Addressing ESG in your supply chain: A practical approach

Businesses are addressing the legal, regulatory and commercial pressures to get their ESG approach right in house. But recent and forthcoming developments indicate the need for businesses also to address ESG issues in their supply chain. 

Our sustainability and supply chain specialists, Ben Sheppard and James Crayton, explain what businesses need to know, and the practical steps they can take to safeguard human rights and sustainability in their supply chain. 

ESG responsibility and reporting: Supply chain now in scope

For some time now, businesses have known they need to address legal, regulatory and commercial pressures to get their ESG approach right. 

But recent and upcoming legal developments highlight the need to extend this focus to address ESG issues in their supply chain:  

  • A group of institutional investors are suing Boohoo over a drop in its share price linked to ESG disclosures relating to factory workers.
  • A recent report by the House of Lords Select Committee on the Modern Slavery Act 2015 recommends amendments to the existing regime underpinning slavery and human trafficking statements, and the introduction of mandatory modern slavery due diligence in supply chains.
  • The European Parliament has approved a new regulation, known as the Forced Labour Regulation, enabling the EU to prohibit the sale, import, and export of goods made using forced labour. Member state authorities and the European Commission will be able to investigate suspicious goods, supply chains, and manufacturers. If a product is deemed to have been made using forced labour, it will no longer be possible to sell it on the EU market (including online) and shipments will be intercepted at the EU’s borders.
  • The upcoming EU Deforestation Regulation will require importers of certain products to ensure deforestation or forest degradation has not occurred at any point.
  • In June 2024, the Supreme Court considered a planning application to expand an oil well. It held, in Finch v Surrey County Council [2024] UKSC 20 that it was unlawful for the Council not to require the environmental impact assessment to cover the impacts of greenhouse gas emissions which would result from use of refined products of the extracted oil. So, effectively Scope 3 emissions. (Scope 3 emissions are indirect upstream and downstream emissions that occur in the value chain of the reporting company, but that are not within its direct control).

And there are corporate reporting drivers too:  

  • In their annual financial report, UK incorporated companies with a premium listing should provide, on a ‘comply or explain basis’, a statement setting out whether they have made climate-related financial disclosures consistent with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations (see below).
  • On 3 October 2023 the Financial Reporting Council confirmed that the UK government has committed to assess and endorse the ISSB’s sustainability disclosure standards for use in the UK. The Financial Conduct Authority (FCA) has separately confirmed that it intends to update its existing rules on climate-related reporting for listed companies (which are based on TCFD recommendations) to refer to the UK-endorsed ISSB standards.
  • In June 2024, the ISSB published its feedback statement for 2024 on the IFRS SDSs. The plans support disclosure requirements under IFRS S2, Climate-related disclosures, and aim to decrease fragmentation in the market. During the next 2 years, the ISBB will deliver further harmonisation of the sustainability disclosure landscape.  
  • The EU Corporate Sustainability Reporting Directive (CSRD), which will require first reporting to be commenced for in-scope entities on a phased bases from 2025 to 2029, aims to provide investors and other stakeholders with access to more decision-useful information about companies’ sustainability risks, opportunities, and impacts. It mandates reporting on a range of ESG topics in accordance with the European Sustainability Reporting Standards. The CSRD requires in-scope corporate entities (including EU companies and non-EU companies with EU activity) to describe their supply chain, to undertake ‘materiality assessments’ of the ESG impacts of the business and its supply chain, and to report accordingly. 
  • And, after a two-and-half-year legislative journey, the Corporate Sustainability Due Diligence Directive (CSDDD) has been formally adopted and will introduce mandatory human rights and environmental due diligence requirements for large EU companies, and non-EU companies operating in the EU. In-scope companies will need to identify and address adverse human rights and environmental impacts in their own operations and throughout supply chains. The new rules will become applicable according to a staggered timeline (largest to smallest companies, then franchisors/licensors) between July 2027 and July 2029.

Addressing ESG in your supply chain: A step-by-step approach

With these developments in mind, how can you take practical steps to address ESG in supply chains? 

Step 1: Understand the challenge 

Firstly, you need to know what sustainability/ESG covers, and which aspects are most relevant to your operations – both internally and throughout the supply chain: 

The business can then define and articulate its strategy, commitments and sustainability reporting against these criteria. 

 Step 2: Outline an approach 

A successful, practical approach to addressing sustainability requires leadership from the top down, including the right cultural messaging and dedicated resource, combined with business-wide data, operational and contract reviews, training and ongoing monitoring: 

Step 3: Implement 

 Specific actions can then address each area, such as: 

The Corporate Sustainability Due Diligence Directive (CSDDD) 

We’ve mentioned that the CSDDD is on its way. It’s an ambitious, wide-ranging and demanding piece of legislation that will have a considerable administrative impact. But compliance will help shape and future-proof your ESG approach. It will support your contribution, in a very tangible way, to positive global change for human rights and the environment. 

The CSDDD requires in-scope companies to take various steps to manage actual and potential negative impacts of their/their supply chain partners’ activities on human rights and environmental matters. Captured activities will include: 

  • the activities of a company’s upstream business partners related to the production of goods or the provision of services by the company (including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or part of the products and development of the product or the service); and 
  • the activities of a company’s downstream business partners related to distribution, transport and storage. 

The CSDDD sets out certain core due diligence obligations to identify, assess, prevent, mitigate, put a stop to, and/or to remediate adverse impacts. It also requires meaningful stakeholder engagement, regular monitoring, and public communication. 

One particularly important obligation will be for companies to adopt and put into place a climate transition plan. In October 2023, the Transition Plan Taskforce (TPT) published its Disclosure Framework, which sets out good practice recommendations for making robust and credible disclosures about climate-related transition plans. The Disclosure Framework is a key component of the TPT’s wider materials. See our related briefing on climate transition planning. 

Other measures that businesses may be expected to take include: 

  • Developing and implementing prevention plans. 
  • Seeking contractual assurances from business partners, accompanied by measures to verify compliance. 
  • Making necessary financial or non-financial investments, adjustments or upgrades to operational Processes and infrastructures. 
  • Modifying business plans, strategies and operations, including purchasing, design and distribution practices. 
  • Providing targeted and proportionate support to supply chain partners. 
  • Providing remediation. 
  • Where necessary, terminating business relationships. 

Working together

Finally, formulating, implementing, maintaining and developing an effective ESG strategy in-house and across the supply chain isn’t something that you have to tackle alone. Sustainability and supply chain specialists can help with:  

  • Internal and upstream/downstream supply chain audits, contract reviews and contract negotiations/re-negotiations and/or terminations. 
  • Drafting and implementing sustainability and due diligence policies and procedures. 
  • Keeping you updated and informed on sustainability-related legal and regulatory developments. 
  • Providing tailored training to staff at all levels. 
  • Assisting you in securing ‘green finance’ or investments based on sustainability criteria. 
  • Delivering low carbon, sustainable and other ‘green’ projects. 
  • Assisting with measuring and reporting of energy, carbon, climate and human rights risks. 
  • Designing and implementing effective transition planning strategies and reporting. 
  • Providing comprehensive, cross-disciplinary advice and transactional assistance. 
  • Risk management and dispute resolution strategies if/when sustainability or due diligence queries, concerns or investigations arise. 

Questions on ESG reporting and due diligence across your business and supply chains? Please contact James Crayton or Ben Sheppard.