What are EU due diligence regulations and why are the recent updates important?
EU Due Diligence Regulations
In the European Union (EU), the concept of due diligence has been codified in various laws and directives, including the Non-Financial Reporting Directive and the Directive on Disclosure of Non-Financial and Diversity Information. These laws require companies to report on their environmental, social, and governance (ESG) impacts and any risks or negative impacts associated with their operations or supply chains.
Affected supply chains don’t have to originate in the EU, they can originate in any part of the world. Special attention is being paid to markets in Africa, Asia, and Latin America where traditionally there has been a lack of traceability and transparency in the first/last mile(ex: smallholder farmer or informal waste collectors) of supply chains for sourcing or recycling.
In addition to these EU-wide regulations, each member state has its own laws and requirements for due diligence, which may vary depending on the specific industry or sector in which a company operates. For example, the mining and extractive industries are subject to specific due diligence requirements under the EU Conflict Minerals Regulation.
To comply with these laws and regulations, companies must conduct thorough and ongoing due diligence to identify and assess potential risks and impacts associated with their operations, products, and supply chains. This includes evaluating the environmental and social impacts of a company's activities, as well as any potential human rights violations or corruption within the supply chain. Check out this step-by-step guide for more tips on how to conduct effective due diligence. Having the right supply chain software can help you comply with these regulations.
What you need to know about the EU due diligence updates
As of January 1, 2023, new due diligence regulations will come into effect in the EU that will require companies to conduct due diligence on their supply chains to identify, prevent, and mitigate any adverse environmental impacts. This regulatory update will particularly focus on encouraging "deforestation-free" products, meaning that ingredients and materials were sourced in environmentally friendly ways.
The new regulations, known as the EU Directive on Supply Chain Due Diligence, will apply to companies selling products within the EU with more than 1,000 employees, or with an annual turnover of at least €400 million and a balance sheet of at least €200 million.
To prepare for these new regulations, companies should begin reviewing and updating their supply chain management processes and systems to ensure that they are able to identify and address any potential risks and impacts. This may include conducting risk assessments, implementing policies and procedures to mitigate identified risks, and engaging with stakeholders to gather information and identify potential areas of concern.
In addition to reviewing and updating internal processes, companies should also be aware of the specific requirements and guidance provided by the EU Directive on Supply Chain Due Diligence. This includes establishing a due diligence framework, appointing a responsible person to oversee the implementation and monitoring of the due diligence process, and developing an action plan to address any identified risks or impacts.
How can you start complying with the newest regulations?
Understanding the latest due diligence regulations and taking actionable steps toward compliance may seem daunting, but getting started earlier rather than later is essential. A few steps to keep in mind are:
- Familiarize yourself with the regulations and how they might affect your supply chain. Keep in mind that the top commodities affected are beef/leather, wood, palm oil, soy, coffee, cocoa, rubber, and some of their derived products.
- Map your supply chain end-to-end (to the farm or plantation level). Supply chains are complex and nuanced, so understanding what you have visibility of, and what you don’t, is the perfect start to ensuring the utmost compliance and protection of your business.
- Conduct a compliance audit of your supply chain against the new regulation requirements. Such an audit can be conducted internally. But we recommend leaning on a third-party consulting agency or supply chain traceability solution.
- Put a traceability solution in place that provides you with the information you need in real-time for your mandatory reporting. The new regulation requires that companies provide the geographical coordinates of the farm or plantation where the affected commodities were grown, in addition to the quantity, supplier, country of origin, etc. This information must be auditable. Products coming from countries considered high-risk will be under more scrutiny and are more likely to be audited.
- Set up ongoing checkpoints and training to ensure compliance continues and improves past your audit. Ongoing check-ins also ensures that stakeholders within your organization and supply chain are up-to-date and bought into requirements.
Overall, the new EU Directive on Supply Chain Due Diligence represents a significant shift in the way that companies are expected to approach supply chain management and due diligence in Europe. By preparing for these new regulations now, your brand can ensure that you are able to meet your legal obligations and protect your reputation.
Actionable steps to protect your business under the 2023 EU due diligence regulation updates
The new EU Directive on Supply Chain Due Diligence, which comes into effect on January 1, 2023, will require companies to conduct due diligence on their supply chains to identify, prevent, and mitigate deforestation and forest degradation. Six steps companies can start taking ASAP to protect their business under the upcoming EU due diligence laws include:
1. Familiarize yourself with the specific requirements and guidance provided by the EU directive on Supply Chain Due Diligence
It is important for companies to understand the specific requirements and guidance provided by the new regulations, including establishing a due diligence framework, appointing a responsible person to oversee the implementation and monitoring of the due diligence process, and developing an action plan to address any identified risks or impacts.
2. Review and update supply chain management processes and systems
Companies should assess their current supply chain management processes and systems to ensure that they are able to identify and address any potential risks and impacts. This may include conducting risk assessments, implementing policies and procedures to mitigate identified risks, and engaging with stakeholders to gather information and identify potential areas of concern.
3. Implement training and awareness programs for employees
Ensuring that employees are aware of the new regulations and their role in complying with them is critical. Companies should consider implementing training and awareness programs to educate employees on the requirements of the new regulations and how to identify and address potential risks and impacts in the supply chain.
4. Conduct audits and assessments of the supply chain
To ensure compliance with the new regulations, it will be important for companies to have robust systems in place to gather and analyze relevant information. This may involve conducting audits and assessments of the supply chain to identify potential risks or impacts and gather additional information and insights.
5. Use a traceability solution to ensure ongoing compliance
The new regulation requires that companies provide the geographical coordinates of the farm or plantation where the affected commodities were grown, in addition to the quantity, supplier, country of origin, etc. This information must be auditable at any time. Products coming from countries considered high-risk will be under more scrutiny and are more likely to be audited.
6. Engage with stakeholders
Engaging with stakeholders, including suppliers, customers, and civil society organizations, can be an important source of information and insights when preparing for the new regulations. Companies should consider engaging with stakeholders to gather additional information on potential risks and impacts in the supply chain and to identify potential areas of concern.
These six steps can help companies prepare for the new EU Directive on Supply Chain Due Diligence and ensure compliance with the new regulations. By taking proactive steps now, you can protect your company's reputation and build trust with customers, employees, and other stakeholders.
Common risks to your current supply chain systems under EU due diligence laws
Given the global economy, most organizations have multi-tier supply chains and suppliers that are often invisible and hence pose a major risk when it comes to the new EU Directive on Supply Chain Due Diligence. Three common areas typically overlooked by companies are:
1. Third-party audits/certifications of raw materials or finished goods are mass-balanced
Brands often rely on certifiers or fair-trade partners to meet their sustainability goals. While this was adequate in the past, it will not be in the future because the new EU regulations need proof of farmer-level data. Most aggregators/certifiers do spot audits and mass-balance the commodity. This means there is no way to determine if your raw materials were co-mingled with non-certified or deforestation-tainted products.
2. Downstream suppliers aren’t traced all the way to the first/last mile
Given that many raw materials like cocoa, coffee, soy, and cotton are sourced in poorer countries from smallholder farmers in remote locations–and recycled materials like glass, paper, and PET are sourced from informal waste collectors–brands rely on aggregators who oftentimes provide no visibility to source and location of raw materials.
3. Business systems (ERPs) are disconnected from field data hence auditing becomes impossible
Traditional ERP systems cannot scale down to remote locations and no geo-located data comes back into the supply chain. Thus, it cannot be audited. Without augmenting current ERP systems at the field level, brands will not meet EU compliance.
Protecting your business under the 2023 Due Diligence laws (effective January 1st) will take, you guessed it: diligence! But taking strategic, actionable steps while avoiding the above pitfalls is crucial to your company's future, success, and growth.
As global compliance regulations and supply chain disruptions rise, companies face unprecedented threats to growth. BanQu is a leading traceability solution that helps companies drive better business through quantitative sourcing insights, real-time supply chain data, and ESG reporting – all on a single platform. Click here to get your free demo today!