Countries across the globe have held human rights and environmental protection legislation for decades. However, the standards of compliance are evolving to ensure greater accountability for corporations and their supply chains. In fact, corporate accountability plays a major role in meeting human rights and environmental protection standards. While new mandatory regulations have taken effect in 2023, companies need to significantly ramp up their due diligence efforts and ensure compliance with these new regulations along with impending supply chain legislation —or face major penalties.
Understanding the Changing Landscape
Nearly all due diligence legislation seeks to implement the standards set by the UN Guiding Principles on Business and Human Rights. One example of such legislation is the German Supply Chain Act (GSCA), formally the Act on Corporate Due Diligence in Supply Chains.
The Role of Corporate Accountability
This act seeks to eliminate forced and child labor as well as provide additional environmental, social and governance (ESG) protections. The legislation intends to improve working conditions for all. In addition, it also seeks to completely eradicate human rights abuses from all commerce and production activities. After only 22 percent of companies were found to be compliant with the German National Action Plan in 2020, the German parliament enacted GSCA and voted to make participation mandatory in June 2021.
The German Supply Chain Act (GSCA)
The GSCA went into effect January 1, 2023 for companies with 3,000 or more employees in Germany. As of January 1, 2024 the law will extend to companies with 1,000 or more employees. The legislation also applies to foreign-based companies with registered German branches. From 2023 onward, applicable businesses in the German market must:
- Establish preventative measures within their supply chains
- Provide annual reports of due diligence activities
- Establish risk mitigation and risk management systems
Any company that does not comply with the GSCA could face repercussions through the Federal Office for Economic Affairs and Export Control (BAFA), including fines up to €800,000 and up to a three-year exclusion in public contracts.
A Global Movement for Compliance
Regulations like GSCA are a growing global movement. In December 2021, US President Joe Biden signed the Uyghur Forced Labor Prevention Act (UFLPA) that states all goods fully or partially manufactured in China’s Xinjiang Uyghur Autonomous Region are products of forced labor and are not eligible for US entry. Even smaller scale legislation like the Fashion Sustainability and Social Accountability Act (FSSAA) introduced in New York has real global regulatory and compliance implications.
Worldwide Due Diligence Directives
Other due diligence directives include:
- EU Mandatory Human Rights Due Diligence Directive
- Norwegian Transparency Act
- Swiss Human Rights Due Diligence Law
- Dutch Due Diligence Act
Challenges and Costs of Compliance
In order to ensure due diligence up and down their respective supply chains, companies are going to face much greater accountability standards and consequences—adding another layer to an already complex international trade compliance ecosystem. The protection of human rights and sustainability standards comes at a very real monetary cost. However, corporations will have to put due diligence at the forefront of their business practices to remain viable in the global market.
A Compliance Solution
Partnering with an expert in global trade compliance can be a first step in ensuring these regulations are met. This includes supplier risk assessment and needs to be addressed sooner rather than later.
Addressing Non-Compliance Swiftly
Should you uncover non-compliance with ESG standards, you will need to act swiftly. Finding and qualifying new suppliers is time-consuming. These kinds of supply chain risks could significantly impact business operations as well as your reputation.
Essential capabilities and software solutions include:
- Restricted party screening
- Sourcing
- Supplier management
- Import management software
- Export management software
The Proactive Approach: Digitizing the Supply Chain
Embracing digital transformation in the supply chain is the proactive strategy to meeting these new and evolving compliance regulations efficiently. This approach not only ensures adherence to regulatory requirements but also enhances cost-effectiveness and ensures customer loyalty. A global trade expert like QAD is not only a great step toward compliance and risk mitigation, but a leap towards a better world.
To find out more about QAD, please visit our website.
