Analyst Insight: Regulatory pressure is intensifying globally to hold businesses accountable for sustainability in their operations as well as in their extended supply chains. Companies that vowed to make good on their sustainability pledge are now being scrutinized to deliver on those promises, as measured by their degree of regulatory compliance.
Germany’s Supply Chain Due Diligence Act, effective in January, 2023, is a first-of-its-kind effort to require enterprises to validate efforts to prevent human-rights and environment-related violations in supply chains. It aims to prevent or end such supplier wrongdoing. The due-diligence requirement scrutinizes companies’ risk-management programs and levies penalties for violations, including fines of up to 2% of revenue, as well as exclusion from future government contracts. Companies that previously governed their suppliers merely by applying the same “code of conduct” as their own must now implement far more rigorous measures to enforce supplier compliance, or be subject to severe penalties.
The Corporate Sustainability Due Diligence Act, adopted by the European Commission in 2022, constitutes similar legislation. It fosters sustainable and responsible corporate behavior throughout global supply chains, enforceable by EU supervisory authorities through imposition of fines, sanctions and compliance orders.