Regulations come and go, covering a broad range of requirements that seem to change as frequently as the seasons. So it may be tempting for some businesses to greet two new emerging regulations with a shrug, but the German Supply Chain Due Diligence Act (SCDDA), also known as the LkSG, and the U.S. Uyghur Forced Labor Prevention Act (UFLPA) are not business as usual.
While significantly different, these new laws send manufacturers around the world a clear message that they must be prepared to account for operations in their supply chain. Especially, as industry leaders have been actively involved in drafting and promoting these regulations.
Before you read on, learn how Assent is purpose-built to give complex manufacturers the data, knowledge, and tools they need to comply with the SCDDA, UFLPA, and all manner of supply chain sustainability compliance requirements.
What are your SCDDA requirements and how can you prepare? Find out in Assent’s SCDDA Handbook.
New Requirements for Manufacturers
The SCDDA requires in-scope companies to investigate their supply chains to identify and address risks to human rights and the environment. The UFLPA creates a rebuttable presumption that goods sourced from the Xinjiang Uyghur Autonomous Region (XUAR) of China are made with forced labor, meaning companies sourcing from the region must prove otherwise to enter the U.S. market. Executing and demonstrating the deep due diligence necessary to rebut this presumption is resource-intensive and difficult, so the rule effectively bars the importation of goods made wholly or in part when connected to the XUAR.
Human Rights Regulation With Teeth
The SCDDA and UFLPA are focused on protecting human rights, both in their respective jurisdictions and around the world. Regulations with this objective are not new and span the globe, including the California Transparency in Supply Chains Act, the UK Modern Slavery Act, and the Australian Modern Slavery Act. Many countries have a law on the books that encourages companies to perform human rights due diligence. By and large, however, these regulations lack strong penalties and strict enforcement. The SCDDA and UFLPA are fundamentally different because they have both.
The SCDDA, for example, sets out recurring penalties for non-compliance and defines fines of up to €800,000 or two percent of average annual turnover for companies earning more than €400 million. The UFLPA bars access to the U.S. market, which can result in millions of lost profits.
It’s important to note that non-compliance with the pre-existing human rights regulations is still a significant risk to companies, albeit resulting from breach of contracts, reputational damage, and consumer scrutiny. The UK Modern Slavery Act and Section 1502 of the Dodd-Frank Consumer Protection and Wall Street Reform Act, which mandates conflict minerals reports for publicly-traded U.S. companies, show the power of industry and public pressure when it comes to meeting regulatory objectives.
As a manufacturer, you can’t meet your SCDDA or UFLPA requirements without deep transparency in your supply chain. For example, the SCDDA requires the implementation of due diligence with regard to direct and indirect suppliers (as companies become aware of risks). For complex manufacturers, that can be several links removed from primary operations. As is the case with the UFLPA, to prevent the seizure of goods, or to get them released from customs, companies must either prove the goods aren’t connected to the XUAR, or show significant due diligence that overcomes the presumption of forced labor — no easy task.
EU Human Rights Due Diligence
On either side of the Atlantic Ocean, there’s renewed political interest in holding companies accountable for their environmental and social impacts. The SCDDA is the latest national law mandating human rights due diligence, but there have been many similar laws enacted recently across Europe, and the EU is working to implement even more, including rules similar to the UFLPA.
Other similar laws on the EU member state level include the:
- French Corporate Duty of Vigilance Law
- Dutch Child Labour Due Diligence Law
- Norwegian Transparency Act
- Swiss Responsible Business Act
The EU has a number of proposed regulations being evaluated for future implementation. In February 2022, the European Commission adopted a proposal for a Corporate Sustainability Due Diligence Directive (CS3D), which if passed would require each member state to enact national legislation with respect to corporate sustainability due diligence responsibilities. Another piece of legislation, the Corporate Sustainability Reporting Directive (CSRD) will soon enshrine minimum sustainability reporting standards and taxonomy for companies doing business in the EU and potentially their suppliers.
The CSRD will, among other things, expand on the scope of the current Non-Financial Reporting Directive (NFRD), and will largely influence manufacturers to treat sustainability information with a similar priority to financial information. With the taxonomy initiative, Europe is building a clear understanding of what is considered environmental or sustainable under the CSRD.
U.S. Forced Labor Protections
In the U.S., the UFLPA had strong bipartisan support, receiving only a single vote against in both the House of Representatives and the Senate. Popular across party lines, the UFLPA appears to be one regulation that is likely to survive administration changes — not always a certainty in American politics.
Adapting Your Program
For the SCDDA and UFLPA, manufacturers will need a robust compliance program with contributions from across an organization to meet requirements. Resources from legal to engineering, procurement to the executive level all have a degree of responsibility to ensure compliance.
Whenever a new regulation is implemented, but specifically when such a regulation brings unprecedented requirements for companies, having a solid understanding of the legislation and your supply chain is crucial to efficacy. No one has more supply chain sustainability, compliance, or human rights expertise than Assent — if you have any questions about the SCDDA, UFLPA, or Assent, contact us at firstname.lastname@example.org.