Reporting on progress
One yardstick of that success will be a company’s ability to comply with the ESG regulations and disclosure requirements coming down the line. The seriousness of this issue is highlighted by the results of the 2022 TMI and Barclays European Treasury Survey, now in its third year, with the top regulatory concern for respondents (29%) emerging as sustainability/ESG reporting.
Pérez continues: “We are starting to see more governments across the globe issuing new laws and regulations around GHG emissions, environmental damage, and social concerns. Many of these measures also impose obligations that cover supply chains.” Take the German Supply Chain Due Diligence Act, for example, which came into effect on 1 January 2023 for organisations with more than 3,000 employees1. The Act aims to make supply chains more transparent, while also bolstering human rights and environmental protection – by placing the onus on businesses, and their directors, to take responsibility for the actions of all their supply chain partners.
Furthermore, the penalties for non-compliance are significant. Buyers that are made aware of ESG violations in their supply chain but take no action to address them could be required to pay up to €50,000, together with an administrative fine of up to 2% of the organisation’s annual revenue (if it exceeds €400m). In addition to fines, companies not complying with the Act can also be excluded from being awarded public procurement contracts for up to three years2.
While Germany’s efforts arguably represent the forefront of ESG regulation in the European supply chain sphere, having country-specific rules is not always helpful to the wider goal of harmonising ESG standards. Thankfully, however, there are both worldwide and pan-European projects underway to help deliver harmonisation.
Here, Pérez highlights the work of the World Bank and the Organisation for Economic Co-operation and Development (OECD) to provide guidance on the development and alignment of green taxonomies. Indeed, one of the key findings at the 8th OECD Forum on Green Finance and Investment in 2021 was that “current ESG and taxonomy [efforts] are a sign for a shift in the right direction, but are generally neither forward-looking nor well-aligned among each other”.3 Work is ongoing in this area to reduce fragmentation.
In the trade arena, additional standardisation steps are being taken by the International Chamber of Commerce (ICC). As well as encouraging green trade through the publication of The Standards Toolkit for Cross-border Paperless Trade and authoring a paper on ESG export finance, the ICC has developed the first industry guidance on what constitutes a sustainable trade finance transaction. Created together with a number of banks and corporates, the finalised Standards for Sustainable Trade and Sustainable Trade Finance were announced at the COP27 conference4 and will once again assist with harmonisation.
Meanwhile, in Europe, a proposal for a Directive on Corporate Sustainability Due Diligence was adopted by the European Commission (EC) in February 2022. According to the EC, “the aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe”.5 (See fig. 1 below for an overview of the companies covered by the new Directive).