In an increasingly interconnected global economy, businesses producing and selling goods across Europe, the United States, and other markets face mounting regulatory demands regarding supply chain due diligence. Central to these demands is mandatory human rights due diligence (mHRDD), which aims to ensure ethical sourcing and production practices throughout global supply chains. Here’s what companies need to know to remain compliant and competitive in light of evolving legislation.
Understanding New and Existing Supply Chain Due Diligence Legislation
Supply chain due diligence legislation mandates businesses to identify, prevent, mitigate, and address adverse human rights and environmental impacts within their supply chains. The legal landscape is dynamic, with regulations emerging at national, regional, and international levels.
New and existing frameworks include:
- EU Corporate Sustainability Due Diligence Directive (CSDDD): Applicable to large EU and non-EU companies with significant operations in the EU, the Directive establishes a corporate due diligence duty; The core elements of this are to identify and address potential and actual adverse human rights & environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners.
- German Supply Chain Due Diligence Act (LkSG): Made effective in 2023, this law requires companies operating in Germany with 1,000+ employees to establish a risk management system to identify, prevent, or minimize risks to the environment and human rights including forced labor, child labor, and unsafe working conditions. They must also implement a human rights strategy and preventive measures and provide an effective way for affected people to file complaints.
- U.S. Uyghur Forced Labor Prevention Act (UFLPA): Enacted in 2021, this law bans the importation of goods linked to forced labor in China’s Xinjiang region, placing the burden of proof on importers to ensure their products are not tainted by unethical practices. Rebuttable presumption applies unless the Commissioner of U.S. Customs and Border Protection (CBP) determines, through clear and convincing evidence, that the goods, wares, articles, or merchandise were not produced using forced labor or that UFLPA does not apply to the goods, wares, or merchandise seeking to be entered into the United States.
- French Duty of Vigilance Law: A pioneer in mHRDD, this 2017 law obliges large French companies to implement vigilance plans addressing human rights violations and environmental harms within their supply chains.
- UK Modern Day Slavery Act: Established in 2015, it sets out a range of measures on how modern slavery and human trafficking should be dealt with in the UK. Whilst not all of the Act is directly relevant for business, section 54 entitled 'Transparency in supply chains' impacts the corporate sector, requiring companies to issue a modern slavery statement annually, reporting the steps taken to mitigate the risks of modern slavery in their supply chain.
- EU Forced Labour Ban: Expected to take effect in 2025/2026. The Ban will cover all products, namely those made in the EU for domestic consumption and exports, and imported goods, without targeting specific companies or industries. It prohibits all products suspected of being made with forced labour on the EU market, irrespective of source and industry.
Key Requirements for Businesses
While the specifics of each regulation vary, there are common themes businesses must address:
- Risk Assessment and Identification: Companies must assess their supply chains to identify human rights and environmental risks. This requires robust data collection, stakeholder engagement, and an understanding of local contexts in sourcing regions.
- Preventive and Corrective Measures: Organizations are expected to take reasonable measures to prevent or mitigate risks and establish mechanisms to address identified issues. This may include revising contracts, auditing suppliers, or suspending problematic partnerships.
- Transparency and Reporting: Transparency is a cornerstone of due diligence. Businesses must publicly disclose their due diligence practices and progress through annual reports or dedicated disclosures.
- Grievance Mechanisms: Effective grievance mechanisms allow affected parties, including workers and communities, to report concerns and seek remedies for violations.
- Traceability: Companies must achieve greater traceability within their supply chains, often leveraging technology to track goods and verify compliance.
The Ethical Supply Chain Program offers solutions to help businesses comply with the ever changing supply chain due diligence legislative landscape. Chat with us today to learn more about our transparency tools, effective grievance mechanism and Connect platform giving you the oversight and data you need for reporting.
The Road Ahead: A Look at the Next Five Years
As supply chain due diligence regulations evolve, the next five years will bring significant developments and challenges for global businesses:
- Expansion of Regulations: More countries are expected to adopt mHRDD laws. The EU’s CSDDD will likely set the standard, prompting non-EU countries to implement similar frameworks. The U.S. may broaden its focus beyond forced labor to address broader human rights issues. We are yet to have finalised details around the EU’s Forced Labour Ban, but it could align with the UFLPA in terms of rebuttable presumption.
- Increased Enforcement: Regulatory bodies will enhance their enforcement capabilities, imposing stricter penalties for non-compliance. Companies will face greater scrutiny from customs authorities, particularly in high-risk industries such as apparel, electronics, and agriculture.
- Integration of Environmental Criteria: Due diligence requirements will increasingly incorporate environmental and climate-related risks. Businesses will need to align their practices with international sustainability goals, such as the Paris Agreement and the UN Sustainable Development Goals (SDGs).
- Technological Advancements: Innovations in supply chain technology will drive more efficient compliance. Blockchain and AI-powered tools will enable real-time monitoring, predictive risk assessment, and automated reporting, making it easier to meet regulatory demands.
- Rising Stakeholder Expectations: Beyond regulatory compliance, investors, consumers, and advocacy groups will continue to demand greater accountability. Companies must demonstrate genuine commitment to ethical practices through transparent reporting and impactful actions.
- Shift in Corporate Culture: Compliance will evolve from a legal obligation to a core aspect of business strategy. Companies that prioritize responsible sourcing and worker rights will enhance their competitive edge and build long-term resilience.
By staying ahead and embedding due diligence into operational DNA, businesses can not only navigate the complexities of the regulatory landscape but also contribute to a more equitable and sustainable global economy. The next five years will be pivotal, and proactive adaptation will separate industry leaders from laggards.
