Using the Wave of Supply Chain ESG Laws to Rethink Risk and Resilience Strategy

The era of mandatory supply chain reporting and due diligence is here. Ushered in by laws like Germany’s Supply Chain Act (LkSG), the EU’s Corporate Sustainability Directives (CSRD and CSDDD), Canada’s S-211 Modern Slavery Act and California’s SB 253, it will require more and more companies worldwide – including thousands in North America – to systematically identify, mitigate and report on environmental and human rights issues in their supply chain. 

Most companies remain unprepared for the level of supply chain scrutiny and transparency these laws will demand.  But with a "smart compliance" approach, procurement teams can streamline their compliance efforts while simultaneously building stronger supplier relationships and making progress on ESG goals.

The Expanding Risk Landscape Behind the New Regulations

Sustainability risks in global supply chains continue to proliferate, with modern slavery soaring to unprecedented levels and environmental impacts poised to cost global companies $120 billion by 2026. The Corporate Human Rights Benchmark recently found that nearly half of the world’s largest companies are failing to mitigate or even identify human rights and environmental issues in their value chains. In response, governments across Europe, North America, Asia and beyond are rolling out legislation to hold companies accountable for their upstream business impacts. Built on the foundation of international frameworks, this new wave of regulation will require many more companies to act on sustainability challenges in their supply chain and demand more from procurement teams. 

Europe is at the forefront of this legislative wave. Germany’s LkSG law is just one of several in the region that will be superseded by the EU’s CSRD reporting law, and the Corporate Sustainability Due Diligence directive (CS3D), which will provide a legal baseline for harmonized supply chain due diligence across the union and multinationals doing business there. The trend is extending beyond Europe to Australia (Modern Slavery Act), Canada (S-211 Modern Slavery Act) and the US (California’s Transparency Act and the upcoming SB 253), among others. See our regulations glossary for an overview of the laws shown below.  

Due Diligence Requirements Are Challenging Many Company’s Resilience Strategies

No matter where your company is based or what industry it operates in, you need to start preparing for mandatory due diligence and reporting. While these existing and emerging laws have their nuances and specific requirements, they all require companies to rethink their resilience strategies and develop systematic approaches for identifying, mitigating and reporting on ESG issues throughout their operations and supply chain. Here’s a look at what this process typically looks like and the challenges your company should be addressing: 

1. Risk mapping and identification: Analyze your operations and entire supply chain for human rights and environmental risks. The California Transparency Act, for example, requires companies to assess risk across their operations and entire upstream value chain.

2. Risk verification: Conduct due diligence at the supplier level to verify identified risks. In-scope companies under the LkSG must assess supplier practices for all “substantiated knowledge” of risks identified during the mapping process. 

3. Risk mitigation and prevention: Take decisive steps to mitigate risks and negative impacts and prevent them from reoccurring. Companies within the scope of the EU CSDDD will need to take “well-documented” steps to identify, manage and prevent any negative impacts from occurring in their supply chains. 

4. Measuring and managing “Scope 3” (supply chain) GHG and Carbon Emissions.  California's SB 253 law will require companies with more than $1 billion in revenue to report on their Scope 3 emissions and have them independently audited. Reports must be submitted digitally and made publicly available.

5. Monitoring and reporting: Regularly assess the effectiveness of your efforts, recalibrate your approach and ensure transparency. The Canadian S-211 Act requires companies to publish an annual report describing their policies and due diligence on forced labor and child labor, including an assessment of modern slavery risks within their operations and supply chain, and outline the effectiveness of those policies and measures.

Proactive ESG Compliance Shares a Common Foundation With Resilience

Does your company have the in-house expertise and resources needed to develop these processes, navigate the fast-evolving legal landscape and protect your business from interruptions? If not, you’re far from alone. As due diligence laws have proliferated, so too have compliance solutions. But not all are created equally. Companies should be wary of relying on a single engagement technique, such as disclosure questionnaires, as their only tool. These one-dimensional approaches often create redundant work for suppliers without providing the insights or guidance they need to improve their sustainability practices. Mitigating risk and building resilience against future negative impacts in your supply chain over the long term requires a tool kit spanning the full risk management and due diligence framework – from risk identification, to engagement and analysis, to mitigation actions and reporting. 

EcoVadis Streamlines Your Compliance Approach Across the Risk Management Framework

EcoVadis has been helping thousands of companies – of all sizes and across all sectors – comply with a wide range of standards and requirements for nearly a decade. Our approach helps you streamline your reporting and due diligence efforts, enabling you to seamlessly comply with current laws and build the foundation for emerging ones. Here’s a look at how we help you throughout your reporting and due diligence journey.

Learn more about the tools and solutions driving our compliance solution →

Fast and broad visibility that enables you to prioritize supplier engagement; disclosure and due diligence measurement capabilities that are tailored to suppliers’ industry, size and location; and targeted solutions that help your suppliers improve their practices as easily and effectively as possible. EcoVadis is uniquely equipped to help you do this.

Beyond this, forward-looking companies should keep the bigger picture in mind: This new breed of regulations is really challenging many companies’ strategies for supply chain resilience. The same negative social and environmental impacts those laws are trying to help reduce represent significant risks to your supply chain. The good news is that choosing the right solution based on the essential criteria will enable your company to not only avoid the increasingly severe consequences of non-compliance but also reap the rewards of investing in a more resilient and sustainable supply chain. 

Request a consultation to learn more about how EcoVadis can help your company drive its compliance efforts. 

About the Author

EcoVadis is a purpose-driven company whose mission is to provide the world's most trusted business sustainability ratings. Businesses of all sizes rely on EcoVadis’ expert intelligence and evidence-based ratings to manage risk and compliance, drive decarbonization, and improve the sustainability performance of their business and value chain. Its AI-powered risk mapping, actionable scorecards, benchmarks, carbon action tools, and insights guide a resilience and improvement journey for environmental, social and ethical practices across 200 industry categories and 175 countries.

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