Businesses are increasingly accountable not only for their direct environmental, social and governance (ESG) impact, but also that of their supply chains. In this article, we overview the key trends and vital considerations for businesses.

Consumer pressure

More and more consumers want to know where their products have come from, with demand for ethically sourced goods soaring over recent years. This raises the stakes to gain customer loyalty and it is now important for brands to operate end-to-end visibility of their supply chains and offer evidence to back up any claims of "sustainability" and "green products". The UK's Advertising Standards Agency has found a number of environmental claims to be misleading and other regulators such as the Competition and Markets Authority have warned businesses that they must avoid inaccurate "greenwashing".

With growing awareness and concern over a number of ESG issues, businesses are having to re-think the way they approach their supply chain design.

Regulatory risks

We are starting to see more governments from across the globe stepping up to issue new laws and regulations that force businesses to reduce greenhouse gas emissions, limit environmental degradation and combat ethical misconduct. Many of these measures impose compliance obligations that cover a business's supply chain.

In the UK, the Modern Slavery Act 2015 requires businesses to disclose each year how they are vetting their supply chains to prevent human rights abuses.

More recently, the Climate-Related Financial Disclosure Regulations came into force, requiring UK companies to include their exposure to climate change related risks in their annual statements. Similar developments are under discussion in the USA and EU.

Recent case law also highlights the trend of ESG accountability. In Begum v Maran (UK) Ltd [2021] EWCA Civ 326, the Court of Appeal unanimously held that a UK company's duty of care could extend to the actions of overseas third parties in its supply chain. This may have wide-ranging repercussions for UK-based companies in respect of harm allegedly suffered within their supply chains.

Begum concerned the unsafe disposal of a ship. The UK-based shipbroker had sold the vessel to a demolition cash buyer based in Bangladesh. The claimant brought a claim against the shipbroker for the death of her husband in a workplace accident at the buyer's premises, alleging that the defendant had acted negligently in failing to ensure the safe demolition of the ship.

The Court of Appeal's reasoning may extend to other industries and their relevant supply chain issues. Notably, for example, concerns have arisen as to adverse working conditions in the "'fast fashion"' industry. Businesses should ensure that they are taking appropriate advice and carefully considering their next steps to ensure appropriate supervision and management of supply chains.

There have also been significant legislative developments further afield, including the Californian Transparency in Supply Chains Act and Germany's Supply Chain Due Diligence Act which, from January 2023, will require large businesses operating within the country to monitor their supply chain for any human rights violations and comply with environmental standards. Infractions can incur significant fines.

Dentons' global network of lawyers is ideally placed to advise on the legal and regulatory environment impacting your global supply chain.

What should businesses do?

Meeting any new regulatory requirements will require investment in supply chain management. New technologies that increase oversight of supply chains can improve efficiency and resilience while also helping the business to comply with regulatory and stakeholder expectations. For example artificial intelligence tools can create virtual models of a company's entire supply chain, which can be used to plan scenarios and stress test to discover weak links or compliance red flags.

Businesses can also benefit from engaging and collaborating industry-wide and sharing their data on supply chain member's' ESG credentials. A community-based approach would provide more insights into how supply chain design can reduce emissions, efficiently source where there are capability gaps, and help assess the ESG risks of suppliers.

As regulations such as the Modern Slavery Act 2015 recognise, businesses have the power to effect change through their purchasing power. Embedding ESG policies, expectations and reporting requirements into supply contracts and making ESG information public can help businesses demonstrate to shareholders and other stakeholders that they are invested in improving the communities in which they operate. Taking a proactive approach to driving sustainability and ethical practices throughout the supply chain, as well as helping ensure the business is playing its part, can have a positive impact on shareholder loyalty, employee retention, consumer trust, and relationships with key business partners.

This article was written with the assistance of Rachel Smith, summer student at Dentons.