The rise of ESG issues in the supply chain

A version of this article was first published by The DCN in March 2022.

Customs & Trade law expert Andrew Hudson takes a look at the increasing importance of environmental, social and governance (ESG) considerations and the consequences for industry.

Over time, there has been extensive discussion on how the supply chain is moving to include issues that go beyond merely moving goods from points of origin to points of destination, the cost of that movement, the safety of that movement, and the impediments to improving that movement.

In more recent times, that narrow focus has widened to include other issues that demonstrate that the supply chain is not isolated from other, less commercial issues.

For several years, I have written and presented on the introduction of corporate social responsibility (CSR) issues into the supply chain. In this work, I have covered a variety of other considerations, such as the expansion of who is “fit and proper” to hold licences in the supply chain and the absolute prohibition on the import of products containing asbestos. It also includes the need to ensure goods are not the product of illegal logging and eliminating goods containing certain chemicals and sanctions against goods of a certain type or from certain countries.

The lists of prohibited imports and exports grow every year, and Australia has recently given itself the power to introduce “thematic” sanctions. The sanctions will not be limited in effect to countries but will be able to be applied to sanction the trade in goods or investment by parties believed to be involved in behaviours that the government considers unacceptable.

Modern slavery

Probably the most recent and public example of CSR concerns in the supply chain is the increased attention as to whether goods are the product of “modern slavery” or “forced labour”. In this context, the US is active in its interdiction against such goods with provisions enabling the seizure and destruction of goods believed to be the product of forced labour (whether wholly or in part). That lead is being followed in other jurisdictions where, regardless of legislation, companies do not want goods and services which may be the product of forced labour.

Those companies are now seeking assurances from their suppliers of goods and services that there is no forced labour involved in the provision of goods and services to those companies.

Australia’s position is less intrusive in the supply chain, and our Modern Slavery Act 2018 (MSA) requires larger companies to provide annual reports on their measures against modern slavery. Still, the government has, to date, stopped short of specifically legislating against the import of goods the product of forced labour. That may change soon as legislation prohibiting such imports has passed through our Senate and is under consideration by our House of Representatives.

While that legislation may not pass, changes could be made following the review of the MSA this year. There is significant pressure for Australia to take more action on forced labour/modern slavery risks, especially with the findings of a report entitled Paper Promises Evaluating the early impact of Australia’s MSA. The report found that companies are failing to comply with the mandatory reporting requirements and that companies are failing to identify or disclose modern slavery risks.

Regardless of legislative amendment in Australia, given the focus on such modern slavery/forced labour issues, it is fair to assume that companies, their officers and inhouse counsel will include due diligence on such issues and seek assurances that their supply chains are free from such concerns.

An evolving environment

The expansion of the CSR agenda will not stop with modern slavery/forced labour. It continues to evolve, both in terms of its title and the issues being considered.

The CSR term is being replaced with the use of the term “environmental, social and governance issues” (ESG), to also include environmental sustainability, gender and human rights issues as being important in the supply chain and part of the governance considerations of companies and those providing goods and services to those companies.

In the international context, that includes negotiations for an “Environmental Goods Agreement” led by Australia at the World Trade Organisation, the OECD Guidelines for Multinational Enterprises from 2011 and the United Nations Global Compact. Further, many of the Free Trade Agreements (FTAs) recently concluded by Australia include ESG issues as specific areas of focus, such as in the recent Australia-UK FTA.

The importance of ESG is now also being seen in the supply chain in several practical ways. For example, those providing international carriage of goods (whether by air or sea) are increasingly focused on environmental concerns and solutions. These include the carbon footprint of air cargo services (and how it can be offset), the use of cargo vessels powered by hydrogen, cargo vessels incorporating sails to reduce reliance on carbon-based fuels, and autonomous vessels run by computers incorporating artificial intelligence and no longer requiring human crew.

A shift towards ethical obligations

Ultimately, the supply chain and the requirements on parties in the supply chain will continue to evolve over time and shift further from traditional supply-chain issues. We could anticipate that ethical considerations will also be imposed.

I have discussed the problems of defining additional ethical obligations and how they can be met at many recent forums and in many articles. That evolution of additional requirements will be driven, in part, by governments, their agencies and international organisations. However, that evolution will also be driven by popular opinion, which reaches the wider political agenda and becomes part of the accepted policy framework.

The imposition of additional obligations will require those in the supply chain to be more flexible and be prepared to pivot to new technologies and practices. This will be a challenge to the drafting of relevant agreements to allow for variation to include new and desirable outcomes and who is to pay for those outcomes. The ability to adopt such new practices will also reward those willing to invest in monitoring current and future ESG requirements. Failure to meet ESG standards, whether imposed by legislation or imposed in contractual obligations, could create real and significant problems for many in the supply chain.

For advice on all aspects of Australian and international trade and customs obligations, please contact our Customs & Trade team.