In recent years, the global business landscape has witnessed a surge in ESG-focused legislation aimed at enhancing corporate responsibility and sustainability throughout the supply chain.
In 2023, Germany enacted the German Supply Chain Due Diligence Act (“LKSG”) and joined the likes of Australia, Canada, France, and Italy, in implementing legislation aimed at enhancing corporate responsibility throughout the supply chain. In a similar vein, European Council recently approved the Corporate Sustainability Due Diligence Directive ("CSDDD"), targeting not only large EU companies but also non-EU companies with substantial EU operations, creating a legal obligation for these companies to address environmental and human rights violations within their supply chains.
As supply chains stretch across borders, the impact of these regulations reverberates far beyond national boundaries. For instance, the first complaint filed under the LKSG included two corporations, Amazon, and IKEA, which are not headquartered in Germany but have significant operations there, underscoring the global applicability of the LKSG.
Will corporations now transition from outsourcing to onshoring or nearshoring?
While many western corporations have already started considering reshoring, it’s easier said than done. Eastern and Central Europe, considered the next best option for nearshoring, faces instability due to Russia-Ukraine tensions and reshoring remains a long-term plan, hindered by contractual obligations and potential business disruptions, making immediate implementation challenging.
Making supply chain due diligences more effective is the only answer.
Corporations should look at investing in ethical sourcing, and should work with their suppliers in achieving those objectives together. We have compiled a compliance checklist designed to help you move beyond a mere ‘check the box’ approach, to instead promote responsible business practices by identifying sourcing ‘hot spots’ in your supply chain.
Try answering these questions with respect to your supply chain in India. This should give you an idea of what risks may exist, and to prioritize mitigation measures.
A. Hotspots indicative of human trafficking
Are you aware of the composition of your work force? Assess workforce composition, particularly vulnerable groups like migrants and women.
How are the workers in your supply chain recruited? Scrutinize recruitment practices to detect exploitation by agents.
Has your supplier maintained a complete and accurate data bank containing the details of the workers and benefits paid to them? Verify the existence of comprehensive worker data banks maintained by suppliers.
Are the workers living in temporary, unsafe and unhygienic accommodation? Unsafe and unhygienic temporary housing often indicates migrant labor, raising the likelihood of trafficking.
Are there ‘high security’ measures at the supplier’s facility? High security measure at the supplier’s facility (e.g. opaque windows, barbed wire, security cameras, etc.) could indicate the existence of human rights abuse.
B. Hotspots indicative of forced labour
Do the workers have alternate employment opportunity in the area where the facility is located? If the facility is located in an area with limited alternate employment opportunity, the risk of forced labour increases.
Are the workers contracted (as opposed to employed) in large numbers throughout the supply chain? Contract workers are more susceptible to exploitation.
Is there a formal complaint procedure and who is responsible for handling the complaint procedure? Absence of complaint receipt and redressal procedure in facilities/establishments may suggest a work environment with unacceptable working conditions.
Is the system of payment cash-based or bank/digital? Payments made at the discretion of the employer in cash, without any detail of rates, hours worked etc., or lack of payments record may indicate forced labour.
Are you told that workers are suffering from persistent injury/illness? Signs of dehydration, heat stroke, , injuries, sanitation-related illnesses, etc. among the workers at the supplier’s facility may be indicative of forced labour.
C. Hotspots indicative of child labour
Do you see a large number of young workers in the facility? The presence of a large number of young workers increases the possibility of children (below 14 years of age) being part of the workforce.
Is a certain section of workers paid very low wages? It is easier to pay young workers less because they are less likely to complain than adults.
Are the young workers employed in hazardous/labour intensive profession? Execrise caution if a supply chain involving hazardous or labor-intensive tasks employs a large number of young workers.
Have inspections been conducted by the regulatory authority under child labour prevention regulations, and are you aware of their findings? Children may be concealed from labour inspections and the records produced may not represent the actual age. Have you compared the records submitted to the authority with the one maintained by the supplier?
D. Hotspots indicative of discrimination
Are female workers being paid lower wages for equivalent hours of work compared to male workers? This is fairly common, unfortunately, besides being illegal. Records showing different wage figures for women should be investigated.
Are some workers on fixed term contracts while others are permanently employed? Absence of indefinite employment contract (subject to normal retirement) facilitates arbitrary termination and deprives workers of job security, pension, healthcare benefits and gratuity.
Is there a robust process to prevent and investigate harassment? Review supplier’s policies to ensure compliance with anti-harassment laws and meet the committee members and ascertain their suitability and training.
E. Hotspots indicative of substandard health and safety facilities
Are accidents common in your suppliers’ facilities? Frequent accidents indicate poor safety practices which are also often underreported. Consider alternative metrics like lost workdays or disability payments.
Are the workers exposed to occupational hazards and suffering from occupational disease? Frequent health issues reported by workers suggest exposure to hazardous conditions. Payment records may be useful here, if they show pay outs made to workers for accident, injury, etc.
Are the facilities using upgraded technology / equipment as part of their safety procedures? Lack of upgraded safety equipment is an indication that health and safety is not a high priority matter for the management.
F. How can you mitigate these risks?
Supply chain mapping: Identify risk hot spots in your supply chain using the checklist above as a base and audit practices for compliance with local and international legislations.
Whistleblowing procedure: Ensure that the organisation has appropriate whistleblowing and non-retaliation procedures that allows workers to report anonymously or to talk with someone other than their supervisor or HR.
Risk assessment: Conduct a risk assessment to determine which parts of the business and which of your supply chains are most at risk. This should include a review of any existing compliance policies, contractual provisions and supply chain relationships.
Action: Work with legal counsel to determine what further actions and resources are required to prevent, monitor and mitigate against any risks that are identified in the business and/or its supply chain.
Contractual risk mitigation: Ensure that supply contracts contain adequate contractual protection including warranties, reporting requirements and audit rights.
Site inspection: Consider introducing site inspections (both scheduled and spot checks) to the extent not already undertaken.
Following these best practices in any ESG due diligences and related investigations can go a long way in helping you comply with and be future-ready for supply chain focused global legislations.