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12 August 2022·4 min read

Julia Pycka

Associate, B2RLaw

ESG For Startups: Re-defining The Supply Chain

Having discussed many issues related to ESG factors and how they can improve the competitiveness of startups or help secure successful funding rounds, it’s time to delve deeper into the details of ESG-aligned business operations. 

What do all companies in the market have in common regardless of their activities? It is undoubtedly the fact that they are subject to a supply chain. Today, the topic of the supply chain is a very multifaceted issue, it is not only a matter of selection of contractors and market positioning. 

Moreover, observing current trends, we can reach the conclusion that the supply chain has become a new tool for achieving environmental, social and corporate governance goals.

It can be said that a company’s supply chain plays a primary role in ESG.

ETHICAL SUPPLY CHAIN

A typical supply chain might be related to obtaining the necessary components for production, finding sellers, warehousing, getting products or services to the market and finally, ensuring their continued existence in the world at a customer's home.

We have observed that the supply chain matters not only in terms of logistics or business operations but also can become a tool for positioning businesses. Why? Market practice shows that it is no longer only financing organizations, but also business counterparties, that expect their contractor to report how their business affects the environment, as well as whether a company has implemented policies related to human rights, compliance with humanitarian issues, and many other corporate governance issues.

The supply chain issue currently extends beyond the attractiveness of services and products. It is no longer enough for a product to be visually attractive. A product or service has to be socially attractive first and above all - it has to support sustainable and responsible corporate action in the global supply chain. The issue of a product's carbon footprint is also important.

RESPONSIBILITY FOR THE SUPPLY CHAIN

The European Commission has published a proposed directive on sustainable corporate due diligence - CSDD (Corporate Sustainability Due Diligence Directive). A significant number of companies are verifying suppliers and reviewing the issue of their social and environmental responsibility. Although the regulations of the CSDDD are not yet in force, it is observed that more and more entities expect their contractors to take responsibility for the supply chain issues of their business partners.  

The supply chain due diligence reporting obligation will apply to entities with more than 500 employees and a total annual turnover of more than €150 million, as well as companies in high-impact sectors with more than 250 employees and having total annual turnover of more than €40 million, operating in defined high impact sectors, e.g. textiles, agriculture, extraction of minerals. Third-country companies operating in the EU will have their turnover threshold adjusted to those granted in the EU. However, the issue of indirect obligation presents itself analogously to the issue of an indirect ESG reporting obligation, which we have already mentioned in a series of articles. 

The fact that one does not have the status of an obligated entity as defined by law, does not mean that one is exempt from the reporting obligation in reality.  It comes down to the possibility of being part of a supply chain in which the obligated entity will be at the end of it. By providing services to large entities, small entities will already have this obligation as well - if only to their clients.

It is worth noting that a similar regulation already exists in German legislation, and it regulates the entire supply chain process. It covers a German company as well as its suppliers and sub-suppliers - regardless of which country they come from. The above will also affect Polish companies whose suppliers or business partners are German companies. 

In conclusion, now is the moment to take an interest in the supply chains of your suppliers and business partners.

HOW SHOULD YOU PREPARE?

The following strategies should be prepared and implemented at first instance to help the company implement ESG factors into their business:

  • respect for human rights;
  • environmental commitments;
  • employment practices;
  • proceedings to reduce the negative impact of the organization, including calculating the carbon footprint of a product at each stage of its existence;
  • development of ESG clauses within supply chain contracts;
  • remuneration policies.

Secondly, companies should develop a supply chain risk analysis as well as prepare and implement appropriate ESG liability clauses in their contracts.

AN OPPORTUNITY FOR GROWTH, AND NOT ANOTHER UNPLEASANT DUTY

Redefinition of the supply chain is happening and is likely to continue. Facing these new responsibilities and preparing for them early on can prevent potential problems with business operations in the future and thus help build a competitive advantage in the market.

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