In the realm of corporate social responsibility and ethical business practices, the supply chain regulations like EU’s CSRD and Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act represent a significant milestone. Enacted to combat modern slavery and climate change, these legislations mandates companies to be transparent about their efforts in eradicating these unethical practices from their supply chains. However, as with any regulatory requirement, there is a temptation for some businesses to comply by submitting only the minimum information necessary. While this might seem like a cost-effective and time-efficient strategy, it carries substantial risks that can adversely affect the company's reputation, legal standing, and overall business health.
1. Reputational Damage
In today's market, businesses must prioritize transparency and ethical practices to satisfy customers, investors, and stakeholders. Companies that only partially comply with the supply chain risk damage to their reputation, resulting in a loss of consumer trust, negative media coverage, and decreased investor confidence. A PwC study suggests that 83% of customers would stop purchasing from a company if they learned of unethical supply chain practices. A damaged reputation is challenging to repair and can impact brand loyalty and market position over the long term.
2. Legal and Regulatory Risks
While the initial submission of minimal information might technically fulfill legal requirements, it leaves the company vulnerable to stricter scrutiny and potential future legislative changes. Regulators may interpret minimal compliance as a lack of genuine commitment, leading to more frequent and rigorous audits. Additionally, if more comprehensive legislation is introduced, the company might find itself unprepared and struggling to meet enhanced requirements, potentially facing fines, sanctions, or other legal actions .
3. Operational Disruptions
Compliance with acts like the Uyghur Forced Labor Prevention Act (UFLPA) and others is an ongoing process, not a one-time obligation. Minimal information submission may indicate insufficient supply chain evaluation or robust monitoring, leading to undetected risks and potential operational disruptions. Supply chain disruptions can increase operational costs by up to 30%. Companies may face production delays, increased costs, and supply chain boycotts, disrupting business continuity.
4. Loss of Competitive Advantage
Companies that actively combat modern slavery gain a competitive advantage. They attract ethically minded consumers, secure partnerships, and enhance brand value. Companies with strong sustainability practices outperform peers by 16% in market value growth. On the other hand, those that stick to the bare minimum risk losing market share to more proactive competitors.
5. Stakeholder Dissatisfaction
Investors, customers, and employees increasingly demand transparency and ethical practices from the companies they engage with. Minimal compliance can lead to dissatisfaction among these key stakeholders, who might feel that the company is not genuinely committed to addressing serious social issues. This can result in divestment, loss of business, and challenges in attracting and retaining top talent .
6. Increased Scrutiny from NGOs and Activists
NGOs and activists scrutinize companies' human rights and modern slavery practices. Companies with insufficient information disclosure may face negative attention, leading to public scrutiny and reputational harm. This can pressure companies to enhance their practices and transparency. .
Regulations like Australia Modern Slavery Act and the EU’s CSDDD are not just regulatory requirements but an opportunity for companies to demonstrate their commitment to ethical practices and social responsibility. While submitting the minimum information might seem like a safe and easy option, the risks associated with this approach far outweigh the perceived benefits. Companies should aim to exceed the basic requirements, embracing transparency and taking proactive steps to eradicate modern slavery from their supply chains. By doing so, they can protect their reputation, ensure compliance, enhance operational resilience, and build stronger, trust-based relationships with all stakeholders.
To learn more about how you can efficiently and effectively comply with supply chain regulations, contact us hello@frdm.co
References
- PwC. (2023). Global Consumer Insights Survey. Retrieved from PwC website
- Transparency International Canada. (2023). The Impact of Modern Slavery Legislation. Retrieved from TI Canada website
- Deloitte. (2022). Supply Chain Risk Management. Retrieved from Deloitte website
- Accenture. (2022). Sustainability and Competitive Advantage. Retrieved from Accenture website
- Harvard Business Review. (2023). The Growing Importance of Corporate Social Responsibility. Retrieved from HBR website
- Human Rights Watch. (2023). Corporate Accountability and Transparency. Retrieved from HRW website
