EU reforms usher in era of improved supply chain visibility

Following intense negotiations, the European Parliament and Council has brought in new legislation which demands the disclosure of non-financial information by large public companies.

New European laws will require businesses to report on their policies regarding social, financial and environmental supply chain risks. This means big changes for corporate social responsibility - once a matter of choice, now a legal requirement - and prudent supply chain management will become essential.

Current EU law allows companies to disclose certain non-financial information, but the unclear and ineffective legislation is applied in different ways across different member states, several of which have simply come up with their own national disclosure requirements. As a result, less than 10% of the largest EU companies currently report on corporate social responsibility data regularly.

Despite this lack of precedent, most businesses view non-financial reporting as extremely valuable. In PricewaterhouseCoopers’ 17th Annual Global CEO Survey, 74% of CEOs agreed that measuring and reporting non-financial impacts contributed to their company’s long-term success. Identifying supply chain risks, whether financial, social or environmental, is essential to the wellbeing and resilience of any modern business.

The European Parliament and Council finally came to agreement on the proposal to improve transparency in business through the mandatory disclosure of companies’ non-financial information. The proposal will be rubber-stamped by the European Parliament before being passed as law by the European Council, a move expected before this summer.

Companies will need to report on their policies, risks and results in relation to environmental, social and corruption issues. European Coalition for Corporate Justice (ECCJ) coordinator Jerome Chaplier explains: “This means a listed large oil company will have to report on its oil spills and the health risks from gas flaring… or a listed clothing retailer will have to consider risks in its supply chain.”

The EU Council faced some struggles to agree on the new legislation, which will only apply to public firms with more than 500 employees. The legislation will cover around 6,000 large companies, accounting for an estimated one in seven. The reform also allows significant flexibility, with companies able to select which indicators and standards they use for reporting, and no sanctions are yet in place for companies that fail to comply. 

However, while business behaviour across Europe is unlikely to transform overnight, the reform marks a huge step towards the shift of social responsibility from a matter of reputation to law. The European Coalition for Corporate Justice argues that corporate social and environmental reporting must be mandatory rather than voluntary in order to avoid the pitfalls of "greenwash".

Friends of the Earth campaigner Julian Kirby stated: “Transparency is vital to help identify and tackle the many problems linked to making our everyday products, from dangerous working conditions and factory deaths to the destruction of natural habitats… This is the first stage in creating a resource-efficient EU which is less vulnerable to price and supply shocks.”

The apparel industry has been making some headway in ethical initiatives for some years now, with organisations such as The Ethical Fashion Forum and Labour Behind the Label working to encourage social and environmental sustainability. It’s already clear that consumers care where their clothes come from, and many high street retailers are making concerted efforts to meet public expectations and maintain ethically sound supply chains. Now, large public garment companies in the EU will need to answer to the law, as well as their customers – making supply chain risk management more important than ever.