Key aspects of regulatory initiatives

Recent regulatory initiatives include the German Supply Chain Act, which, subject to certain criteria, imposes due diligence obligations on German companies operating in the country and abroad, and the forthcoming European Union Directive on Due Diligence, which seeks to harmonise standards across the EU.

Adopted by the Bundestag (German Parliament) in June 2021, the Supply Chain Due Diligence Act (the ‘Supply Chain Act’) came into force on 1 January 2023.[1] The Supply Chain Act requires supply chain due diligence regarding human rights and environment-related obligations. It covers all the steps necessary to manufacture products and render services, starting from the extraction of raw materials to end-customer delivery in Germany or abroad. These due diligence obligations trigger challenges vis-à-vis direct and indirect suppliers.

In line with the Supply Chain Act, on 23 February 2022, the European Commission of the EU published the draft of its corporate sustainability and due diligence directive that aims to promote sustainable and responsible corporate behaviour by incorporating human rights and environmental considerations into company operations and corporate governance.[2] The proposed directive marks a shift from voluntary to mandatory sustainability due diligence in the EU and represents a step towards greater corporate accountability for environmental and social impacts. The directive must now be approved by the European Parliament and Council of the EU. According to the proposed directive, Member States are required to integrate it into national law within two years from the adoption.

Under these regulations, businesses must establish grievance mechanisms and report on their activities to prevent or minimise risks and violations related to sustainable supply chain management. Moreover, enforcement and sanction mechanisms are foreseen, establishing administrative or civil liability for non-compliant companies, not to mention the negative publicity and reputational damage this may entail. Key due diligence obligations include:

  • establishing a risk management system; 
  • performing regular risk analyses;
  • designing and adopting human rights policies; 
  • establishing due diligence measures in their own business area and vis-à-vis suppliers;
  • taking remedial action in the event of an imminent or actual violation of a human rights or environmental obligation to end, minimise or prevent a such violation, as the case may be;
  • establishing a complaint procedure for the reporting of human rights violations; and
  • documenting and reporting due diligence measures. 

These legislative efforts are marking a pivotal moment in global corporate responsibility, imposing unprecedented requirements on companies operating within and beyond Europe. For Latin American (LATAM) companies, this represents both challenges and opportunities that demand careful consideration and strategic action.


Challenges and opportunities in Latin America

To adapt to the legal framework, companies in Europe are strengthening their third-party due diligence processes by increasing requirements for suppliers worldwide. Even small and medium-sized companies will need to create or adapt their compliance programmes accordingly if they want to become or remain part of the global supply chain in their sector.

In LATAM, local compliance regulations and integrity culture vary across countries, presenting additional challenges when implementing this legislation.

Navigating the complexities of compliance in LATAM requires a proactive and adaptive approach. Adapting to the requirements calls for a thorough assessment of the local compliance landscape in each country of operation, which involves understanding the specific legal and regulatory frameworks, as well as the local culture and corporate integrity culture. To tackle these challenges, it is highly recommended to engage local legal counsel and compliance experts to navigate the intricacies of each jurisdiction.

European companies must understand different compliance practices and cultures across LATAM countries to establish effective communication channels and collaborative approaches with their LATAM counterparties. Strengthening third-party communication and training can help meet compliance requirements and build sustainable relationships based on shared values.

On the other hand, LATAM companies face their own set of challenges, including implementing a robust third-party due diligence process with specific tools to prevent, mitigate and remedy human rights and environmental wrongdoings. This means evaluating existing compliance programmes to assess the gaps and areas that require enhancement to align with the expectations of the new regulations, including reviewing codes of conduct, policies and procedures to ensure they comprehensively address human rights and environmental considerations. Additionally, companies may need to invest in training programmes to raise awareness among employees and third parties about the importance of sustainability and social responsibility.

By navigating these challenges effectively, companies can boost their business opportunities and foster corporate reputations. They can build stronger partnerships that promote sustainable and ethical business practices, enhance their reputations and contribute to developing a socially and environmentally conscious business environment. It calls for mutual understanding, open dialogue and knowledge sharing to bridge the gaps and create a common ground for compliance and responsible business practices while establishing consistent standards and promoting a culture of integrity throughout the entire supply chain.

In conclusion, companies including sustainability and social responsibility as key elements of their compliance risk management system will boost their market position with European counterparties and foster their reputation in an increasingly socially and environmentally conscious business environment.

Takeaways

The main takeaways from this article are as follows:

  • regulations like the German Supply Chain Act and draft EU directive show a shift to mandatory sustainability due diligence, emphasising the need for a stricter oversight of supply chains to address human rights and environmental issues;
  • companies face the challenge of adapting to varying compliance regulations and integrity cultures across different countries, making effective communication channels and collaborative approaches essential to bridge compliance and cultural gaps and build sustainable relationships based on shared values;
  • LATAM companies need to implement robust third-party due diligence processes, including reviewing their compliance programmes and tools to align with the expectations; and
  • navigating the challenges of these regulations can lead to opportunities for companies, fostering stronger partnerships, enhancing reputations and contributing to a socially and environmentally conscious business environment.


[1] German Bundestag, ‘Act on Corporate Due Diligence Obligations in Supply Chains Of July 16, 2021’ www.csr-in-deutschland.de/SharedDocs/Downloads/EN/act-corporate-due-diligence-obligations-supply-chains.pdf?__blob=publicationFile accessed 3 June 2024.

[2] European Commission, ‘Proposal for a Directive on corporate sustainability due diligence’ (23 February 2022) https://commission.europa.eu/publications/proposal-directive-corporate-sustainability-due-diligence-and-annex_en accessed 3 June 2024