Supply chain management (SCM) is a business technology concept. End-to-end visibility is an ... [+]
Following 45 days of negotiations, the European Council approved a watered-down version of the Corporate Sustainability Due Diligence Directive. The EU CSDDD has had a difficult journey, facing delays, changes, and hurdles to overcome. Nonetheless, the direction of travel of European governments is clear: companies need to do more to identify their exposure to unethical practices, human rights abuses, and significant adverse environmental issues, across their value chain. The German Supply Chain Act is currently setting the benchmark in Europe, but in the United States, the Uighur Forced Labor Prevention Act (UFLPA) is a significant force. This wave of new legislation is pushing companies to understand and evaluate their supply chain in much greater depth than ever before.
Before the EU Council approved the directive, the original directive was aimed to impact companies of +500 employees with a net turnover of 150 million but after deliberation, these numbers have been increased to +1,000 employees and a turnover of 450 million euros. With the recent changes to the directive, the number of companies impacted is about .05% of the total number of businesses operating within the EU.
The CSDDD will be phased in over an extended time, starting in 2027 companies with 5,000 employees and a 1.5 billion euros turnover will need to report. By 2029, companies with 1,000 employees and 450 million euros turnover will be impacted.
The directive aims to foster “sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance.” The core elements of this duty are identifying, ending, preventing, mitigating, and accounting for negative human rights and environmental impacts in the company’s operations, subsidiaries, and value chains.
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The CSDDD is still awaiting final approval, but the core due diligence steps will require companies to identify potential, and actual adverse human rights and environmental impacts. Not limited to their operations but across subsidiaries and value chains. They will have to follow the six steps listed above which closely resemble the OECD Due Diligence Guidance For Business Conduct. In addition to preventing and ending adverse impacts, companies will also need to verify that their direct and indirect business partners comply with the same steps and actions. This can be done by an independent third party or a selected industry intuitive to complete the verification. In the instance that a company does identify potential or adverse impacts within its value chain, it is encouraged to engage with the value chain members instead of cutting relationships.
Under the proposed rules companies will be liable for damages and impacts, if unable to prevent them from happening or if an impact has already occurred. People who were affected will be able to claim compensation and bring forward legal action.
One of the major pieces of this regulation is that the CSDDD is the first EU law that will mandate companies to adopt a “Climate Transition Plan” by the Paris Agreement. This is surprising due to the EUs outspokenness on its dedication to the Paris Agreement set in 2015. The public sector can only pass so many laws to decarbonize sectors, eventually, the governments will apply pressure on companies to begin establishing concrete plans to decarbonize their operations as well.
The most difficult problem for procurement organizations to solve will be to make sure they are ethically sourcing several tiers up their extended end-to-end supply chain. Providers of risk management solutions that can provide visibility across an n-tier supply chain in near real-time will be big winners from this directive. These include companies like Everstream AI and Exiger.
Modern supply chain risk solutions are marvelous pieces of technology. While generative AI has made artificial intelligence a hot topic, these solutions have been using different forms of AI in interesting ways for years. These solutions use natural language processing, for example, to read online publications and other data sources, make sense of what they read, contextualize the data into information, and report supply chain disruptions caused by weather, geopolitical events and other hazards in near real-time.
These solutions rely on Big Data. Exiger is tracking events occurring in 16 million supply chains that include 600 million legal entities. Additionally, they are tracking 5 billion pounds of goods back to their original source to ensure a wide variety of compliance standards are met.
Exiger subscribes to 90,000 publications so that their AI can assess and analyze 7 billion records covering companies, markets, and other dimensions of risk. Exiger also has relationships with Google and Microsoft that allow them to read articles on the OpenWeb.
Multitier mapping is done in a couple ways. First, it is done through surveys. Exiger reports that government supply chain regulations are making it increasingly possible to put language in contracts requiring vendors to reveal upstream suppliers. But no survey-based mapping is ever complete.
Manual mapping is preceded by an AI-based prediction of what a company’s multitier supply chain is likely to look like. These predictions are based on applying different forms AI to OpenWeb searches, import/export records, data from sourcing platforms like ThomasNet, federal logistics records, and other data. These predictions accelerate a company’s ability to verify how their extended supply chain is constructed.
In short, these modern risk solutions really are amazing in terms of the scale at which they operate and the risk event information they can provide.
Gaven Simon, a market research analyst at ARC, is the coauthor of this article. Gaven is a member of the industrial sustainability and energy transition team at ARC.
