Modern supply chains are sometimes built for efficiency, rather than ethics. With products passing through dozens of hands across multiple borders, the risk of human rights violations grows. In what some will see as a disappointing move, the EU recently has recently watered down its Corporate Sustainability Due Diligence Directive (“CS3D”), reducing the obligations on corporations to understand and prevent human rights issues in their supply chains. However, even without strict legal obligations, recent breaches involving high-profile brands show that the potential for reputational harm if companies don’t meet their stakeholders’ ethical expectations is as high as ever.
Let's be clear on the meaning of “human rights issues”: here, we are referring to forced or compulsory labour, unsafe conditions, and illegal child labour. While any company should work hard to avoid or stamp out these issues in its first tier suppliers, it may not have the insight into the operations of its contractors and suppliers higher up. Yet the public and stakeholders expect companies to maintain control throughout. Similarly, ESG investors will actively avoid companies who fail to meet that bar. In short, ignorance is no defence.
Regulations aren’t the be-all and end-all
This risk of public backlash and reputational harm is accompanied by teeth in the form of the EU’s CS3D, adopted in May 2024. Initially this imposed extensive obligations on companies to investigate and rectify human rights risks, but the European Commission’s latest Omnibus Simplification Package severely waters down those obligations, reducing its scope and limiting requirements to only first-tier suppliers. Still, reputational damage remains a major risk, even if legal obligations are eased. If anything, societal expectations will continue to grow.
"No Lawsuit, No Problem?" No longer...
We have all seen brands suffering severe harm solely because of public scrutiny, without any apparent legal liability. Over recent years groups like Human Rights Watch, the Business & Human Rights Resource Centre, and Stop Uyghur Genocide regularly issue reports into various industries and even specific companies, identifying alleged human rights abuses in a range of global supply chains. That scrutiny continues to make the news, regularly highlighting issues like cramped living conditions and miniscule pay for factory workers. In these cases, it is the headlines and social media storm which have caused the reputational – and inevitably, financial – harm to the companies involved, even in the absence of legal proceedings.
Plan for the Worst, Communicate at Your Best
Human rights risks are no longer just a legal and compliance concern, they’re a central business risk with reputational (and therefore financial) consequences. Those who ignore risks in their supply chain today may find themselves tomorrow’s headline for all the wrong reasons. On the other hand, the best-prepared companies will lead by embedding visibility and accountability – as well as compliance – across their supply chains. In a climate of rising expectations, control and communication aren’t optional. They’re essential to earning and maintaining trust.