Regulatory compliance throughout the globe is shifting dramatically and quickly, and it’s essential for organizations to stay on top of compliance changes that apply to them. In the wake of the General Data Protection Regulation (GDPR) passing in 2018 in Europe and the UK, these regions have cracked down further in key areas, with supply chain due diligence, human rights compliance, and ESG compliance all becoming high priorities.
In this essay, we address specific developments to regulatory compliance in Europe, what they mean for organizations that are located and operate within these areas, and the resources available to make compliance easier and more streamlined.
EU Regulatory Compliance Trends
The EU and UK have ramped up regulatory compliance action recently, particularly in the areas of supply chain due diligence, ESG compliance, human rights due diligence, and market surveillance.
Supply chain due diligence
When it comes to supply chain due diligence, the EU has issued a new directive designed to tackle companies failing to perform due diligence throughout the full extent of their supply chains. In the wake of COVID-19, recent supply chain disruptions have emerged that created opportunities for a number of new players to enter supply chains around the world. Performing thorough due diligence is now more important than ever, as many of the new players have been allowed to enter into the supply chain without being properly vetted and required to maintain their own compliance protocols.
The directive, entitled the “EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence,” references the European Parliament’s concern that only one in three businesses is currently conducting appropriate due diligence measures with regards to its value chain. These “appropriate due diligence measures” include but are not limited to taking measures and making efforts to prevent potential adverse impacts in the fields of human rights, the environment, and good governance; put appropriate processes in place; and publicly communicate their approach to due diligence in a due diligence strategy document.
Since the companies affected by this directive span an extensive range of size, resources, and revenue, compliance measures will be divvied up proportionately based on a number of factors, including each organization’s severity and likelihood of the adverse impacts, operational sector, position in the supply chain, and nature of goods and services, among others.
The challenge with this new regulatory update for organizations is that it comes in conjunction with a recent ruling regarding the role of a parent company in enforcing due diligence. In a 2016 case that reached a verdict earlier this year, the EU top court ruled in favor of the application of a “single economic entity principle,” under which multiple companies within the same group are considered one entity. In regards to the new compliance directives, this means that damages, fines, and regulations can be brought all the way up to the parent company, rather than dealt with at the individual company level.
ESG compliance
Along with supply chain due diligence, ESG compliance initiatives are also on the rise, as evidenced by a number of new commitments set forth at the recent 2021 United Nations Climate Change Conference. The push toward greater environmental due diligence is becoming a much higher priority for both stakeholders and governing agencies. As a result, these new EU due diligence directives are also pushing toward significant ESG compliance measures, including, but not limited to, waste production measures, sustainable use of natural resources, and the assessment of pollution, greenhouse gas emissions, deforestation, biodiversity, and ecosystems.
This push is different from earlier initiatives in a noticeable way: previously, the main emphasis was reactive in nature, with the focus being on slowing the waste, pollution, and other negative environmental impacts that companies can have. This directive, however, emphasizes not only reactive measures, but also proactive measures, by requiring companies to investigate alternative production methods, sustainably utilize resources, and create awareness of environmental impact. To remain in compliance with these directives, organizations and their parent companies will need to rethink their approach to ESG compliance to be proactive in their environmental sustainability and actively report to customers and shareholders.
Human rights due diligence
A new EU and UK initiative from the European Commission emphasizes a major push in human rights due diligence. While some human rights regulations are currently in place, this directive would require companies to carry out due diligence processes and reporting in regards “to potential or actual adverse impacts on human rights, the environment and good governance in their operations or business relationships.”
While organizations will benefit from an overarching governance to refer to when it comes to remaining in compliance with human rights regulations, companies are going to have to become much more organized and proactive in the analyzing of human rights risks throughout their supply chains, collection of human rights due diligence data, and reporting of their findings. This initiative will allow for governing agencies to perform investigations on a risk-based approach in response to reported concerns from a third party. Investigations that result in a status of non-compliance can result in fines or the exclusion of undertakings from public procurement, state aid, and public support schemes.
Market surveillance
Market surveillance regulators work to increase product compliance for applicable market participants by “increasing the control of goods imported into the EU internal market and imposing additional requirements on economic operators.” In coordination with all the new initiatives in supply chain, human rights, and ESG compliance, market surveillance initiatives have increased, as well.
One of the major driving forces behind an increase in market surveillance is the emergence of cybersecurity compliance protocols in the e-commerce market. According to a report, “online sales of non-compliant (e.g., unsafe or incorrectly labeled) products is seen as a major source of unfair commercial behavior and safety concerns.” With the massive extent of the e-commerce market, market surveillance efforts are increasing significantly to ensure companies are maintaining cybersecurity compliance in this complicated space.
Effectively, market surveillance regulations can keep your products out of the market if your organization and methods for production don’t meet compliance requirements. This presents a pressing challenge for applicable organizations — as market surveillance measures increase, company compliance measures will need to increase in kind to maintain product distribution in the European market.
Why Do UK and EU Regulatory Compliance Trends Matter?
It is essential for relevant organizations to stay on top of trends in compliance in order to drive their due diligence strategies and avoid non-compliance disciplinary action. The results of being found out of compliance with any given due diligence regulation can include:
- Large administrative fines (comparable in magnitude to fines currently provided for in competition/antitrust law and data protection law)
- Exclusion from public procurement, state aid, or public support scheme
- Import bans in the case of severe human rights violations (such as child labor)
- Product exclusion from the European market
- Media coverage regarding unethical practices resulting in reputational damage
Work with EU Regulatory Compliance Experts
Staying on top of regulatory compliance changes is essential for organizations across the globe, and especially in the UK and EU, as things are changing so quickly. It can, however, be very challenging for organizations to keep up with compliance trends, and with something this important, they cannot afford to fall behind. Allow our experts in EU regulatory compliance trends to make due diligence compliance much easier. To get started, contact us today.