In the context of supply chain ethics, where environmental and social concerns are on the rise, companies face a critical moment to adapt to new demands for sustainability and respect for human rights. They manage large inventories and track a wide variety of products and materials that sometimes make it difficult to comply with increasingly demanding requirements and regulations.

Poor practices at any stage of the supply chain (from design and production to sourcing, transportation and service delivery by the company) can have significant consequences on a variety of issues affecting both their own workers and the local communities where they operate in relation to environmental, social and governance aspects (ESG).

Thus, to promote appropriate standards in this area, regulatory measures are being implemented to facilitate compliance with the Sustainable Development Goals (SDGs) set out in the United Nations 2030 Agenda, as well as other international texts that protect human rights and ensure environmental protection.

The impact of supply chain ethics on human rights and the environment

When companies ignore human rights or neglect the environment in their supply chains, the results can be disastrous: exploitative labour in textile factories, precarious situations, low wages, discriminatory practices, poor safety measures, indiscriminate deforestation to produce raw materials such as palm oil, or water and soil contamination, among others.

These negative impacts not only affect the people and ecosystems directly involved but can also have long-term ramifications in broader areas such as public health, social and economic stability, and global biodiversity.

The European Union has already launched several initiatives that set out specific requirements for companies to demonstrate their commitment to protecting the environment and human rights at every stage of their supply chain.

New corporate responsibilities on human rights and the environment

On April 24, 2024, Europe took a significant step towards sustainability with the European Parliament’s approval of the Corporate Sustainability Due Diligence Directive (CSDDD). This regulation, which will impact thousands of companies within the EU and beyond its borders, aims to integrate human rights and environmental aspects into the operations and corporate governance of responsible business.

The new directive establishes a corporate due diligence responsibility (both for European and some non-EU companies) to identify, eliminate, prevent, reduce, and account for adverse human rights and environmental impacts in companies’ activities and supply chain ethics.

Corporate board members will have the obligation to monitor due diligence channels and procedures and integrate them into business strategy, considering the human rights, climate change and environmental implications of their decisions.

In turn, organizations will have to develop due diligence policies and codes of conduct in their contracts with suppliers, in addition to creating mechanisms to ensure transparency in the supply chain and procurement. This will require companies to implement a whistleblower system, conduct periodic reviews to assess the effectiveness of their due diligence policies and measures, and publish an annual statement on their website reporting on these obligations.

Although the directive does not explicitly require supply chain traceability, companies will need to be prepared with detailed knowledge of their suppliers’ practices.

This directive is not the only regulation to have emerged in this field in recent months. For instance, in Germany, the Act on Due Diligence Obligations of Companies in Supply Chains (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten) came into effect in January 2023. This legislation mandates that German companies ensure respect for human rights in global supply chains, covering aspects such as protection against child labour, the right to fair wages, and environmental preservation. Initially applicable to organizations with over 3.000 employees, its scope has since been extended in 2024 to include those with over 1.000 employees.

Other European countries, such as the Netherlands, Austria, Belgium, and Finland, are also advancing in the regulation of supply chains. In June 2023, for example, Austria submitted a bill to the National Council for approval, focusing on supply chain ethics and their guarantees of human and labour rights, as well as environmental and animal protection. Although the results of the referendum were expected in February 2024, the latest information indicates that the review process is still ongoing, and the final report has not yet been issued.

What will be the method for ensuring compliance with the new rules?

The new rules on corporate sustainability due diligence will be enforced through administrative oversight and civil liability. At the national level, Member States will designate authorities to monitor and enforce the rules, imposing effective and proportionate sanctions.

At the European level, the Commission will establish a network of supervisory authorities to coordinate these actions. In addition, it will be ensured that those affected will receive compensation for damages caused by non-compliance with the obligations set out in the new proposals.

Benefits of the new sustainability requirements for supply chain ethics

The implementation of these measures guarantees greater protection of human rights, including labour rights, promoting a healthier and more sustainable environment for present and future generations. In addition, trust between companies and citizens will be strengthened by increasing transparency, allowing for more informed decisions, and promoting accountability to different interest groups or stakeholders.

For companies, the benefits are greater legal certainty and fairness in the marketplace, and greater ability to attract talent and sustainable investors and public buyers.