Europe Raises the Compliance Bar. Is Your Supply Chain Prepared?

Sweeping regulatory changes in the European Union (EU)are raising complex questions for businesses and introducing new tensions along the world’s supply chains.

Manufacturers and importers will soon be tasked with reporting the origin of some metals and materials used in their products. They also will be responsible for disclosing aspects of their suppliers’ human rights and environmental activities, involving detailed due diligence policies.

The EU currently is considering a conflict minerals law modeled on the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Section 1502. This U.S. law requires American manufacturers of consumer products that contain tin, tantalum, tungsten, or gold to report whether the metals come from a “conflict mine” in one of 10 countries in Africa’s Congo region.

The corresponding EU law would also require companies to exercise due diligence in their supply chains to reduce the risks of sourcing metals in their products from a conflict area. In a significant departure, the EU law would apply not just to the Congo, but also to materials from any “high-risk or conflict-afflicted area” around the globe.

The European Parliament has passed the regulation, and it is now the subject of negotiations between Parliament and the European Council.

European countries have also imposed new restrictions on chemical biocides common in shampoos, resins, and a range of consumer products. The EU’s Biocidal Products Regulation requires manufacturers and importers to obtain authorization before placing a product containing biocides on the market. The regulation calls for these companies to evaluate supplier credibility as part of the compliance process, a new prerequisite that parallels the conflict minerals requirements.

Nonfinancial Disclosures

A third major regulatory reform, the nonfinancial disclosure reporting rule, requires companies in the EU to report on aspects of social, environmental, anticorruption, human rights, and employee-related matters. Starting in 2017, listed companies will be required to disclose information related to due diligence processes, outcomes of stated policies, and the principal risks related to these matters throughout the company’s operations.

The EU’s new laws have serious implications for manufacturer and supplier operations, due diligence, and credibility. Suppliers and sub-suppliers will likely have to adjust operations, policies, and practices to demonstrate to their downstream business partners that they have met conflict minerals standards, have been certified to sell biocidal products, and have implemented standards to support human rights, and social and environmental practices.

To keep supply chains moving, shippers in Europe will need to develop systems to collect and synthesize information about materials and pending regulations. All stakeholders need an advanced system for engaging suppliers and managing data. With far-reaching regulatory changes in sight, information about suppliers’ values and internal policies is invaluable.

The anticipated shifts in the European regulatory landscape should create a sense of urgency in any organization. Businesses must look to education, collaboration, and corrective-action programs for suppliers to reap rewards. Reinforcing systems to manage data helps prompt compliance and mitigate risks from regulatory obligations. When the tide of change begins to rise, it’s time to prepare your supply chain.