As legal frameworks evolve, companies are increasingly required to engage deeply with their suppliers, not only to ensure compliance but also to mitigate risks across their supply chains. Here’s a look at how current frameworks and regulations shape supplier engagement and the associated risks of non-compliance.
Key Points on Supplier Engagement and Legal Trends:
- Growing Legal Obligations: Companies face escalating legal requirements to gather and disclose detailed information from their suppliers. This information is crucial for complying with regulations like the Toxic Substances Control Act (TSCA) in the U.S. and similar regulations in Europe. The focus is on managing compliance and reducing legal risks associated with product content and production conditions.
- Focus on Substance Management: The need for precise processes to gather and evaluate supply-chain information has become critical, particularly with substances like PFAS under increasing scrutiny. Effective supplier engagement is essential to managing these risks and avoiding legal penalties.
- Importance of Supplier Collaboration: Engaging suppliers is vital for managing risks related to Scope 3 emissions—emissions that are often significantly higher than a company’s direct emissions. Effective collaboration involves integrating risk considerations into procurement and providing support to help suppliers meet regulatory standards.
Legal Frameworks and Supplier Engagement:
CDP (Carbon Disclosure Project):
- Supplier Engagement Rating (SER): CDP assesses companies based on how they engage suppliers on climate-related issues. This includes encouraging suppliers to disclose environmental data, set science-based targets, and improve their performance.
- Questionnaires: CDP requires companies to report on supply chain management, including risk assessments and collaboration with suppliers.
GRI (Global Reporting Initiative):
- GRI 308: Supplier Environmental Assessment: This standard asks companies to disclose the percentage of new suppliers screened using environmental criteria and to report on the significant negative environmental impacts in their supply chain.
- GRI 414: Supplier Social Assessment: This standard focuses on the social impacts of suppliers, requiring disclosure of the percentage of new suppliers screened using social criteria and the significant negative social impacts in the supply chain.
SASB (Sustainability Accounting Standards Board):
- Industry-Specific Guidance: SASB provides metrics related to supplier engagement, particularly in industries with material supply chain risks, such as labor practices in the apparel industry. Companies are encouraged to disclose their supplier engagement policies and how they mitigate associated risks.
TCFD (Task Force on Climate-related Financial Disclosures):
- Value Chain Risks: While TCFD doesn’t focus directly on supplier engagement, it encourages companies to consider climate-related risks throughout their value chain, including the supply chain. Companies are expected to disclose how they manage these risks, which often involves engaging suppliers to ensure resilience.
Emerging Trends in Supplier Engagement:
- Increased Scrutiny on Supply Chains: Companies must now ensure their suppliers adhere to strict environmental and social standards. This shift is driven by legal requirements and the need to mitigate risks associated with non-compliance, which can lead to significant fines, particularly under regulations like the Corporate Sustainability Due Diligence Directive (CSDDD) in the EU.
- Focus on Risk Mitigation: Accurate and timely information from suppliers is critical for managing compliance risks and ensuring that companies meet evolving regulatory standards.
Risk of Non-Compliance:
- Legal Exposure in Europe and the U.S.: Failure to comply with supply chain regulations can result in hefty fines and legal repercussions. In the EU, the CSDDD imposes due diligence requirements with significant administrative fines and potential civil liability for violations. Similarly, in the U.S., regulations like the Uyghur Forced Labor Prevention Act (UFLPA) create legal risks if supply chains are not adequately managed.
Harmony Analytics and Your Business
Harmony Analytics captures data on corporate compliance, including penalties relating to supply chain issues such as labor laws and pollution. By consistently evaluating over 11,000 companies, Harmony provides insights into the risks associated with supplier engagement and corporate compliance. Connect with the Harmony team for detailed support and insights as you navigate these evolving legal requirements.
