Regulation means paying lip service to supply chain ethics won’t wash

Businesses have been feeling the pressure in recent times to confirm they are engaged in ethical sourcing of products. But a moral imperative to conform to Fair Trade principles and ensure suppliers are not engaged in modern slavery or employing child labour is now being converted to regulatory pressure with the advent of the Corporate Sustainability Reporting Directive (CSRD).

The CSRD means companies all over Europe – beginning with the largest in 2024 but including SMEs by 2026 – must now map, understand, report and act on material sustainability issues in their companies and their supply chains. Prof Donna Marshall, sustainable supply chain scholar and executive director of the UCD Earth Institute, says such regulation is essential to ensure we can transition to a truly sustainable economy rather than “business as usual”.

According to Marshall, regulatory pressure will provide a “much more even playing field” for companies who must disclose their policies, processes, targets and performance across issues such as climate, resource use, biodiversity, circularity, human rights, communities and working rights and conditions across their supply chains.

But while she describes it as “a large step forward, she acknowledges that there may be downsides to the CSRD, particularly in terms of the suppliers that need help and assistance in mapping and managing sustainability in their own businesses and supply chains.

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“These, usually very small and microbusinesses, will probably not get the help they need and could go out of business,” says Marshall. “We have to make sure that these businesses are protected.”

Neil Willoughby, head of EU policy with Ibec Europe, says the CSRD is welcome as it codifies reporting as a key tool to achieve adequate transparency and clear communication on the integration of sustainability into business activities and impacts. This helps to foster trust between companies and stakeholders, he notes.

“Importantly, the CSRD and related legislation like the EU Corporate Sustainability Due Diligence Directive provide legal clarity and certainty for businesses on how to better understand and manage the impact of their activities from a social and environmental perspective,” he says.

Willoughby agrees that the requirements may prove challenging for some businesses unused to this level of reporting.

“It will represent a new departure in terms of the level of detailed information that must be reported and the corresponding increase in the amount of resources that must be dedicated to non-financial reporting,” he adds.

Such a harmonised approach across the EU through member states’ transposition process and subsequent enforcement can provide certainty and a clear decision-making framework for businesses in their supply chain management, he says.

The reporting directive will have an immediate effect on the supply chain decisions of Irish firms, says Marshall.

“CSRD will impact all companies in Ireland no matter what their size, as all companies are part of a supply chain,” she adds. “The largest companies have to comply this year and will be cascading demands on to their suppliers to get data to be able to report, so companies need to be ready now to be able to comply with the demands for data across the main ESG issues: climate, pollution, water, biodiversity, circular economy, workforce, supply chain workers, affected communities, consumers and end users, and business conduct.”

Willoughby says Irish companies are well placed to meet these demands.

“Irish business is fully committed to global sustainability and to driving more investment into sustainable business practices,” he adds.

Globally, the CSRD is likely to significantly affect industries with reputations for harsh labour conditions, such as fast fashion and consumer electronics.

“Each year 100 billion items of clothing are produced, with unimaginable impacts on the environment and some of the worst working conditions,” Marshall points out. “The fashion industry employs one out of every six people but 98 per cent of people working in fashion supply chains do not earn a living wage. So having to report on working conditions, human rights and wages across supply chains is going to have an enormous impact on the decisions and behaviours of all the members of fashion supply chains.

“Now we will get a much better picture of what is going on in fashion supply chains and be able to hold companies to account for poor practices either environmentally or towards people.”

The same change will happen in electronics, which is slightly ahead of fashion when it comes to certain types of sustainability, Marshall says.

“However, there is still a lot of work to be done and the CSRD, again, will be an incentive to ensure good practice throughout electronic supply chains. Additionally there is growing concern around raw materials for electronics, particularly metals and minerals needed, the environmental impact of excavating these, and the exploitation of people who have to mine or find these materials.”