Supply Chain Compliance is About to Get a Whole Lot Tougher
In January 2023, the Germany Supply Chain Due Diligence Act will come into effect, requiring businesses to monitor supply chains for human rights violations and compliance with environmental standards.
There has been supply chain legislation before whose goal was focused on making sure various aspects of ESG (Environmental, Social, & Governance) performance were enforced by companies. But, as Abigail Myers-Antiaye – the principal product compliance manager at Coupa – pointed out in a presentation at Coupa Inspire at the beginning of the month, supply chain practitioners have never seen compliance legislation that was so broad and impactful. In the past, this kind of ESG legislation was focused on “a specific risk domain, like child/forced labor like the 2020 Uyghur Forced Labor Act. Now we are seeing a move to all encompassing (ESG) legislation with significant penalties.”
At a high level, the act requires that companies ensure compliance with human rights and the prevention of environmental degradation, both within their direct activities but also along their entire supply chain; and that grievance mechanisms be set up with reporting on an annual basis to the German government on the regulated activities.
More specifically, the ESG dimensions receiving increased focus include:
- Freedom of association
- Child labor and modern slavery
- Unsafe working conditions
- Discriminatory Employment
- Environmental degradation
Further, under the provisions of the new legislation, companies’ responsibility extends beyond their own factories, warehouses, stores, and corporate offices to encompass their entire supply chain. The responsibility is heavy for tier one suppliers but becomes more graduated the further up in the supply chain that ESG infractions occur.
This is not toothless legislation. Fines can be up two percent of sales/annual turnover but are capped at 8 million Euros. Companies can also be prevented from public tenders for a specified period of time. Perhaps as bad as a fine and loss of sales opportunities, is the brand damage that could result if a company is prosecuted.
The act will apply for companies with a corporate or branch office in Germany or a German workforce of at least 3,000. One year later, it will apply to companies with a workforce of at least 1,000.
Germany has the fourth largest economy in the world, so many multinationals will be affected by this. Multinationals might contemplate moving a regional office out of Germany to avoid this. This would be short sighted. According to Ms. Myers-Antiaye, the European Union has similar legislation moving forward that may come to fruition in about a year and goes even further than the German Act. The European Commission has had this on its agenda for the past few years and Germany pre-empted a European Directive with their own legislation when this stalled at the beginning of last year.
The German legislation translates into concrete provisions in the way companies must comply with their due diligence obligations. This involves analyzing ESG risks, taking measures to prevent and mitigate these violations, setting up grievance mechanisms, and reporting on their activities. To comply, companies will need clear policies and be able to prove to regulators that they have robust digital processes to enforce and measure the effectiveness of these policies.
The reason Ms. Myers-Antiaye was talking about this was because Coupa’s business spend management (BSM) platform can help companies do exactly that. The platform allows their customers to employ real-time third-party information feeds from organizations that monitor things like whether a supplier is minority owned, is employing children, or has unsafe working conditions in their factories. In addition to assessing vendor compliance via third party data feeds, Coupa gives companies the ability to undertake due diligence on their N-tier supply chain via tailored detailed questionnaires. Coupa’s strategy is make it easy for companies to comply with continually changing regulations while making business spend more sustainable and more inclusive.
Before going to the very well attended Coupa Inspire user conference, I was not exactly sure what a business spend management solution was. What I learned is that this is a solution that covers the entire procurement to pay process in a deeper manner, where risk is better operationalized, and with better return on investment, than traditional enterprise solutions do. The solution helps companies find suppliers they might want to work with, run procurement events, create a contract, have contract terms reflected in purchase orders (PO), invoice, and pay.
When it comes to enforcing good behavior along the supply chain, being able to stop transactions before the PO is sent is a powerful tool to ensure digital compliance to this set of regulations. That is what Coupa does. If new information from an audit company shows that a supplier is employing children, that automatically gets flagged in the system and a PO is halted before it can be sent out. Coupa gives a level of transparency which allows a company to know whether they are transacting with a company who is high risk and either stop working with them or undertake more due diligence.
3.3 trillion in spend flows through the Coupa platform. The community data can be leveraged to help a company find more ethical suppliers. Coupa is also working to expand the ways that community data can be leveraged to detect that a certain supplier may be engaged in questionable behavior.
While there will undoubtedly be supply chain executives groaning as they contemplate what it will take to be compliant with this set of regulations, ethical companies should keep in mind that this legislation is a powerful lever to address the competitive disadvantages suffered by companies that are already investing voluntarily in sustainable supply chain management.
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