Michele Leung, Green Finance Advisor of Friends of the Earth (HK)

Global regulators are stepping up on the supply chain ESG assessment and disclosure, both from the environmental and social perspectives. Supply chain ESG risks would be far reaching and complex; yet transparency around direct and indirect suppliers is still opaque.

EU regulators introduced “do no significant harm” principle, which requires assessment of companies, and their economic activities should not support or carry out actions that cause significant harm to any environmental or social objectives.

Most recently, the European Council and the European Parliament reached a provisional deal on the corporate sustainability due diligence directive (CSDDD)[1]  ,which aims to enhance the protection of the environment and human rights in the EU and globally. It aims to “set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.” Notably, this directly does not only apply to EU companies but also for non-EU companies, provided they have over €150 million net turnover generated in the EU.

Specifically on the social perspective, human rights and labour practice are often come into the spotlight.  When evaluating on labour standard, companies are often analyzed on the management and transparency of their supply chain, while the working standards in the regions of operation are also being considered.  These are often assessed according to the Ten Principles of UN Global Compact and UN Guiding Principles on Business and Human Rights.

On the other hand, from the environmental perspective, centering the key themes of climate change and biodiversity, the key topics include raw materials sourcing, deforestation, carbon and water footprint. For example, on raw material sourcing, companies are evaluated on the environmental impacts of the raw materials used in their products and their management efforts around sourcing policy and commitments are being considered.   

Under the EU’s new anti-deforestation law[2], “any operator or trader who places commodities like cattle, wood, cocoa, soy, palm oil, coffee, and some of their derived products, such as leather, chocolate on the EU market, or exports from it, must be able to prove that the products do not originate from recently deforested land or have contributed to forest degradation”. It is posing a huge challenge to the food product industry, as ingredients are often sourced from emerging markets, which the monitoring and reporting would be difficult, and traceability is a challenge.

In conclusion, transparency around supply chain ESG risk is crucial as it enables companies and investors to manage risks and navigate regulatory requirements. Supply chain should be better managed to mitigate the risk of operational disruption, reputational damage, possible liabilities, and financial loss.


[1] https://www.consilium.europa.eu/en/press/press-releases/2023/12/14/corporate-sustainability-due-diligence-council-and-parliament-strike-deal-to-protect-environment-and-human-rights/

[2] https://environment.ec.europa.eu/topics/forests/deforestation/regulation-deforestation-free-products_en