Corporate supply chain due diligence and the impact of the EU’s new supply chain law in 2022

There are new regulations in the European Union that are concerned with the supply chain that affects the regular operation of the supply chain. It is essential for all stakeholders to fully understand the regulations as they will directly or indirectly affect their business operations. Harmonization, legal certainty, and a level playing field for all EU states are some of the objectives of the proposed legislation. If this goal is met, the EU’s new supply chain law could include national flagship legislation and legislation to track individual commodities. As a result, only laws that have already been passed are listed.

What is the EU’s new supply chain law is and how it will impact companies?

According to the European Parliament’s draft, voluntary due diligence standards have not made significant progress. Businesses are responsible for respecting human rights and the environment, while states and governments are responsible for protecting these values. This should not be delegated to private parties.

In 2022, the Parliament, the Commission, and the Council are expected to agree on a draft. According to EU parliamentarians, small and medium-sized businesses should also be covered if they are publicly traded or operate in a high-risk sector, such as raw materials and textiles.

Indirect suppliers will also be subjected to a risk assessment as part of the plan. Even before any signs of a breach, companies would have to take action. The proposed ban on importing products linked to forced labour has also been discussed. According to the proposed legislation, companies that violate human rights, whether by deed or omission, would be required to make restitution.

The law’s requirement for due diligence prompts people to inquire about the provenance of the things they buy. Certificates of origin can be traced back to the Kimberley Process for diamonds, established in 2003. Gold, tin, tantalum, and tungsten, all of which are conflict minerals, require proof of their origin since January 1, 2021, when this requirement took effect in the EU.

The laws against child labour and human rights violations in Europe have been passed by individual European countries. In 2015, the British Parliament passed the Modern Slavery Act, which prohibits slavery and forced labor in the modern era. Netherlands Child Labour Due Diligence Law and French Loi de vigilance set out human rights due to diligence requirements for large companies in the supply chain in terms of corporate responsibility. In countries like Germany, there are also other voluntary commitments in place. A common legal framework has now been established for these efforts.

What does the EU’s new supply chain law  mean from an ESG perspective

Environmental factors in ESG, such as emissions, waste management, product life cycle management, efficient energy use, and more, are all included in the ESG framework. To combat global warming, cut emissions, and reduce corporate carbon footprints, consumers have stepped up their efforts and consumer activism.

Human rights and supply chain labour standards are included in the ESG’s social component. Experiencing the effects of workplace culture and health and safety practices, such as those associated with child labour, is prohibited by law. As long as a business has a good relationship with its local community and has obtained a “social license,” it can improve its “social score.”

Governing ESG refers to corporate governance and a set of rules or principles defining different parties’ rights, duties, and expectations. Corporate governance includes the board of directors and the managers, shareholders, and stakeholders. As a tool to assist in a company’s long-term strategy, a clearly defined corporate governance system can help balance or align various stakeholders’ interests. As part of their due diligence, investors can use this tool to look for signs of sound corporate governance practices.

The growing need for ESG due diligence 

An indication of the growing global emphasis on corporate ESG responsibility is the introduction of mandatory ESG due to diligence requirements for companies. In new and prospective laws within the EU, its Member States, and other countries, intends to ensure that companies take measures to prevent and address adverse impacts on human rights, the environment, and good governance in their supply chains and business relationships. The result is that some companies face mandatory ESG due diligence requirements and punitive measures/enforcement action for failing to identify and address ESG risks in their supply chain. ESG-related issues, including human rights, are becoming increasingly important to the legal and regulatory frameworks that govern corporate activities and supply chains.

Some corporations have previously adopted voluntary international reporting and due diligence standards. However, the prospect of penalties and debarment for EU and non-EU companies doing business within the EU would likely introduce man-made standards for supply chain due diligence.

The use of AI in due diligence

When it comes to sifting through mountains of data, AI tools can do it faster and more accurately than humans. Compliance and risk assessment, information synthesis, and information analysis and discovery are the primary uses of AI due diligence.

AI and machine learning are less likely to make mistakes than humans because of the increased speed they can process and interpret data. Compared to traditional due diligence methods, AI due diligence is quicker, more accurate, and has the added benefit of anticipating issues before they arise. With AI, due diligence and investment risk analysis norms are being reformed by reducing natural human errors, eliminating manual errors, and automating internal operations to increase productivity.

To a large extent, performing due diligence can be automated. Nevertheless, a few areas still need a more hands-on approach to verify. SignalX, an AI-powered automated due diligence tool, helps one speed up their due diligence efforts and focus resources where they are most needed.

To find out how Permutable can help you with your supply chain due diligence to comply with the EU’s new supply chain law contact