New EU rules as an opportunity for cleaned-up supply chains

By Irina von Wiese
Irina von Wiese ist Senior Advisor bei der Kommunikationsberatung Finsbury Glover Hering, ehemaliges Mitglied des Europäischen Parlaments und ehemalige stellvertretende Vorsitzende des EP-Unterausschusses für Menschenrechte.
Irina von Wiese is a Senior Advisor at communications consultancy Finsbury Glover Hering and former Vice Chair of the European Parliament’s Subcommittee on Human Rights.

Slaves produce clothes we wear, pick fruit we eat, dig for minerals used in our phones and build some of the physical infrastructure on which our economies rely. They are working all over the world: in developing and developed countries, on all continents, and in most sectors.  

Catastrophic incidents such as the 2013 collapse of the Rana Plaza garment factory in Dhaka occasionally shine a flashlight onto the plight of modern slaves. But it wasn’t until reports emerged of mass Uighur labor camps in Xinjiang that many companies started to wonder about the provenance of their supplies. National legislators sprang into action: the French Loi de Vigilance (2017), Dutch Child Labour Due Diligence Act (2019) and the German Lieferkettengesetz (2021) all oblige companies to take a closer look at their supply chains.

None of them, however, covers all sectors throughout the entire supply chain, and each uses its own definitions, remedies, and enforcement mechanisms. Businesses operating at the international level are left confused, while investors and NGOs plead for a harmonized approach at least within the European Union. The EU has so far shied away from direct intervention, divided over the extent to which laws and import bans should be used. This is about to change. Commission President Ursula von der Leyen has announced a ban on products made by forced labor alongside far-reaching obligations on companies in all sectors to clean up their supply chains.

The new rules mark a fundamental shift in the way businesses will be held accountable for breaches of human rights that may be happening at the other end of the globe, unbeknown to them. And this concerns, just like data protection, not just EU firms but all companies globally doing business in the world’s largest single market.  

This shift is driven to no small part by the European Parliament. In 2018, the cross-party Working Group on Responsible Business Conduct set out to introduce, at the EU level, rules that had existed only as aspirational UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises.  

Impact of the new rules is enormous

For the short time that I, as the last UK delegate in this Working Group, was privileged to work on this proposal, we consulted widely with industry representatives, investors, regulators, and NGOs. Two things became apparent: 1) voluntary guidelines are not sufficient to entice businesses to take responsibility for their supply chains and 2) the current potpourri of national rules brings about more confusion than benefits. What is needed is harmonization and legal certainty

The Parliament recommended mandatory supply chain due diligence for companies operating in EU markets, along the entire value chain, irrespective of sector. Supply chain due diligence will include compliance with agreed social as well as environmental standards and tackle forced labor and other forms of modern slavery, human trafficking, child labor, and minimum standards of labor law. After many delays, the Directive on Corporate Sustainability Due Diligence was published by the EU Commission yesterday and will enter into force in EU member states around 2024. The significance of this legislation cannot be overstated. 

First, its reach is extremely wide. It catches companies with more than 500 employees (and some SMEs) wanting to do business in the EU single market, no matter where they are incorporated. Second, it is onerous. Proper due diligence goes beyond monitoring and reporting: companies will need to identify, prevent, mitigate and account for the risks of human rights violations across all their operations and along their entire value chains.  Third, consequences for non-compliance are severe. They include not only administrative fines but also damages claims unless companies can prove they have taken adequate measures.

Companies have reacted with some trepidation. They fear being caught in the cracks between tectonic plates of geopolitics. This is especially true for companies that depend on sales in markets from which they may have to withdraw their supplies. They risk the wrath of customers on both sides of the divide – as has already happened to Western fashion retailers in China.  

Practicable guidelines

Some have questioned the effectiveness of such laws. Will private companies really be able to force tangible change? Even if they divert supply chains, will it make a difference in countries where forced labor is state-sponsored? The answers to these questions remain outstanding. What seems clear is that as long as they profit from cheap inputs, private actors have a role to play in fighting bad practices in supply chains. This does not absolve governments from their responsibility – both in their own countries and vis-à-vis others – but ensures that accountability is spread between economic actors

The success of the new regime crucially depends on how, and how quickly, companies react. Those who act now and see this as an opportunity, rather than a threat, can reap first-mover benefits. There is still time to shape legislation, advocate for practicable guidelines, proportionality, and clear definitions. Lawmakers need to ensure that these costs are proportionate and do not penalize those who make a good faith effort and track down problems in the supply chain. 

Early movers will be able to anticipate and pre-empt the rules. It may cost more now. But positioning a brand as human rights champion is a long-term investment, just as the investment in climate change mitigation. Companies with a track record in social and environmental engagement see considerable upsides and a competitive advantage. In a recent letter to the European Commission1, 80+ firms joined NGOs and investor organizations in calling for timely implementation of the rules

Entire supply chain in view

In the age of consumer and shareholder activism, European companies can no longer hide behind complex global operations. Mitigating risks means putting in place structures and processes which will ensure transparency and the ability to intervene at short notice. Contingency plans will have to be in place in case supply chains need to be re-routed. Boards will have to embrace these changes and be prepared to enforce them.  

Companies just adapting to the requirements of the Lieferkettengesetz will have to extend their vigilance beyond direct suppliers. Many will have to make difficult choices between equally lucrative markets. The sooner companies embrace the new rules, the better they will be placed by the time they come into force.  

Mandatory supply chain due diligence is overdue. Implemented properly, with the right incentives for businesses and investors, it could well be one of the most consequential tools the EU has ever devised. It is to be hoped that ultimately people at the bottom of supply chains will benefit from better working conditions. On the way to eradicating slavery and forced labor, this is an important step. 

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