain, effective from 2023. 

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This matters because global companies operating in Germany will now be responsible for their suppliers’ and their suppliers’ suppliers’ environmental and social practices in principle across their entire supply chain, albeit graded according to the degree of influence. Non-adherence to the law — for instance, the use of forced labor in one of their manufacturing plants—results in fines up to 2% of global revenue and the loss of federal contracts.[1] This encompasses all industries and is preceded by legislation in France (Duty of Vigilance Law 2017) and the U.K. (Modern Slavery Act).[2] The law is a landmark step toward a sustainable and ethical supply chain, as  companies will be required to establish risk and conduct risk analysis for their own business (including subsidiaries) and their suppliers, and to publish their preventive and corrective actions taken annually. Further, in case of violations, affected parties can authorize NGOs and trade unions to raise claims before German courts on their behalf.[3]

This shift in paradigm from voluntary corporate responsibility to legally binding obligations toward adherence to human rights encompasses issues such as avoidance of forced labor, human trafficking and workplace health and safety, and environmental obligations like proper disposal of harmful industrial wastes and preserving natural resources such as water, land and air.

In order to fulfill our legal responsibility to protect people and the planet, as well as profits, we — as supply chain and sustainability leaders — need to embrace supply chain transparency by:

First, integrating the corporate social responsibility function with supply chain operations. Start by creating a cross-functional team focused on supply chain sustainability. This team needs a comprehensive understanding of the entire value chain in order to identify potential sustainability risks and opportunities. Then it must establish or refine the supplier code of conduct, conduct periodic audits and evaluate and manage supplier performance using the identified risks and opportunities.[4] Apple’s environment & supply chain innovation function is a good example of how to use sustainability to improve operational efficiencies. Firms like IBM, Cisco, etc., have also embraced circularity and established supply chain sustainability teams.

Second, creating visibility by employing traceability solutions. Limited visibility across the supply chain has been a major hurdle to identifying the environmental and social impact across the value chain and mitigating the negative impacts. With cloud-based technologies, companies can now trace and track every component or raw material going into any product from the point of origin and validate suppliers’ declarations through its entire value chain, making it possible to assess risks and eliminate them. For instance, Porsche employs a digital traceability solution provider to trace all of the 30,000 parts that go into their cars from origin to finished product[5]. This enables Porsche to identify harsh labor practices in mining and extractive industries and take actions to mitigate them.

Third, reporting: What gets measured, gets managed. BlackRock, the world’s largest investment management firm, is beginning to compel companies to track and report their corporate social responsibility efforts and impact.[6] While standardization of environmental, social, and governance (ESG) metrics has been a challenge, initiatives such as Global Reporting Initiatives (GRI) and Sustainability Accounting Standards Board (SASB) complement each other, as GRI has a more global outlook while SASB looks at sector-specific information with a financial lens.[7] With the digitization of the supply chain, it is far easier today to implement ESG auditing and reporting. And as the cherry on top, there are technology providers who equip companies with end-to-end solutions on ESG reporting, from collecting information from suppliers, validating data and assessing performance against standards and benchmarks to finally providing investor- and customer-ready reports to share.

The United Nations General Assembly has declared 2021 as the ”International Year for the Elimination of Child Labor,” expressly providing businesses with the impetus to partner with governments and communities. Governments like Germany are adopting policies and laws in line with the UN’s human rights goals. But more important, global companies now have cloud-based technologies already in place to track materials and monitor suppliers across their entire complex, multi-geography supply chains. Because of the alignment of technology with public and investor policy, supply chain leaders now have the impetus, capacity and opportunity to address unethical, inhumane practices and tackle climate change.

References:

https://www.hrw.org/news/2021/06/11/germany-new-supply-chain-law-step-right-direction#

https://www.business-humanrights.org/en/latest-news/german-due-diligence-law/

https://www.natlawreview.com/article/new-german-supply-chain-due-diligence-act-view-across-border

https://www.mofo.com/resources/insights/210701-supply-chain-due-diligence-act.html

https://www.reuters.com/article/us-germany-companies-supply-chains/germany-passes-law-on-tougher-oversight-of-supply-chains-idUSKCN2DN1AV

https://www.globalreporting.org/about-gri/news-center/gri-and-sasb-reporting-complement-each-other/

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