To combat climate change, modern slavery, and many other sustainability challenges, world leaders have implemented multiple ESG laws, regulations, and targets. In fact, California is currently poised to pass new legislation targeted at driving more transparency into procurement and supply chains.
Procurement teams must know these laws and drive compliance across their value chains. Here are the most applicable to the US, EU, and Asian markets.
California Transparency in Supply Chains Act (CTSCA)
Since 2012, the law has required companies operating in California with more than $100 million in annual revenue to disclose their efforts to combat modern slavery in their supply chains. These efforts include supplier audits, certifications, and employee training. Non-compliance can lead to legal actions, financial penalties, and reputational damage. As procurement leaders, it’s crucial to ensure adherence to CTSCA’s provisions to protect against forced labor risks, maintain ethical sourcing, and meet regulatory obligations while fostering transparent, responsible supply-chain practices.
California Climate Corporate Data Accountability Act (CCCDA)
Legislators passed CCCDA in September 2023, which will apply to an estimated 5,300 companies operating in California with more than $100 million in annual global revenue. Taking effect beginning in 2026, it will require covered companies to report Scope-1 and Scope-2 greenhouse gas (GHG) emissions from fiscal year 2025, plus climate-related risks and any risk-mitigation strategies. Beginning in 2027, covered companies must also report Scope-3 emissions, which will require them to collect GHG emissions data from across their value chains. Non-compliance can result in legal repercussions, including fines and reputational harm.
Uyghur Forced Labor Prevention Act (UFLPA)
The UFLPA presumes that any shipments originating from the Xinjiang Uyghur Autonomous Region (XUAR) or made with XUAR-connected labor, parts, or products are made with slave labor and thus inadmissible to the US. To rebut this presumption and allow entry, companies must conduct robust supply-chain due diligence, down to the supplier and sub-tier supplier level, and show convincing evidence that their imported goods or products were not produced with slave labor in any way. Since June 2022, non-compliance has already resulted in more than $1.6 billion seized imports as US ports.
German Supply Chain Due Diligence Act (LkSG)
LkSG addresses supply chain-related environmental and human rights abuses and mandates that companies not only conduct supply-chain due diligence but actively mitigate and remediate identified risks and report findings and action. The law applies to German companies and select foreign entities operating in Germany with a workforce of 3,000 or more (1,000 or more beginning in 2024). Procure-ment and compliance teams must also continuously monitor for efficacy and ongoing improvement. Non-compliance could result in fines or penalties amounting to 2% of annual revenue or a maximum of 800,000 euros.
The European Green Deal is a transformative EU policy and economic-investment framework focused on achieving climate neutrality by 2050. It encompasses various economic, legal, and policy initiatives to address environmental challenges, and promotes sustainable procurement and supply-chain practices across industries. The Green Deal applies to EU member states, businesses, and organizations: covered parties must align with ambitious sustainability goals, reduce emissions, adopt circular economy practices, and invest in green technologies. Non-compliance can lead to fines, reputational damage, and exclusion from government contracts.
Other bedrock ESG laws and regulations that procurement teams in the US, Europe, and Asia should know, as they may apply to their operations, include:
- The European Commission’s Corporate Sustainability Reporting Directive, or CSRD, proposes comprehensive sustainability reporting standards for EU companies with 500 or more employees. It mandates disclosing ESG data, focusing on climate and environmental impacts. Compliance involves conducting due diligence and submitting detailed ESG reporting. Non-compliance can lead to reputational risks, potential fines, and exclusion from public contracts.
- The US SEC’s proposed a rule change, announced in March 2022, may require publicly traded companies in the US that tout Scope-3 GHG emissions reductions to disclose them to the Securities and Exchange Commission. Following a public commenting period and pushback, including from the SEC Commissioner herself, the pending rule change would join other emerging Scope-3 emissions tracking mandates.
- The Paris Climate Accord is a decentralized global effort to reach net-zero emissions by 2050 and limit global warming to 1.5 degrees Celsius over pre-industrial levels. It requires its 194 signatories to submit nationally determined contributions and then legislate and regulate at the national level to fulfill their contributions and meet goals.
- America’s “double carbon target” goals, set in April 2021 when the US formally rejoined the Paris Agreement, seeks 50-52% emissions reductions by 2030 from 2005 levels, in addition to the US’s commitment to reaching net-zero emissions by 2050. They require multi-level governmental action and collaboration with businesses and the public, but don’t specify enforcement mechanisms, such as new laws or regulations.
- China’s “double carbon target” goals commit the People’s Republic to peaking its carbon emissions by 2030 and achieving net-zero status by 2060. But China’s new goals amount to a non-binding pledge that affects mostly Chinese companies, which are accountable to the Chinese government, which is accountable only to itself.
- The UK Modern Slavery Act (2015) applies to companies with £36 million or more in annual revenue and requires them to conduct supply-chain due diligence and disclose efforts to combat modern slavery. Companies must prepare annual Modern Slavery Statements detailing actions taken by the company to identify, prevent, or mitigate modern slavery risks in its supply chains and operations. Non-compliance risks reputational damage, legal action, and substantial fines.
Given the breadth and depth of ESG laws and regulations, and the risks that non-compliance brings to your top and bottom lines, procurement leaders must incorporate ESG legal and regulatory compliance across the source-to-pay spectrum. Specifically, this includes supplier discovery and sourcing, supplier and supply-chain risk management, and performance management.
Companies must work with the most sustainable, reputable, ethical, and accountable partners to reduce their ESG and compliance risks – and have reliable, auditable and accurate data processes to prove compliance. See how we can help you comply here.