How Third-Party Risk Management is Impacted by Climate Change Legislation

We must adapt to the risks that climate change poses to us physically as well as economically. For example, the heat waves happening across Europe have caused disruption to third-party suppliers and supply chains. Governments are becoming a driving force for change as they try to achieve their own environmental targets with regulations around sustainability. Businesses need to be aware, prepare and adapt their procurement processes to match the increased regulations as we move toward a lower carbon economy. Many businesses no longer have a choice but to employ sustainability measures to stay compliant with current and future legislation.  

Numerous reports detailing the effects of climate change, notably the reports released by the Intergovernmental Panel on Climate Change (IPCC), have stated that climate change is now affecting every region across the world. The 2022 Global Risks Report from the World Economic Forum identified “Disorderly Climate Transition” as a global risk. If nothing is done to address this, they predict that “Complete climate inaction will lead to losses projected to be between 4% and 18% of global GDP with different impacts across regions.”

We are seeing increased legislation regarding the environmental impact and sustainability of businesses as a result of these reports and environmental change has a direct impact on supply chains. The issue is high on the agenda for governments around the world, meaning organizations are going to have to adapt their processes and management, in particular their third-party risk management (TRPM) and approach to procurement and supply chain management.

Current and Impending Legislation

Supply Chain Due Diligence Act (SCDD)

The German Federal Council has enacted a new piece of legislation to focus on child labor, slavery, safety in the workplace, employment and wage discrimination, and environmental harm. The legislation consolidates the Minamata Convention, Stockholm Convention, and the Basel Convention. Effective on January 1, 2023, German companies with more than 3,000 employees will be required to prevent or at least minimize human rights and environmental rights infringements in their supply chains. This threshold will be lowered to 1,000 employees as of 1 January 2024.

They must also provide ways for employees of indirect suppliers to file complaints about human rights or environmental violations including:

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  • Forced labor
  • Child labor
  • Discrimination
  • Violations to freedom of association
  • Unethical employment
  • Unsafe working conditions 
  • Environmental degradation

EU Directive on Corporate Sustainability & Due Diligence

On February 3, 2022, the EU adopted a proposal for a directive on corporate sustainability due diligence. The proposal aims to foster sustainable and responsible corporate behavior throughout global value chains. Companies play a key role in building a sustainable economy and society. They will be required to avoid adverse impacts of their operations on human rights such as child labor and exploitation of workers, and on the environment such as pollution and biodiversity loss to help minimize the impact of businesses on climate change.

If adopted, this will apply to the following EU and non-EU companies:

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  • EU Companies Group 1- All EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).
  • EU Companies Group 2 -Other limited liability companies operating in defined high impact sectors that do not meet Group 1 thresholds but have more than 250 employees and a net turnover of EUR 40 million worldwide. For these companies, rules will start to apply 2 years later than for group 1.
  • Non-EU Companies - Active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

Environment Act UK 2021

The UK Environment Act, which became law in 2021, was created to improve air quality, biodiversity, water, and waste reduction and resource efficiency as well as environmental improvement plans, including interim targets. This will have a direct impact on the way companies conduct business, especially regarding procurement.

 TRPM in the Future

There are many other legislative developments around the world, and organizations must start to prepare now by implementing new third-party risk management policies to avoid financial and reputational damage. There is an ever-growing demand for sustainability and corporate responsibility across worldwide public and private sectors, and businesses are looking for an approach that can balance their compliance with increased legislation while adding value to supply chains.

There should be a renewed focus on third-party risk management, especially from a procurement and supply chain perspective. You need to ensure that your TRPM system is focused on:

• Digitalization and automation
• Ensuring your business is prepared for the digital future with a fully integrated platform that supports TRPM
• Clear scope, milestones, KPIs and clear allocation of responsibilities and resources
• Agility to ensure you can adapt to changing environmental and economic landscapes
• Streamlined policies and procedures that are communicated clearly across the organization, including third parties
• Due diligence is thoroughly undertaken during the procurement process and there is continual monitoring throughout the length of the relationship
• Measure how far along the digital maturity curve your business may be and then communicate your requirements to improve your TRPM accordingly
• Having a unified risk appetite and understand your risk attributes

Preparing for legislation in the future will help you mitigate current and future risk and gives you the best platform to successfully procure and manage your third parties and avoid costly disruptions to your supply chain.