EU Parliament votes for rules to integrate human rights and environmental impacts along the entire value chain

EU Supply Chain Act: What companies should know

EU Supply Chain Act
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Julia Widmann

Content Marketing Manager

At EU level, companies are to be obliged in future to take human rights and environmental standards into account in their global supply chain. This article looks at the new regulations, how and which companies would be affected by the supply chain act and what hurdles but also advantages this would bring for companies.

Key facts about the EU Supply Chain Act

The EU Parliament adopted the negotiating position on the Supply Chain Act on 01 June 2023 by 366 votes to 255 with 38 abstentions. Negotiations will now be held with member states to determine the final text of the legislation. The law will enter into force as soon as the EU Parliament and the Council of Ministers agree on a final version.

Which companies will be affected?

  • EU-based companies, irrespective of their sector (including financial services), that employ more than 250 people and have a worldwide turnover of more than €40 million.
  • Parent companies that employ more than 500 people and have a worldwide turnover of more than €150 million.
  • Non-EU companies with a turnover of more than €150 million, if 40 million of this turnover was generated in the EU.

Due diligence along the entire value chain

In order to comply with the planned requirements, companies must fulfil their due diligence obligations towards human rights and the environment along the entire value chain.

In concrete terms, the EU Parliament foresees that companies act as follows:

  • Identify and prevent negative impacts of their activities on human rights (child labour, slavery) and the environment (pollution, biodiversity loss).
  • Assess the negative human rights and environmental impacts of its partners along the value chain (suppliers, sales, distribution, transport, storage, waste management, etc.).
  • Set a transition plan to limit global warming to 1.5°.
  • Engage with those affected by their actions, including human rights and environmental activists.
  • Establish a grievance mechanism
  • Regularly review the effectiveness of their due diligence

Stricter standards for the textile industry

The EU Parliament advocates a ban on the destruction of unsold and returned clothing and calls for clothing to be made longer lasting and easier to recycle. In this way, the EU Parliament wants to take steps against the fast-fashion culture and make it easier for consumers to make sustainable purchasing decisions.

What sanctions can companies expect for non-compliance?

  • Denunciation by name (naming and shaming)
  • Withdrawal of a company's goods from the market
  • Fines of at least 5% of worldwide net turnover
  • Non-EU companies will be excluded from public procurement in the EU for non-compliance.

Benefits of stricter supply chain controls for companies

In addition to people and nature, companies themselves also benefit when both corporate governance and the supply chain are considered with a greater sustainability focus.

Here are a few benefits that come with stricter supply chain controls:

1. Improving ESG practices

With national and international ESG regulations on the rise, companies need to constantly improve and demonstrate their sustainability performance anyway. By increasing supply chain controls, companies can identify sources of problems and thus implement environmentally friendly measures, improve working conditions, promote ethical business practices and thus minimise their ESG risks.

2. Screening and selecting partners

Careful screening of partners along the supply chain for ESG standards can be combined with general quality control to ensure that suppliers and partners meet all the standards required by the company.

3. Improved transparency and reporting

Disclosure and communication about ESG measures along the supply chain promote interaction with stakeholders and strengthen their trust in the company.

4. Minimising reputational risk

Failure to comply with both governmental and societal sustainability standards can lead to reputational damage, customer boycotts and litigation. In order to counteract these risks and remain competitive, sustainability must be integrated into the business strategy of companies.

What measures can companies already implement now?

In order to already meet all standards when the EU Supply Chain Act is introduced and not to risk any sanctions, companies can already start with increased control of their supply chain now. Specifically, this means:

  • The monitoring and assessment of partners along the entire value chain.
  • Integrating social and environmental sustainability into all company processes and policies.
  • The further training of employees in the area of ESG and corporate sustainability.

    Our Climate Academy offers a wide range of essential ESG modules and sector-specific deep dives.

In summary, this means...

The planned, stricter EU supply chain law raises some hurdles for companies, but at the same time holds very great advantages. In order to counter the climate crisis and safeguard human rights, companies will have to become aware of the sources of errors along their supply chain and eliminate them as much as possible. This also helps to identify quality deficiencies, identify potential solutions and build closer ties with stakeholders.

Directly addressing the supply chain of one's own company serves to minimise the risk of sanctions and to directly take steps towards a sustainable corporate future in order to be prepared when regulation is introduced.

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