Environmental protection and sustainability are becoming more and more a trend. For many companies real measures to meet sustainability criteria are getting priority. Supply Chain Due Diligence Act and the Taxonomy under ESG regulation is intended to help with this.
EU Green Deal & Taxonomy
To enable Europe to become “the first climate-neutral continent in the world” by 2050, the European Union implemented the European Green Deal. With the European Green Deal, the EU aims to create a transition to a modern, resource efficient and cost-effective economy that does not let anyone down.
To reach the EU’s targets for climate and energy for 2030 and the objectives of the European Green Deal, a classification system is intended for the first time. This is important to create a uniform understanding of the sustainability of economic activities. As a first step, the Taxonomy places a special focus on climate goals. In the future, it should also cover social aspects and good Corporate Governance in addition to various environmental goals.
To align with the Taxonomy, economic activities must:
The six established environmental objectives are Climate Change mitigation (1), Climate Change adaptation (2), water (3), Circular Economy (4), Pollution prevention and control (5) and protection of ecosystems (6).
The Taxonomy should make it easier to define sustainable activities and to encourage companies to align with the goals of the European Green Deal.
Environmental Social Governance (ESG)
Furthermore, the Environmental Social Governance (ESG), used as a broad term of Corporate Social Responsibility (CSR), obliges companies that publish financial benchmarks to disclose how to include environmental, social and corporate governance criteria in their calculations. These criteria are used by traders and investors to assess how a company’s sustainability and ethical standards affect its financial results and operations.
Supply Chain Due Diligence Act
Today, not only the expectations of companies in their social and political dimensions are getting higher but also transparency in the supply chain is becoming more important.
Germany is strongly involved in global supply chains. For our clothes and food, people are suffering from poor working conditions. A “Supply Chain Due Diligence Act” must be adopted, which is going to be mandatory for companies. For the first time, the law regulates corporate responsibility for compliance with human rights in the supply chain.
The goal of this law is to improve the protection of human rights, specially to forbid child labor. The new “Supply Chain Due Diligence Act” will enter into force in 2023 for companies with a registered office or branch in Germany with 3,000 or more employees, from 2024 for companies with 1,000 employees or more.
The rule is to have the responsibility for the entire supply chain, with graded requirement for the company. One of the core elements of due diligence is the establishment of a risk management system to identify, avoid or minimize the risks of human rights violations and damage to the environment. The responsibility of the company no longer ends at its own factory gate but extends along the entire supply chain. An authority will be provided to monitor the companies’ supply chain management.
It is seen that there are a lot of changes coming up. More and more companies are recognizing the upcoming changes and are embracing these changes and emerging laws.
Gräf, F. und Weidner, J.2020. Sustainable Finance- Taxonomie. BMWi
World Business Council for Sustainable Development. The new EU Taxonomy on sustainable activities. 2020. wbcsd