Companies are starting to ensure key suppliers and service providers align with their policies
Companies are beginning to place a much greater focus on ensuring that their key suppliers and service providers’ businesses and business practices align with their own ESG strategies and policies.
“For example, as part of a procurement or tender for services, our client may seek confirmation that the service provider has a diverse workforce or has a diversity and inclusion or similar policy in place,” he explains.
Or, as part of a tender for goods, the client may seek confirmation or a commitment that none of those goods have been sourced, manufactured or produced through child or forced labour. Some clients are also asking their suppliers what commitments they have in place around their energy transition or their net zero or carbon reduction targets.”
He says companies should be aware of the draft Corporate Sustainability and Due Diligence Directive (CSDDD) which was recently published by the European Commission. Once approved this will be transposed into national law by member states.
The CSDDD sets out an EU standard for human rights and environmental due diligence which would apply to what are known as Group 1 and Group 2 companies.
These are companies or groups of companies with an aggregate annual net turnover in the EU of more than €150 million or more than €40 million with at least 50 per cent of net worldwide turnover generated in certain high-risk sectors such as textiles, clothing and footwear, agriculture, forestry, fisheries and food.
“While the CSDDD is currently draft, it provides clarity as to the scope and form of prospective human rights and environmental due diligence obligations, which will be relevant for companies seeking to mitigate adverse impacts in that regard in their supply chains,” says Farrelly. “Companies should be taking steps now to plan for these impending obligations.”
Interestingly, companies in the renewable energy sector are coming under increasing pressure to ensure that forced labour is not present in their supply chain.
Farrelly points out that Matheson has advised a number of clients on the solar industry supply chain for their renewable energy projects, due to the alleged use of forced labour in the manufacture of the polysilicon used in modern solar PV panels.
“Based on our recent experience, we can provide some helpful tips on how to identify and address potential forced labour issues in a company’s supply chain,” he adds.
“A number of solar industry bodies have condemned the use of forced labour and have issued industry guidance on the topic. In particular, the Solar Energy Industries Association (SEAI) in the US has developed a supply chain traceability protocol and other industry bodies such as Solar Energy UK have discussed putting similar protocols in place. We would recommend that solar industry participants use these protocols where possible.”
The European Commission has published guidance aimed at helping companies to combat forced labour in their supply chains.
“While this guidance is not specific to the energy industry, it will be of use to any energy industry participants that are looking to due diligence their supply chain,” Farrelly explains.
“Listed companies, banks and insurance companies will already be familiar with these types of obligations through the EU Non-Financial Reporting Directive, which requires them to report on information with regard to human rights and social issues. Similarly, companies that are active in the United Kingdom will be familiar with the requirements of the Modern Slavery Act 2015. However, for other companies this type of due diligence will be new and we expect that these companies will find the European Commission guidance to be particularly useful.”
According to Farrelly, while many companies are currently under no general legal obligation to identify and address forced labour issues in their supply chain, it is expected further trade restrictions and bespoke contractual obligations will be used to address the issue in the short term.
“In the medium to long term, legislation, including the CSDDD, and agreed industry procedures combined with appropriate contractual obligations are likely to become the key tools for managing forced labour issues,” he adds.
“In any event, we recommend that companies, in particular those that have commenced their ESG journey and are in the process of setting their ESG strategy or policies, begin investigating their supply chain as soon as possible to identify and mitigate potential issues,” Farrelly concludes.
The above article was originally published in the Innovation section of The Irish Times on Thursday, 9 June 2022.