The Era of Mandatory Supply Chain Risk Due Diligence is Here – Is Your Company Ready?

May 15, 2023 EcoVadis EN

The era of mandatory supply chain due diligence is here. Ushered in by laws like Germany’s recently enacted Supply Chain Act (LkSG) and the EU’s upcoming Corporate Sustainability Due Diligence Directive (CSDDD), it will require companies to look deeper into their supply chains than ever before to systematically identify, mitigate and report on environmental and human rights issues. However, most companies remain unprepared for the level of supply chain scrutiny and transparency these laws will demand. This article looks at what this evolving due diligence landscape will mean for your company and how EcoVadis can help you comply – now and well into the future. It also highlights how our solution streamlines your compliance efforts while enabling you to simultaneously make progress on corporate ESG targets, create value for stakeholders and drive positive impact throughout your supply chain.

The Ever-Evolving Due Diligence Landscape

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. Despite this, many companies have been slow to act. 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 are rolling out legislation to hold companies accountable for their harmful upstream business practices. Built on the foundation of voluntary frameworks and reporting-focused laws like the UK Modern Slavery Act, this new wave of mandatory due diligence 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. France introduced its Duty of Care Law in 2017, Norway’s Transparency Act came into force in 2022, Germany enacted the LkSG earlier this year and the Netherlands is working on its own HREDD bill. Overarching these efforts is the EU CSDDD, which will provide a legal baseline for due diligence in the union and require countries with existing legislation to harmonize with the Directive’s requirements. Beyond Europe, Australia, Canada and the US have all taken decisive steps toward mandatory supply chain due diligence, and Japan has published HREDD guidelines to encourage companies to prepare for European standards. These trends appear set to accelerate and impact, either directly or indirectly, a staggering number of companies around the world. See our regulations page for details on each law. 

Expanding Due Diligence Challenges Your Company Must Prepare For

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

  1. Risk mapping and identification: Analyze your operations and entire supply chain for human rights and environmental risks.  The Norwegian 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 suppliers if “substantiated knowledge” of any risks is obtained 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. Monitoring and reporting: Regularly assess the effectiveness of your efforts, recalibrate your approach and ensure transparency.  The CSDDD will require companies to evaluate the effectiveness of their approach annually and publish their due diligence strategies and statements. 

How EcoVadis Streamlines Your Compliance Efforts

Does your company have the in-house expertise and resources needed to develop these processes and navigate the ever-evolving legal landscape? If not, you’re far from alone. For nearly a decade, EcoVadis has been helping thousands of companies – of all sizes and across all sectors – comply with a wide range of standards and requirements. Our approach helps you streamline your 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 due diligence journey.

Learn more about the tools and solutions driving our compliance approach

Choosing the Right Solution Is Critical For Compliance and Beyond

As due diligence laws have proliferated, so too have compliance solutions. But not all are created equally. Procurement teams often are still acquiring the ESG knowledge and skills, and must carefully select their tools and data providers to ensure they meet the rigor and supply chain-wide risk visibility regulators are expecting.  “Disclosure only” approaches (e.g. asking every supplier to fill a questionnaire without any analysis or feedback) can create redundant work for suppliers without providing the insights or guidance your team needs for decisions, or that suppliers need to actually improve their sustainability practices. To mitigate risk and prevent negative impacts in your supply chain over the long term, you need fast and broad insights that enable you to prioritize supplier engagement 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. 

Many companies will be subject to multiple laws. This will demand proactive resilience-building. And keeping the bigger picture in mind, compliance alone is not enough in the face of supply chain instability and an accelerating climate crisis. Companies need to ensure that, on top of meeting compliance requirements, they are making meaningful progress on their sustainability goals – from diversity and equity commitments to net-zero targets – and helping their suppliers do the same. Ultimately, 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 reap the rewards of building a more sustainable supply chain. 

For more specific information, view our requirements mapping for CSDDD,  LkSG, or our Human rights and modern slavery due diligence guide.

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

About the Author

EcoVadis EN

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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