Regulation watch: How to manage the risks created by the Supply Chain Due Diligence Act

Since the introduction of the Supply Chain Due Diligence Act (SCDDA) over one year ago, businesses in Germany must now consider stricter environmental, social and corporate governance (ESG) requirements.

This makes German organisations responsible for human rights throughout their global supply chains.

The German government can investigate the supply chain of companies based in Germany with more than 3,000 employees if their supply chains are not clear of human rights violations.

This year, the SCCDA employee threshold has dropped from 3,000 to 1,000 employees - setting strict requirements for more manufacturers in the region.

Fines of up to €800,000 or 2% of average annual global turnover for companies that earn over €400 million are now a danger.

What does it mean for businesses

The knock-on effect on businesses across Europe is likely to be significant.

According to data from Resilinc’s 24/7 monitoring system, EventWatchAI, which scans millions of sources across 200 countries and in 100 languages for potential disruptions, in 2023 alone, ESG-related fines in Europe increased by 22% compared to the previous year.

Amazon and IKEA are two companies already affected by the SCDDA, with a complaint filed last year for alleged failures to ensure employee safety for workers in Bangladesh.

How to manage the threats

Risk managers must consider the implications if they do not ensure compliance within their supply chains.

A recent Resilinc customer survey sent to supply chain leaders found that 65% of respondents reported they are required to include sustainability and ESG requirements in new projects and products.

This is the direction of travel for risk managers, with significant fines a possibility for organisations at risk of non-compliance.

Here are four ways that risk managers can take strategic steps to ensure ESG compliance;

1. Identify ESG risks in your supply chain

Consider which ESG risks pose the greatest threat to your company.

For example, leading automakers including BMW, Mercedes-Benz, and Volkswagen have come under scrutiny for potential ESG violations through ties to forced labour in the Xinjiang region of China.

This is likely to implicate suppliers down several tiers of the supply chain. But to fully identify ESG risk you must identify where your products, parts, and raw materials are sourced; this is where supply chain mapping comes in.

2. Map your supply chain to identify your sources

Here’s an important statistic for risk managers to remember; 80% of supply chain disruption originates with tier-two or tier-three suppliers. And that’s where ESG risk becomes a visibility and knowledge problem.

It’s likely not the high-volume, tier-one suppliers where non-compliance issues will originate. It’s your supplier’s suppliers where visibility is needed.

And the only way to gain that transparency is to map your supply chain down multiple tiers to the part-site and raw material level.

AI-powered autonomous mapping tools allow companies to understand where they source commodities, parts, and materials and flag potential ESG risks.

3. Monitor ESG disruptions to mitigate risk

Where ESG fines are issued, supply chain disruptions will likely follow soon after.

By monitoring supply chains for these issues, companies can go from notification to mitigation within minutes.

4. Assess and quantify your suppliers

Supplier assessments are another important tool in a risk manager’s arsenal.

In addition to mapping and monitoring, pre-scripted ESG assessments can help uncover problem areas in your supplier’s operations. By collecting data on supplier practices, businesses can evaluate the risk involved and assign a risk score according to vulnerability in practices and compliance to ESG policies.

If suppliers are at risk of causing legal, brand, or supply issues, then businesses can work with those suppliers to develop joint plans to close gaps. This limits exposure to any issues; but if the risk is too great businesses must consider whether sourcing alternative suppliers is a more effective choice.

With the potential for more EU legislation to come into effect, risk managers will find that mapping and monitoring are the only way to reveal exactly who and what is in their supply chain.

ESG legislation requires preparation, visibility, and knowledge. By implementing measures to mitigate, address, and proactively prevent non-compliance, risk managers can confidently ensure that the impact of non-compliance violations is significantly reduced