Policymakers globally are developing significant volumes of ESG legislation. Particularly in the EU, regulatory frameworks are ambitious, complex, and often have extraterritorial reach.
For the fmcg sector, this developing landscape poses many challenges. So what have have been the key developments in 2023 and what do they mean going forward?
Diligence, diligence, and more diligence
A key policy tool driving the transition to a more sustainable economy is regulation that establishes greater corporate accountability for ESG-related harms. This can target specific value chain risks, including commodity-specific regimes.
This idea of businesses taking steps to identify and manage human rights and environmental risks is not new. The UN Guiding Principles and OECD Guidelines are long-standing initiatives. However, due to a perceived lack of practical implementation and effectiveness in identifying and managing risks, more hard law is being enacted.
Last year ended with significant news in this regard. The EU reached a provisional political agreement on the Corporate Sustainability Due Diligence Directive (CSDDD), which should herald a new era by introducing wide-ranging requirements for sustainability management, and aims to reduce the adverse effects their operations have on human rights and the environment. This follows the EU deforestation regulations, which carry similarly onerous requirements for certain agricultural products.
The Corporate Sustainability Reporting Directive effectively requires diligence through its mandatory materiality assessment. To report credibly, companies will also need to map their value chains – upstream and downstream – and take substantive steps to adopt and implement effective policies, processes, and procedures on sustainability topics.
All these EU regimes will have extraterritorial effect. They will not only impact in-scope companies – estimated by some to be in the tens of thousands – but their indirect business partners along their global value chains.
Even regimes that are not related to supply chains will have an impact. Examples include the Sustainable Finance Disclosure Regulation and EU Taxonomy, which incorporate some of the above ‘soft laws’ and demonstrate policymakers are also using indirect levers – access to finance – to drive change.
Sustainability litigation trends
The past year has also brought an increase in ESG litigation, particularly regarding supply chains. Claimants are seeking remedy at group-level for harms connected with subsidiary-level and supply chain operations, often involving harms in another jurisdiction, in the form of claims for behavioural change, damages or denouncing practices as ‘green/social-washing’. The use of ‘soft law’ mechanisms to scrutinise ESG issues within companies’ operations or business relationships has also increased.
These cases have had varying degrees of success, but victory in court is not always key. The strategic goal is often to generate publicity and use leverage to influence corporate strategy and drive change. Even ‘soft law’ mechanisms, which cannot compel participation or impose fines, can result in serious reputational damage and successful claimant outcomes.
Beyond litigation, ESG activism is now a common occurrence, leading to more companies being held to account for their business relationships on a range of topics, including climate change, human rights and protection of nature and biodiversity.
Implications and key takeaways
These developments leave fmcg companies with lots to think about, particularly regarding their farming, production, and sourcing practices. The core of any workplan should be an appropriately calibrated ESG strategy, robust risk management system and implementation of associated governance frameworks.
Some key things to consider are:
- Have you mapped and do you understand the key sustainability risks associated with your supply chain (beyond tier one)?
- What relevant policies and processes are in place? How are they being implemented and monitored in practice?
- What contractual provisions are in place to obtain information, conduct audits, or exercise leverage?
- How do you engage with your supply chain? How can you upskill others? Are there collaboration opportunities (across industry or multi-stakeholder)?
- Do you have mechanisms to escalate incidents and a process to determine next steps?
2024 promises to continue the recent trend of development-filled years, most notably with the CSDDD to be finalised ahead of the upcoming EU elections, and plenty of other regulations still in their infancy or yet to come into force.
Fmcg companies will need to continue to monitor for developments, including nascent best practice. While some of the relevant regimes may not yet be in force, the time needed to prepare for compliance should not be underestimated.