A New Era of EU Supply Chain Law is Coming.
As we move into an age of heightened corporate environmental and social responsibility, the European Union is leading the charge with ambitious and progressive new policies.
If your business exports to Europe, these changes should be on your radar – and so should RFID, which can help you meet the standards demanded by the new regulations.
The EU Green Deal and European Supply Chain Act usher in a new era of due diligence in corporate sustainability and human rights. They set high expectations for businesses to provide transparency in their supply chains – and they also create an opportunity for your company to make supply chain efficacy a true competitive advantage for your brand.
The EU Supply Chain Act – not just for big business.
Beginning with the largest companies and their suppliers then gradually rolling down to smaller players, the draft European Supply Chain Act sets a new standard in transparent social responsibility. Regulators around the world are already taking note when setting their own policies, so we can expect a gradual tightening of supply chain laws globally in years to come.
Although it impacts just the largest businesses initially, the standards set by the new legislation are expected to quickly become the benchmark against which European consumers measure brands and evaluate their purchases – so it’s time for exporters of all shapes and sizes to consider how their value chains perform.
Building end-to-end transparency into your supply chain is a herculean task for any business. But, by starting early, using technologies such as RFID to build rigor into your data collection, and adapting your manufacturing processes to meet new standards, you can build your brand efficacy and unlock a successful future trading in Europe.
What is the European Supply Chain Act?
According to the European Centre of Human Rights and Amnesty International, there is still a growing trend towards inhumane working conditions in global manufacturing. The natural environment is also affected by exploitation, with environmental impacts of poor manufacturing practices having significant consequences for the future and the livelihoods of millions.
Taking a strong stance to address these issues, the EU Supply Chain Act (also known as the Corporate Sustainability Due Diligence Directive (CSDD)) was adopted in June 2023. It demands that large companies audit their global value chain for any potential human rights impacts and environmental violations and take steps to end any adverse impacts they have on the environment and workers right through their supply chain (regardless of whether they are a direct employee or a supplier’s employee). It applies to both EU based and non-EU companies that export to member countries.
“By taking these measures, the EU is sending a clear signal that businesses have a duty of care and need to be more mindful of how their operations affect people and nature.”
To ensure they’re complying with EU standards, brand owners must establish traceability of their products back to its fourth-tier suppliers. So, for example, for an apparel manufacturer this would mean providing evidence of pesticide use in the cultivation of a cotton fibre used in a garment, among other requirements.
By taking these measures, the EU is sending a clear signal that businesses have a duty of care and need to be more mindful of how their operations affect people and nature.
These requirements will make transparency the new imperative for exporters. You management of supply and manufacturing data will become mission critical.
What are the Implications of the EU Supply Chain Act for Exporters?
With the upcoming regulations coming into force as early as 2025 for the largest companies, brands need to begin reflecting on how this legislation could impact them.
As well as considering possible administrative, financial, or reputational implications within their organisation and along its value chain, IT infrastructure will also play a key role.
Technologies such as RFID, which can carry a high level of data within a single product tag, are likely to become essential as digital product passports come into play in EU member states.
A value chain looks at the full life cycle of a product’s development (beyond just the direct supply chain) – it includes raw material extraction, production locations, labour standards in factories, waste management systems, etc. Companies should also ensure they are aware of the potential risks posed by all stakeholders within their supply ecosystem so they can prepare ahead for timely compliance when the rules come into force.
Under the EU Corporate Sustainability Due Diligence Directive, companies must also have a climate transition plan. This plan needs to demonstrate that they are striving to align with the sustainable economy and 1.5°C Paris Agreement warming target (keeping the Directive in line with the EU Green Plan, which also demands supply chain transparency).
Time for SME’s to Shine
Even if your products aren’t impacted in the first wave, now is the time to start future-proofing your business or getting ahead of the curve. New Zealand’s nimble SME’s are ideally placed to make changes to processes now to ensure they’re compliant in future, or even better, that they’re one step ahead of the major players.
While large corporates grapple to transform supply chains spanning dozens of manufacturing points, hundreds of SKU’s and multiple stakeholders, SME’s have a significant opportunity to walk a sustainability high-road.
“Even if your products aren’t impacted in the first wave, now is the time to start future-proofing your business or getting ahead of the curve.”
Those that strategically position and use technology to prepare themselves early can gain a competitive advantage by creating strong brand stories with genuine transparency at their heart. Testing and learning new technologies, selecting suppliers carefully from the outset and holding them to account, and building strong relationships right through the value chain will help you create a strong operating foundation.
Considerations for Manufacturers and Exporters to Europe
1. Transparency is Non-Negotiable: The CSDD places a premium on transparency. Exporters must prepare for a heightened level of scrutiny by disclosing detailed information about their supply chain – right down to the 4th tier of the supply chain, raw material inputs. This necessitates a comprehensive review of suppliers, demanding adjustments to ensure alignment with the EU’s exacting sustainability standards. Collect that data and review your systems to ensure you can store it and report on it easily – RFID is an ideal place to start.
2. Know Your Environmental and Social Risks and Plan to Mitigate Them: Compliance goes beyond showcasing your green initiatives. Exporters must conduct exhaustive assessments of their environmental and human rights impact, identifying potential issues and implementing risk management strategies to mitigate them. Corporate governance also plays a key role, with boards needing to stay abreast of legislative frameworks in order to manage risks effectively.
3. Do Your Due Diligence on Human Rights in your Supply Chain Partners: A focal point of the Act is the emphasis on human rights issues within supply chains. You are responsible for carrying out due diligence on your suppliers. Start as you mean to go on, by putting in place audits and impact assessments right through your value chain, then create robust policies to safeguard human rights and set you up for success.
4. Encourage a Culture of Collaboration: The EU Supply Chain Act advocates for collaborative efforts between stakeholders. Exporting companies are encouraged to proactively engage with suppliers, local communities, and regulators to foster a culture of sustainability and positive business relationships. Corporate responsibility doesn’t begin and end with you – each company in your supply chain has the same diligence obligations, so make sure they are aware too. Such engagement not only aligns with the Act but also bolsters the reputation of your business.
5. Realign your Policies and Practices: Scrutinize your existing sustainability policies and practices. Are they congruent with EU standards? If not, a business strategy overhaul could be in order. Ensure your company policies align seamlessly with the Act / CSDD requirements. Ensure your team are aware of your policies and why they’re important, and that they’re consistently implementing them throughout all facets of your operation. Create an action plan that everyone in your value chain buys into.
6. Educate Yourself and Prepare to Continuously Adapt: The sustainability landscape is dynamic. Exporting companies must remain abreast of regulatory changes, technological advancements, and emerging best practices. Staying informed will help you to be ready to adapt to new requirements and position your business as a trailblazer in sustainable practices.
Carve Your Path to Sustainability Excellence
As the EU Supply Chain Act takes centre stage, exporting companies find themselves at a pivotal point with regards to sustainable and responsible business practices. Compliance with the directive not only safeguards you against regulatory repercussions, but also serves as a gateway to new markets and enhances your brand’s reputation.
We know it’s daunting, but understanding the implications of the changes the EU is making around sustainability and human rights, and acting early, will set you up to succeed in the European market long term.
To begin a conversation on how RFID can help your business deliver the supply chain transparency demanded by EU regulations, give our Vitag team a call today.
SOURCES:
* European Commission: https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145
* Draft EU Supply Chain Act: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0071
* Fortune: https://fortune.com/europe/2023/08/05/eu-regulations-human-rights-supply-chains-abuses-sweatshops/
* IPSO: https://www.ispo.com/en/outdoor/eu-supply-chain-act-no-data-no-compliance-no-business
* NZTE: https://my.nzte.govt.nz/article/20231101-the-benefits-of-transparency-in-your-supply-chain
* Fashion United: https://fashionunited.uk/news/business/what-to-know-about-the-eu-s-upcoming-digital-product-passport/2023082871266
NOTE:
The new due diligence rules will be applicable to the companies and sectors listed below.
• EU companies:
- Group 1: Consists of EU limited liability companies that are of significant size and economic power, with 500 or more employees and a net worldwide turnover of at least EUR 150 million. This is anticipated to take effect in early 2025.
- Group 2: Consists of other limited liability companies operating in specific high impact sectors. These companies do not meet both of the Group 1 thresholds, but have more than 250 employees and a net worldwide turnover of EUR 40 million or more. The implementation of rules for these companies will begin 2 years after Group 1.
• Non-European Union companies that operate within the European Union and have a turnover threshold aligned with Group 1 and 2, generated within the EU.
Small and medium enterprises (SMEs) are not included in this proposal’s initial phase.