LKSG related Articles

"Doing the right thing" and "doing things right" are two essential principles that can help companies to strengthen human rights and protect the environment in their supply chains.

By "doing the right thing," we are referring to acting ethically and following moral principles, such as respect for human rights and the environment. This concept is reflected in a company’s efforts to make decisions and take actions that are consistent with its values and commitment to social and environmental responsibility.

"Doing things right" refers to following good practices and processes to achieve desired outcomes. In the context of protecting human rights and the environment in supply chains, companies should implement robust systems and processes to ensure that their suppliers meet their standards and commitments. Examples of these standards can include:

• establishing clear policies and expectations for suppliers,
• monitoring and evaluating their performance, and
• taking corrective action as needed.

By "doing the right thing" and "doing things right," companies can demonstrate their commitment to protecting human rights and the environment in their supply chains and can work to ensure that to uphold these principles throughout their operations.

The recently implemented German Supply Chain Due Diligence Act and the upcoming EU Directive on Corporate Due Diligence is a significant step forward to help companies "do the right thing." Regarding "doing things right," the administrative effort required is an ongoing point of discussion, but an evolution we are sure to see over time.

Lastly, this is new territory also for the regulators. German regulatory body BAFA (the Federal Office for Economic Affairs and Export Control)  has published several documents to help give guidance to companies for their way forward.

Notwithstanding regulatory aspects, what benefits do commercial enterprises receive when following a "moral compass" or an "ethical business compass?" How does actively monitoring human rights and environmental protection risks in their supply chain affect direct and indirect suppliers?

There are several benefits for commercial enterprises to follow a business ethical compass and actively monitor supply chain risks in terms of human rights and environmental protection:

• Reputation: By following a moral compass and taking a proactive approach to monitoring and addressing supply chain risks, businesses can enhance their reputation and build trust with customers, investors, and other stakeholders. This aspect is critical today, where consumers and investors increasingly demand that companies act responsibly and sustainably.
• Legal compliance: Many countries have laws and regulations that require businesses to respect human rights and protect the environment in their operations and supply chains. By following a business ethical compass and monitoring supply chain risks, businesses can ensure that they follow these laws and regulations and avoid the costs and risks associated with non-compliance.
• Cost savings: Implementing effective risk management processes for a supply chain can help businesses identify and address potential issues before they escalate into costly problems. This risk management can help businesses avoid supply chain disruptions, reduce product recalls risk, and minimize remediation costs.
• Risk management: By actively monitoring supply chain risks and addressing them, businesses can mitigate the risk of negative impacts on their operations, reputation, and financial performance.
• Innovation and competitive advantage: Adopting sustainable and responsible practices can drive innovation and help businesses differentiate themselves from their competitors. This practice can be beneficial in markets where consumers and investors are increasingly seeking out companies that are proactive in addressing social and environmental issues.

Summary

"Doing the right thing" and "doing things right" can assist companies in improving human rights and environmental protection in the supply chain. Companies should develop solid systems and processes to ensure suppliers meet these requirements and commitments. Following a business ethical compass helps companies develop confidence with consumers, investors, and other stakeholders. Sustainable and responsible practices can boost innovation and set companies apart. This methodology is crucial in areas where consumers are increasingly looking for socially and environmentally responsible companies.

The Council and Parliament's provisional agreement on parts of a comprehensive package to combat money laundering and terrorist financing places a strong focus on two crucial aspects: the transparency of beneficial ownership and the mitigation of risks associated with high-risk third countries.

With regard to beneficial ownership, it is emphasised that transparency and disclosure are crucial in order to effectively combat money laundering and terrorist financing. The agreement reaffirms the need to identify the actual persons (beneficial owners, or UBOs for short) who benefit from or control legal entities and to make this transparent in order to close possible loopholes.

We are particularly pleased with the clear definition of a threshold value for beneficial ownership: the agreement sets this at 25%. The associated provisions for multi-layered ownership and control structures are also clarified so that it is no longer possible to hide behind several layers of company ownership.  This includes the requirement for entities or arrangements associated with persons or entities subject to targeted financial sanctions to be flagged, as well as granting register authorities in charge of registers to conduct on-site inspections at the premises of legal entities if there are doubts about the accuracy of the information in their possession.  Furthermore, the agreement establishes that besides supervisory and public authorities and obliged entities, members of the public with legitimate interests, such as the press and civil society, may also access the registers.

With regard to risks from high-risk third countries, obliged entities are required to take enhanced due diligence measures when doing business with such countries. This is to ensure that the EU financial system is not jeopardised by weaknesses in the anti-money laundering and terrorist financing regulations of these countries.

The agreement emphasises the importance of a risk-based approach and allows Member States and obliged entities to take specific measures to adequately assess and address risks. The texts will now be submitted to the representatives of the Member States and the European Parliament for approval before being formally adopted and published in the Official Journal of the EU.

It is therefore clear that without appropriate digital tools such as Trustnet.Trade from Cargodian for analysing the risks associated with business partners and documenting the outcomes of the risk analysis and assessment, which include identifying beneficial owners (UBO) and assessing risk in specific countries, it will not be possible to meet the new requirements.

On 23 April 2024, the EU Parliament agreed on new regulations that ban selling, importing, and exporting products made using forced labour.  The regulations got overwhelming support, with 555 members in favour, six against, and 45 abstentions.  These regulations are meant to make it tougher for products linked to forced labour to be sold within the EU. The goal is to eliminate any links to modern slavery and human rights abuses in both imports and exports within the EU.

These regulations are also intended to stop the concerning rise of inexpensive products made from forced labour spreading in the EU market.  According to the International Labour Organization, around 28 million people worldwide are in forced labour situations, generating a total of $236 billion (€217 billion) annually.

International Scrutiny on Xinjiang

EU lawmakers were motivated to take action because they are concerned about human rights in the Chinese region of Xinjiang.

In 2021, the United States passed a similar law to protect its market from products that might be connected to human rights violations in Xinjiang.  The U.S. government accuses China of committing genocide against Uyghur Muslims in Xinjiang.

China denies these accusations, stating that there are no abuses in Xinjiang, despite strong evidence that about 1.8 million Uyghurs and other Turkic peoples have been detained in “re-education” camps.  There, they were trained in different skills and made to work in factories producing a range of products, from chemicals and clothing to car parts.  Xinjiang is also important for cotton production and supplies many of the world’s materials for solar panels.

Who Will Be Subject to The New Regulation?

The key prohibition in this regulation prohibits any “economic operator”, which applies to any business or group of people who sell, import or export products in the EU, from selling, importing or exporting products made with forced labour.

This regulation also focuses on online platforms.  If products are being sold online and the platform targets end-users in the EU, it’s considered as selling products in the EU.  This applies if the platform is targeting end-users in one or more EU countries.

EU Efforts Against Forced Labour

Authorities in each of the 27 countries in the bloc or the executive Commission can investigate questionable products, supply chains, and manufacturers, aiming to complete initial investigations within 30 working days.  This regulation empowers authorities in member states and the European Commission to look into cases where forced labour might have been used, as well as suspicious products, supply chains, and manufacturers.

The European Parliament stated that investigations into suspected cases of forced labour will rely on factual and verifiable information gathered from various sources.  These include international organisations, cooperating authorities, and whistleblowers.  The Commission can ask for help from other Union bodies, offices, or agencies to carry out tasks like investigations.  These tasks include processing information, supporting investigations, and cooperating with Member States and international authorities.  The Commission’s role in making decisions to ban products is separate and impartial.  It should have the expertise and resources needed to fulfill its responsibilities under this Regulation.

Various risk factors and criteria will be considered, such as how much forced labour is controlled by the government in specific industries and locations.  This points to the fact that when the government forces people to work, it creates a big risk across a whole area.  It’s challenging, and sometimes even impossible, to uncover the full extent of such practices particularly in regions where freedom of expression is restricted.

Article 4 of the European Convention on Human Rights serves as a cornerstone in the fight against forced labour.  It prohibits serious exploitation, even if it’s connected to human trafficking in certain situations.  If there are suspicions related to countries outside the EU, the European Commission can start investigations and request governments in those countries to address instances of forced labour.

Which Stages of the Supply Chain Are Included?

To make sure this regulation is effective, it’s important to ban products made with forced labour at any point of their production, manufacture, harvest, and extraction.  This ban should include all types of products and their parts, and it should apply no matter where the products come from, whether they’re made in the Union or brought in from other places, and whether they’re sold within the Union or exported.  This regulation, however, do not cover transportation services.

What Are the Consequences of Using Forced Labour?

If products are confirmed to be made using forced labour, they will be removed from the market in the EU.  Additionally, if these products are found already being sold in the EU, they will either be donated, recycled, or disposed of.

Moreover, the regulation prohibits products declared to be made using forced labour from being sold online in EU member countries, with shipments coming into the EU being stopped at the borders to prevent the circulation of products made through exploitative labour practices.  However, there are ways for banned products to be allowed back into the market.  This can happen once the company shows that it has removed forced labour from its supply chains.  For certain products that are considered risky, importers will have to give detailed information about the manufacturers.

If a component of a product breaches this rule, only that component needs to be replaced, not the whole thing.  So, the authorities need to consider how much of the product might have been made with forced labour. Here are two examples to explain this:

1. If a component of a printer was made with forced labour, only that component needs to be replaced, not the whole printer. The manufacturer must either find a new supplier for that component or ensure it’s not made with forced labour.  So, in this case, only the component needs to be replaced.
2. If the chilli used in making sauce was made with forced labour, the whole batch of sauce must be discarded. In this case, it’s impossible to discard part of the product.

In some cases where there’s a supply risk to critical products, the authorities might decide not to impose disposal.  Instead, they might direct the company to keep the product until they can prove it wasn’t made with forced labour.

This legislation will affect all businesses, including small and medium-sized enterprises (SMEs).  It applies to all products sold on the EU market, whether they’re made in the EU or imported, regardless of the industry.

Companies that do not enforce the regulation will face fines imposed by the member states, with the intention of making the fines fair and discouraging non-compliance.

Public Database on Forced Labour Risk

Forced Labour Single Portal

The Commission will establish a regularly updated database of specific economic sectors in specific geographic areas where the government uses forced labour.  The database will be populated with reliable information from various sources.  These include the International Labour Organization (ILO), the United Nations (UN), and other research or academic groups.

The database should be accessible to the public via the Forced Labour Single Portal.  If there is solid evidence that products from certain industries in certain places are likely made with forced labour by government authorities, those industries and areas should be listed in the database created by this regulation.

Single Information Submission Point

The Commission will create a special central system (called the Single Information Submission Point) where people can submit information.  This system will be in all official languages of the Union, easy to use, and free of charge.  It should be made available to the public at the latest 18 months after the date of entry into force of this regulation.

Anyone, whether a person or a group without legal status, can report suspected violations through this central system.  They need to include details about the companies (economic operators), or products involved, explain why they believe there’s a violation, and provide any evidence or documents they have, if possible.

What’s Next

The regulation needs to be approved by the EU council before they become official.  This step is seen as just a formality.  Once approved and published in the Official Journal, EU member countries will begin enforcing the law within three years.

What Should I Do Now to Prepare?

Use data-driven assessment tools and technology like Trustnet.Trade to create clear visibility, identify risks, and promote sustainable practices throughout your supply chain, including lower tiers.

This is crucial for any sustainability efforts, from statements about modern slavery to reporting on environmental, social, and governance (ESG) factors.  It can also lead to other advantages like improved operational efficiency, stronger risk management, and a supply chain that’s better able to withstand challenges.

Conclusion

The EU Parliament has approved new regulations to fight against forced labour.  These regulations are meant to eliminate any connection to modern slavery in the EU and send a strong message to countries worldwide.  The regulations make it illegal to sell, import, or export products made with forced labour.  The regulations also give power to authorities to investigate suspicious products and supply chains.  The regulations create a public database about forced labour risks and punish those who are non-compliant.  The EU Parliament’s dedication to fighting forced labour reflects a joint effort to uphold human rights and create a fairer world.

Starting 30 December 2024, the EU Deforestation Regulation (EUDR) will be in full effect.  This new rule requires companies selling products in the EU to ensure their goods do not contribute to deforestation.  Here’s a simple guide on what the EUDR is, who it affects, and how businesses can prepare.

What is the EU Deforestation Regulation (EUDR)?

Why It Matters

Deforestation, mainly driven by the demand for products like coffee, cocoa, timber, and paper, is a major global problem.  About 90% of deforestation is linked to how these products are sourced.  Previous efforts to reduce deforestation have not been very successful, often due to lack of transparency in supply chains.

The EU, the second-largest importer of products causing tropical deforestation, decided to act.  In 2023, they introduced the EUDR to ensure products sold in the EU do not contribute to deforestation, supporting the European Green Deal’s goals.

Key Points of the EUDR

The EUDR requires companies to verify their products are deforestation-free.  This applies to:

• Cattle (beef and leather)
• Cocoa
• Coffee
• Palm oil
• Rubber
• Soy
• Wood (including furniture and paper)

Companies must trace these products back to where they were produced and ensure they follow local and international laws on land use, environmental protection, and human rights.

What Companies Need to Do

Deforestation-Free Checks

Companies must do thorough checks to confirm their products do not cause deforestation.  This includes:

• Data Collection: Gathering detailed information about the product’s origin and supplier.
• Risk Assessment: Identifying any risks of non-compliance.
• Risk Mitigation: Taking steps to reduce any identified risks.

Compliance with Local Legislation

Companies must also ensure their products follow local laws on land use, environmental protection, labour rights, human rights, and the rights of indigenous peoples.

Due Diligence Statement

Businesses need to submit an electronic statement to the European Commission and relevant EU authorities, declaring they have checked their products and found minimal risk of non-compliance.

Important Dates

The EUDR will be implemented in stages:

• 2019: EU starts planning the EUDR.
• 2021: Proposal for the regulation is adopted.
• 2022: Agreement on the regulation.
• 2023: EUDR becomes law on June 29th.
• 2024: Medium and large companies must comply by December 30th.
• 2025: Small and micro-sized companies must comply by June 30th.
• 2028: The regulation will be reviewed every five years starting June 30th.

How Businesses Can Prepare

To comply with the EUDR and ensure a deforestation-free supply chain, businesses should:

1.      Map Your Supply Chains

Gain comprehensive visibility into your supply chains by tracing products back to their origins. Identify any gaps in traceability and areas at high risk for deforestation.

2.      Conduct Risk Assessments

Set up strong systems to collect, verify, and report the origins and production methods of your products.  Regularly assess risks to spot any compliance issues.

3.     Mitigate Risks

Work closely with suppliers to improve practices and ensure they meet EUDR requirements. Communicate with all partners to ensure they understand and comply with the new rules.

4.     Continuously Monitor Progress

Stay updated on any changes or new guidelines related to the EUDR.  Regularly review and update your due diligence processes to stay compliant.

Conclusion

The EU Deforestation Regulation is a significant move towards reducing global deforestation by increasing transparency in supply chains.  By understanding and preparing for the EUDR, businesses can contribute to more sustainable practices and support efforts to protect our forests.

How Trustnet.Trade Can Help

Trustnet.Trade makes compliance management easier through its robust digital platform, centralising data collection and enabling continuous risk monitoring.  It enhances visibility and intelligence regarding quality and compliance data.  Trustnet.Trade helps your company with appropriate risk assessment and thorough supply chain mapping.  Such a centralised approach would make it easier to collect and analyse data efficiently, providing a streamlined solution for maintaining and improving compliance standards.

On July 18th 2024, a recently approved regulation by the European Union (EU) entered into force that requires almost all products sold in the EU to have a Digital Product Passport (DPP).  The aim is to make product information clear and accessible, meeting the growing demand from consumers, investors, and other stakeholders for details about where products come from, what they are made of, and their environmental impacts.

What is a Digital Product Passport?

A Digital Product Passport (DPP) is a digital file that provides detailed information about a product’s life.  This includes where it comes from, the materials used, its environmental impact, and how to dispose of it.  Each product gets a unique identity linked to this data, making the product’s journey and sustainability clear.

The EU’s Ecodesign for Sustainable Products Regulation (ESPR)

The goal of the Ecodesign for Sustainable Products Regulation (ESPR) is to make sustainable products the norm in the EU, reducing their environmental and climate impact.  This rule applies to all products sold in the EU, no matter where they are made.  It includes strict rules on how companies should manage products, like banning the destruction of unsold clothing and footwear, and making products last longer and easier to repair.

The ESPR proposal was introduced by the European Commission in March 2022, as part of the Circular Economy Action Plan under the European Green Deal.  As of June 2024, the ESPR had been proposed but not fully adopted. The regulation aims to make sustainable products the norm within the EU by setting strict rules on product design, durability, reparability, and resource efficiency, among other factors.  The European Parliament approved the ESPR in April 2024, but the full adoption process involves further negotiations and finalisation by the Council of the European Union.

The New Digital Product Passport (DPP)

A key part of the ESPR is the Digital Product Passport.  The EU Commission will run a public web portal where consumers can look up and compare sustainability information from the product passports.  Companies with complex supply chains will need to understand and document each stage of their value chain to meet these requirements.

Timeline and Scope

Digital Product Passports are not required yet, but they are expected to become mandatory for various products between 2026 and 2030.  This rule will apply across all 27 EU member countries and cover many types of products, focusing on those with high environmental impacts and big improvement potential.  These include:

• Textiles (e.g., clothing and footwear)
• Furniture
• Chemicals
• Batteries
• Consumer electronics
• Electronic devices
• Construction products

Components of the Digital Product Passport

To meet the EU’s DPP data requirements, a Digital Product Passport should include:

• A unique product identifier (UID)
• A global trade identification number as per ISO/IEC standards or equivalent (International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC))
• TARIC (Integrated Tariff Rate System) code and other relevant commodity codes
• Compliance documents (e.g., declaration of conformity, technical documentation, conformity certificates)
• Information on substances of concern
• User manuals, instructions, warnings, and safety information
• Details about the manufacturer, operators, and importer
• Unique facility identifiers
• Information for consumers on how to install, use, maintain, and repair the product to ensure long life and minimise negative impact
• Information on how to return or dispose of the product at end-of-life
• Information for treatment facilities on disassembly, recycling, or disposal

The exact data required will vary depending on the product type and specific delegated acts of the ESPR

Benefits of Implementing Digital Product Passports

1. Enhanced Transparency

DPPs give detailed information about product origins, materials, and environmental impacts, increasing visibility for a company’s brand and fostering trust among customers.

2. Improved Supply Chain Management

DPPs provide a full digital record of a product’s value chain, helping companies optimise processes, reduce environmental impact, and ensure a more sustainable and efficient supply chain.

3. Regulatory Compliance

DPPs help companies easily meet environmental standards and regulations, promoting responsible and sustainable business practices.

4. Trust Building

By providing transparent and verifiable information on a product’s origin, authenticity, and compliance with relevant standards, DPPs help build trust among customers, investors, and other stakeholders.

Conclusion

The introduction of the Digital Product Passport is a big step toward better transparency and sustainability in the EU market.  By understanding and preparing for these new requirements, businesses can not only comply with regulations but also enhance their brand’s reputation, improve supply chain efficiency, and build stronger trust with stakeholders.

The Ecodesign for Sustainable Products Regulation (ESPR) was proposed by the European Commission (EC) on 30 March 2022.  It is part of the European Green Deal that aims at transforming the European Union (EU) into a climate-neutral, resource-efficient, and competitive economy by 2050.  It also aims to promote sustainable products in the EU market.  Though still in its early stages, ESPR could set global standards for ecodesign.

Deadlines and Transition Periods

Deadlines and transition periods will be defined in delegated acts after the ESPR is adopted, during its implementation phase from 2024 to 2030.  The first ESPR delegated act is anticipated to be issued no earlier than one year after the ESPR takes effect, around the second quarter of 2025.  This act will have a transition period of at least 18 months before it becomes effective, approximately by the fourth quarter of 2026.

What Is the Ecodesign for Sustainable Products Regulation (ESPR)?

ESPR sets requirements for the design and performance of sustainable products sold in the EU.  It aims to improve circularity, resource efficiency, and energy efficiency.  Unlike the current Ecodesign Directive, which focuses only on energy-related products, ESPR covers a wide range of product categories.

The regulation governs virtually all products placed on the market or put into service in the EU, with limited exclusions such as food, feed, and medicinal products.  The regulation includes 16 product aspects that define environmental sustainability, including durability, reliability, reusability, upgradability, reparability, and environmental impacts.

Additionally, the regulation sets performance and information requirements for products, including minimum quantities of recycled content, restrictions on certain substances, and the inclusion of a Digital Product Passport (DPP), which provides information on products’ sustainability attributes, empowering consumers to make informed choices and facilitating repairs and recycling.

Key Points of ESPR

ESPR will affect different product groups at different times, prioritising high-impact items like textiles, furniture, and chemicals.  Eventually, it will cover all products in the EU market, focusing on:

• Carbon footprint
• Durability, reusability, and repairability
• Requirements for unsold consumer products
• Recycled content
• Digital Product Passport for material and sustainability transparency
• Energy and resource efficiency
• Use of non-circular materials

Why ESPR Matters

ESPR could have a big impact globally.  Known as the Brussels Effect, EU regulations often influence laws in other regions, potentially setting global standards for sustainable product design.

This means that non-EU manufacturers wanting to sell their products in the EU must ensure their products meet the ESPR’s requirements, which will lead to a worldwide impact on sustainable product design and production practices.

The Importance of ESPR

ESPR aims to standardise ecodesign, offering a clear framework for companies committed to sustainability.  This helps address the current lack of global guidelines, providing a science-backed roadmap for manufacturers and designers.

ESPR takes a life-cycle approach to product design, focusing on reducing environmental impacts from the design phase through end-of-life.  By 2030, ESPR is expected to save 132 million tonnes of oil equivalent in primary energy, reduce greenhouse gas emissions by 260 million tonnes of CO2 equivalent, and create 200,000 new jobs.

Who Needs to Comply with ESPR?

ESPR applies to all products sold in the EU, regardless of where they are made.  This means that US-based ecommerce businesses and other non-EU companies operating in the EU market must comply.  The regulation applies to virtually every product category placed on the EU market, expanding beyond the current scope of energy-related products.

Impact on Suppliers

Suppliers to businesses selling products in the EU must also meet ESPR requirements.  The Digital Product Passport will require detailed information about product materials, so suppliers need to provide this data to their customers.

How ESPR Affects Ecommerce Businesses

For companies selling products in the EU, compliance with ESPR is mandatory.  Products must meet the new regulations or be withdrawn from the market.  Additionally, like the General Data Protection Regulation (GDPR), ESPR could influence similar laws worldwide, affecting global product design standards.

Manufacturers and importers have to ensure their products meet the new sustainability criteria set by ESPR, which may involve redesigning products, manufacturing processes, or supply chains.  Compliance is necessary for market access in the EU.

Preparing for ESPR

With ESPR requirements, businesses, especially in fashion and textiles, should take steps to ensure compliance.  Here are some key strategies:

1. Conduct a Life Cycle Analysis (LCA)

Perform an LCA to assess your product’s environmental impact from creation to disposal.  This approach helps identify areas for improvement in product design with sustainability in mind.

2. Use ESG Reporting Software

Integrate sustainability reporting into your tech stack for real-time insights into your environmental impact.  This helps identify and address weak points, crucial for developing sustainability initiatives and staying compliant with other climate laws.

3. Organise a Sustainability Audit

A sustainability audit provides an overall view of your company’s environmental impact.  While ESG reporting offers real-time data, an audit gives a comprehensive snapshot, both useful for strategic planning.

4. Gain ESG Certification

Achieving ESG certification aligns your business with trusted sustainability frameworks, moving you closer to compliance with climate laws.  It also offers third-party validation of your sustainability commitment, enhancing stakeholder confidence.

5. Learn Ecodesign Basics

Understanding ecodesign basics, which ESPR builds on, ensures that your products are on the path to compliance. This foundational knowledge is crucial for integrating sustainable practices into your product development process.

Conclusion

The Ecodesign for Sustainable Products Regulation is a significant step towards sustainable commerce in the EU and potentially worldwide.  By understanding and preparing for ESPR, businesses can ensure compliance and lead in sustainable product innovation.  Now is the time to integrate these practices into your operations, positioning your company at the forefront of sustainable design.