Supply Chain
Looking Ahead:
Operational Impacts of Supply Chain Disclosure, Due Diligence Laws

Supply chain globalization is creating economic opportunity for parts of the world previously left out of global trade, but the same forces that have provided greater access to jobs and cheaper goods for consumers have also fueled the deplorable and prevalent issues of modern slavery around the globe.

According to the International Labour Organization, 16 million of the estimated 40 million victims of modern slavery worldwide are in forced labor conditions within the private sector. Legislation has risen over the years to address this persistent scourge, starting with the California Supply Chain Transparency Act, the UK Modern Slavery Act and France’s Devoir de Vigilance.

The growth in due diligence legislation makes the legal and operating environment more complex for businesses than ever before, making robust management practices essential.

A quick examination of the legislative landscape

As we discussed in this updated report on modern slavery, which examines the legislative landscape worldwide, legislation can be grouped into two main categories: Mandatory disclosure and mandatory due diligence laws.

Mandatory disclosure laws require companies to disclose information on their activities relating to modern slavery. They are entirely dependent upon public scrutiny, and the spectre of damaging brand reputation is what holds parties accountable for their actions. Mandatory due diligence laws are generally more prescriptive — there is a liability aspect that makes the due diligence law landscape even more urgent, which drives companies to really act and change.

New rules in the Netherlands expected this month will require companies to assess supply chains to identify any child labor risks, and then develop due diligence plans to address and mitigate risk beyond only direct suppliers. Switzerland is considering similar legislation, with a call for investors to back the proposed due diligence rules and move them closer to approvals.

Operational impacts of modern slavery legislation on companies

While these laws are instrumental in creating more ethical, sustainable supply chains, any new law heightens the risk environment. Global organizations may face several operational impacts as a result of complying with new rules:

1. More stringent requirements mean a greater chance of lawsuits, which take considerable time and money to settle, regardless of whether they end up in a conviction.

2. With brand reputation risk at an all-time high, violating due diligence laws can be even more severe for some companies than civil and criminal consequences.

3. Drastic measures to comply with laws or deal with violations — such as selling off shares or entire subsidiaries, or delocalizing part of a company’s activities — could affect operations.

4. Departments may need to be restructured to comply with new rules — including compliance, procurement, CSR, HR, health and safety, and security.

Leading organizations will likely take on a more strategic approach to addressing due diligence regulations. By turning their focus beyond compliance alone and proactively seeking and engaging with suppliers who leverage better workforce and employment conditions to drive quality, speed, innovation and more, these organizations will inherently minimize liability and many of these operational impacts.

Beyond tactics: A more strategic approach on the horizon

Given due diligence obligation are mixed in with a broad range of concerns including environmental, safety, labor, and corruption risks, assessment and monitoring may be spread across silos in risk, compliance, sustainability, procurement, legal, and other teams. Companies are responding by looking for ways to connect those silos and get a centralized, holistic view of supplier risk data in one place.

Most large multinationals can look to their compliance departments for guidance in developing due diligence capacity, as compliance professionals have deployed similar systems for several decades to address anti-corruption legal requirements. Another great resource is the** US Customs and Border Protection**, which issues reports on products and locations prone to forced labor, and recommends that companies refer to them when performing their due diligence. There are also studies and measures available — such as the Corporate Human Rights Benchmark — which assesses 101 of the largest publicly traded companies in the world on a set of human rights indicators. Another resource is Business and Human Rights. Companies should leverage resources such as these in their due diligence efforts.

Many companies are turning to sustainability ratings and intelligence, which can be a foundational element of a due diligence framework. A comprehensive solution should enable organizations to identify, map and screen risks across the entire supply chain, get a holistic assessment and rating of a partner’s sustainability management system (including human rights topics), and create corrective action and improvement plans for low-scoring suppliers. With a country-, category- and spend-specific view of risk; and the ability to consistently monitor and drive better supplier performance, it’s much easier to keep up with the evolving due diligence environment.

Although it will require adaptability and attention, the growing legislative landscape is positive progress in addressing critical sustainability risks; and should be seen as an opportunity for organizations across all industries, sectors and sizes to drive real, tangible change. With the right tools and approaches that create a solid due diligence foundation, companies can not only meet these new standards but go farther, moving beyond compliance to drive performance and thus value and lasting impact.

Get the modern slavery and new legislative landscape paper here.