EU supply chain law obliges companies to operate in a fair and climate compliant manner
The EU Supply Chain Act stets new standards in climate management. It obliges companies to respect beside human rights also climate protection – along the entire supply chains. Everything you need to know about the new law in terms of climate actions.
On February 23, 2022, the EU Commission presented its proposal for a law on corporate sustainability obligations, the so-called EU Supply Chain Law. The EU Supply Chain Act goes well beyond the German Supply Chain Act (LkSG), which will apply from January 2023, which is why companies should follow the EU regulations when implementing the measures in order to avoid subsequent improvements. All about the new EU law and what it means for businesses.
What does the EU Supply Chain Law include?
How the EU and Germany Supply Chain Law are implemented.
1. Supplier Collaboration
The draft for the European supply chain law obliges EU companies to check their suppliers along the entire global supply chain, including all direct and indirect business relationships.
2. Engagement for Decarbonization
The goal is global compliance with applicable human rights standards – and climate protection in order to promote a fairer and more sustainable global economy and responsible corporate governance. Engaging suppliers to implement a shared climate strategy becomes thereby essential.
3. Transforming Supply Chains together
Who is effected?
- European companies, and companies from third countries active in the EU, with more than 500 employees and more than €150 million in sales worldwide are subject to European law. This affects around 17,000 companies.
- High-risk sectors like textile industry, agriculture and mining have to meet the requirements from 250 employees and €40 million in sales onwards. A transitional period of two years applies to these sectors.
- Small and medium-sized enterprises (SMEs) are not directly affected by the law, but indirectly, e.g. as a supplier of large companies.
What do companies have to consider in terms of climate?
Corporate due diligence along the supply chain has to respect climate and environmental aspects.
- First of all, companies must reconcile their internal policies with the 1.5 degree target of the Paris Agreement!
- All suppliers (direct and indirect ones) must identify actual or potential climate impacts and risks, in order to take appropriate action to prevent, mitigate and remediate them.
- The supplier due diligence requirements must be integrated into corporate management systems.
- Companies must track grievances and provide transparent, public information about the exercise of their due diligence obligations, including an annual report.
- Companies are obliged to control and monitor the effectiveness of these measures.
How to prepare for the EU Supply Chain Law?
It is very likely that European countries will adapt the new law. In December 2020, all 27 member states voted already in favour of the European supply chain law. And especially the German government declared that it wants to support the EU Commission’s plans for a strong supply chain law. “We have agreed in the federal government to push ahead with a European supply chain law that goes beyond the German law,” said Development Minister Svenja Schulze.
Companies in whole Europe therefore need to set up supply chain engagement processes.
Setting up Climate Supply Chain Engagement Programs
Implications for Small and Medium-Sized Companies
Small and medium-sized companies are indirectly affected by the EU Supply Chain Act, because in the medium term, large companies will ask them to fulfil the rising requirements.
However, this can definitely provide an opportunity for SMEs, because they can position themselves clearly as climate leaders and prepare at an early stage to benefit from competitive advantages. However, this is often difficult, as resources, time or comprehensive know-how is often lacking. Therefore, it makes sense for SMEs in particular to use holistic solutions that easily support to prepare for all these requirements.
The Professional Licence of our Climate Intelligence Platforms allows SMEs to streamline, manage and report their holistic climate performance.
Implications for large Companies and Enterprises
Companies must ensure compliance with the new legal requirements. Not only for themselves and their subsidiaries, but also for their suppliers along the entire value chain. This includes eventually thousands of suppliers and purchases of products and services up- and downstream the value chain.
Affected companies must therefore check exactly the environmental and climate performance of their suppliers. However, checking the entire supply chain can be a greater challenge. Especially when dealing with SMEs that are not yet climate ready.
In order engage their suppliers in fulfilling all the requirements, companies should carry out supply chain collaboration programs. Those go beyond supplier monitoring and enable not only the examination of climate performance, but also the tracking of improvements. With the help of digital engagement systems companies can get ahead of regulatory requirements and decarbonization efforts.
The Enterprise Supply Chain Licence of our Climate Intelligence Platform supports companies to engage suppliers in their climate strategy and identify specific risks and opportunities along the supply chain.
This it how it works
Climate Intelligence Platform provides insights about risks and opportunities along the supply chain.
1. Suppliers climate performance disclosure
The enterprise licence enables you to invite key suppliers to disclose climate relevant primary data through the Climate Performance Assessment.
2. Structured, comparable data and support
Suppliers get guidance throughout the entire process, to enable an easy engagement process and the gathering of high quality data.
3. Primary supplier data and insights
The Climate Intelligence Platform provides companies and their suppliers benchmarks, performance analyses and insights into decarbonization efforts.
Your company aims to set up a climate supply chain program to engage suppliers in your climate strategy? Book your demo here to learn how to manage climate relevant data along the supply chain.