As environmental, social and governance (ESG)-related legislation and regulation becomes an ever-increasing focus for governments and regulators across the globe, companies face complex challenges, with increasing exposure to environmental and human rights litigation across multiple jurisdictions. As well as dealing with the sheer volume of new rules and requirements, organisations must navigate divergences in approach and guidance between different jurisdictions.
Supply chain liability is one example of the complex issues that businesses must navigate. Bribery and corruption are well-established risks that businesses have long had to grapple with in their supply chain and internal organisation; but addressing ESG-related risks has become a paramount requirement.
The EU’s Corporate Sustainability Due Diligence Directive (CSDDD), adopted earlier this year, had been hailed as a watershed moment for corporate accountability. The CSDDD requires businesses to identify and address adverse human rights and environmental impacts in their own operations, their subsidiaries and those of business partners in their supply chains. It also requires companies to report annually on their human rights and environmental due diligence efforts.
Companies face severe financial consequences if they fail to comply with the CSDDD, including fines, or payment of damages resulting from an intentional or negligent failure to carry out due diligence.
The CSDDD will apply not only to large EU-based companies, but also non-EU companies with a turnover in excess of €450 million within the EU. Its impact therefore is far reaching.
Legislative developments on the cards
On 16 October 2024, the UK House of Lords Select Committee published its report on the review of the UK Modern Slavery Act 2015 (MSA). It found that the UK had 'fallen behind' on international due diligence developments and recommended that the UK adopt modern slavery due diligence legislation, as well as forced labour import bans.
The report specifically cited the EU CSDDD, the German Supply Chains Act, the French Duty of Vigilance Law, and the Norway Transparency Act as examples of legislation that imposes clear due diligence requirements.
Forced labour import bans have been in place for numerous years in the United States, with the US Tariff Act 1930 and the Uyghur Forced Labour Prevention Act 2021. Similar bans have recently been introduced in Canada and Mexico, pursuant to the United States-Mexico-Canada Agreement. The EU Forced Labour Regulation was also adopted by the EU parliament in April 2024 and will introduce similar forced labour import bans for products imported and exported to and from the EU, likely from 2027 onwards.
New legislation would need to be tabled for the Select Committee’s recommendations to be adopted into UK law. Such legislation would bring the UK in line with current international practice and provide companies greater certainty on their ESG-related due diligence requirements. The report itself recognised that many UK companies are already subject to these requirements in other jurisdictions.
Threat of legal action
Businesses also face the threat of litigation from activists and NGOs. There has been a significant increase in claims brought by minority shareholders and NGOs for failure to address ESG-related risks, particularly where state enforcement has until now been lacking. One example is that of the World Uyghur Congress (WUC), which in 2023 brought a claim in the English High Court against three British government agencies, including the National Crime Agency (NCA), who had declined to investigate or block cotton imports into the UK from China’s Xinjiang Uyghur Autonomous Region.
The WUC had called upon the UK enforcement agencies to prevent imports deriving from alleged human rights abuses, such as forced labour. The NCA declined to investigate the matter. In June 2024 the Court of Appeal ruled that the basis of the NCA’s decision not to commence an investigation into the imports under the UK’s Proceeds of Crime Act 2002 (POCA) was unlawful.
Significant for the issue of supply chain liability, the Court of Appeal’s ruling considered the practical effect of the 'adequate consideration' exemption under POCA.
The NCA had decided there was no 'proper basis' for commencing an investigation under POCA. Its decision was in part based on its understanding that the presence anywhere in a supply chain of the 'adequate consideration' exemption would have the effect of 'cleansing' any criminal property. On this basis, any onward dealing with that property in a supply chain could not constitute money laundering.
The Court of Appeal rejected this interpretation, stating that this proposition was wrong as a matter of law – marking a significant departure from the previously understood position. The full impact of this judgment has yet to be seen. For now, businesses will need to take a cautious approach and assume they could be held criminally liable if it is found that they know or suspect that they have benefited from forced labour anywhere in their supply chains.
Next on the horizon
As the global landscape of ESG-related legislation and regulation continues to develop at a rapid pace, businesses will need to continue to stay ahead of the curve. This will require companies to invest time and effort into assessing and understanding their supply chain and downstream risks, as well as their own impact on the environment and human rights – or else, face the legal consequences.
Maria Cronin, partner, and Fred Kelly, senior associate at Peters & Peters
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