This summer, one of the UK’s best-known online brands found its supply chain at the center of a high-profile modern slavery investigation. Within hours of the story breaking the company’s share price plummeted, as commentators, politicians, and the wider public shared their verdict on the allegations leveled against it.
While COVID-19 has put supply chains under unprecedented public scrutiny from a logistical perspective, this example highlighted another key issue within third-party relationships that is rapidly gaining traction among governments and regulators worldwide: human rights.
Many companies are now taking a fresh look at their supply chains for compliance with human rights standards and other related risks. For those that haven’t yet prioritized this as an area of focus, here’s a summary of recent developments in Europe and the United States, along with three suggested steps for mitigating your third party risks.
Recent Developments: What You Need to Know
Multiple jurisdictions have become increasingly serious about implementing environmental, social, and corporate governance (ESG) legislation. Recent developments around the globe demonstrate that more governments now seek a greater role in the regulation of corporate supply chains. Their goal: to hold companies accountable for non-compliance with human rights and environmental standards.
In April 2020, the UK government published new guidance regarding the slavery and human trafficking statements that certain businesses are obliged to publish annually under Section 54 of the Modern Slavery Act 2015.
Such statements must document the steps that companies have taken to identify and address the modern slavery risks in their supply chains in the past year. What’s more, the UK government has signaled it is considering introducing civil penalties for non-compliance and will issue a further update on the topic “in due course”.
In July 2020, the Slave-Free Business Certification Act was introduced to Congress. If passed, the act would require corporations with annual, worldwide gross receipts in excess of $500 million to audit and report on instances of forced labor in their supply chains.
The proposed act is similar to the UK Modern Slavery Act 2015, albeit significantly stronger when it comes to the penalties for non-compliance. Companies that deliberately violate it could be liable for civil damages of up to $100 million, and punitive damages of up to $500 million.
Unlike the California Transparency in Supply Chains Act (‘CATSCA’), which was signed into law in 2010 and requires certain retailers and manufacturers doing business in California to publicly disclose their efforts to eradicate slavery and human trafficking from their supply chains, the proposed legislation would be a federal law. It would impose an obligation on companies to audit their supply chains and report findings to regulators.
The initiative comes in light of the new legislative frameworks established by Congress that more closely link U.S. human rights objectives to forced labor abuses against Muslim ethnic minorities in Xinjiang, China. Companies whose supply chains intersect with China – and especially Xinjiang – should be prepared for more scrutiny based on evolving U.S. expectations for human rights there.
In April 2020 the EU Commissioner for Justice, Didier Reynders, announced that the EU will introduce mandatory human rights and environmental due diligence legislation in early 2021. The draft law, yet to be published, is likely to be cross-sector and provide for sanctions in the event of non-compliance.
Some EU member states, including France (Corporate Duty of Vigilance law 2017) and the Netherlands (Child Labor Due Diligence law 2019), have already implemented human rights due diligence regulations, while others are expected to introduce similar laws soon.
German legislators are currently working on a mandatory human rights due diligence law that would require companies based in Germany to assess, mitigate, prevent and address human rights and environmental risks through all tiers of the supply chain.
The Consumer as Enforcer
The new German supply chain law has sparked a fierce debate in parliament and a wave of social activism among the population. Over 200,000 people have signed the petition to Chancellor Merkel in favor of the legislative initiative.
Governments and businesses are facing mounting pressure from civil society organizations, human rights defenders, and the general public to conduct thorough and regular due diligence and monitoring on their supply chains and determine where improvements can be made. Customers are ready to fill the gaps left by regulators by highlighting suspected breaches – with considerable commercial consequences for companies.
What You Need to Do: Three Steps to Mitigate Supply Chain Risk
The onset of COVID-19 has accelerated the broader view of ethical responsibility: now, a company’s ethical credentials are judged on a wider range of ESG requirements.
Whether it’s human rights protection, diversity and inclusion, carbon-emissions reduction or supply chain resilience, it is critical from a legal, commercial, and reputational standpoint to address these evolving expectations.
Rethinking your third party risk management strategy in light of recent developments should include the following key steps:
1. Conduct a Comprehensive Risk Assessment
Engage in a comprehensive risk assessment to identify and proactively deal with modern slavery, human rights, and wider ESG risks. It is critical to understand whether any of your supplier relationships have a potential or actual negative impact that needs to be addressed.
Given the practical complexity that this presents, follow the logic of ‘adequate procedures’ framework in relation to anti-corruption compliance. The measures to prevent potentially adverse effects on human rights should be reasonable and proportionate in view of the company context, risk probability, and potential impact.
2. Extend Your Compliance Efforts to Your Supply Chain
Adopting a risk-based approach to managing your third parties will enable you to prioritize your risk management efforts and target resources accordingly. A third-party risk management solution will make it easier to conduct screening and monitoring on an ongoing basis.
At the same time, your compliance processes, including audits, training programs, policies, and reporting mechanisms, should flow down to your supply chain:
- Gain attestation of your company policies and procedures to align your supply chain with internal human rights and environmental standards.
- Provide regular training for your third parties and employees that work with them to mitigate risks of non-compliance.
- Extend your whistleblowing hotline to encourage third parties to identify and report potential violations.
3. Look for Synergies Between Compliance, Legal and Corporate Social Responsibility
Your human rights risk assessments and audits should be part of a corporate due diligence and risk mitigation strategy that encompasses wider ESG factors.
Working in silos is no longer an option - compliance and ethics departments must consider the connections among corruption and human rights violations. A co-operative approach will deliver efficiency and cut down the existing duplications in risk assessment and due diligence processes.
With regulatory, commercial, and media attention on the rise, companies will need to rethink their supply chain sustainability strategies accordingly. In the face of increasing transparency and awareness, businesses that have until now operated on a light-touch basis regarding supply chain risk management will be forced to improve their controls.