Regulating Supply Chain Sustainability

September 13, 2011
  • Peder Michael Pruzan-Jorgensen

    Former Senior Vice President, BSR

a What would have been unthinkable only a few years ago is now the order of the day.

With a swath of recent sustainability related regulatory initiatives adopted in the US and Europe, companies must now begin to incorporate regulatory requirements in their approach to managing ethical, social, and environmental risks in the supply chain.

This raises the stakes for companies that operate global supply chains and will necessitate a new, more strategic approach to managing these risks as a truly integrated part of the supply chain strategy.

Here is a quick snapshot of the most important initiatives:

• In April 2011, the U.K. Bribery Act came into force. The Act is widely seen as the most far-reaching piece of legislation on combating corruption across the world with several provisions that go farther than the US's Foreign Corrupt Practices Act (FCPA). From a supply chain perspective it is noteworthy that the Act has extra-territorial jurisdiction, so it applies to UK nationals or residents anywhere in the world as well as any business operating in the United Kingdom. Moreover, as the Act doesn't distinguish between direct or indirect bribes, it makes a company liable to payments made by suppliers or other business partners acting on its behalf or just furthering business for the company. It also makes facilitation payments illegal. Transparency International provides an excellent introduction to how the Act influences companies' supply chains.

• With the adoption of the U.S. Dodd-Frank Act in 2010, companies will have to not only disclose whether conflict minerals (defined as gold, tin, tungsten, and tantalum) in their products originate from the Democratic Republic of Congo, but also report on the due diligence exercised when they do. While this regulation only applies to companies listed in the US, it is widely expected that the EU will adopt similar and possibly more far-reaching regulation in the near future. BSR's Marshall Chase wrote about this for Guardian Sustainable Buisness recently.

• The California Transparency in Supply Chains Act is another regulatory initiative that requires companies doing business in the state to disclose their policies, processes, and controls to eradicate slavery and human trafficking. An important requirement is that companies must provide consumers direct access to their disclosure from the homepage of their corporate websites. BSR's Celine Suarez summarises what companies can do to prevent human trafficking.

• The EU Flegt Law, adopted in October 2010, prohibits marketing of illegally logged timber on European markets and requires companies to exercise due diligence to minimise the risk that illegal products reach the market. The due diligence obligation requires companies to seek information about the origin of the timber, harvest conditions, suppliers involved, and compliance with national laws; to conduct a risk assessment; and to put in place mitigation measures. The law applies to virtually all paper-based products except recycled products and printed products such as books and magazines.

These are just some of the most important regulatory initiatives. In addition, companies must start meeting "soft" law requirements, such as the revised OECD Guidelines on multinational enterprises and the UN Guiding Principles on Business and Human Rights adopted in May and June 2011 respectively.

Throughout these regulations and initiatives are two threads: disclosure and due diligence, both of which require increased knowledge about the supply chain and the origin of products and services. Companies' procurement strategies need to fully embed these new expectations and requirements by integrating due diligence measures at the core of the procurement process.

Violating the U.K. Bribery Act carries a penalty of up to 10 years imprisonment; supply chain responsibility has become a tad more serious.

This post is also published on the Guardian Sustainable Business.

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