Navigating corporate sustainability in supply chains

By Helena Kilburn, Senior Associate of Corporate Finance
on May 9, 2024

Supply chains detail the progression of a product from its inception to its final destination and end of life. In the case of a solar panel, for example, the upstream supply chain entails sourcing materials like silicon, refining them into wafers, and ultimately assembling the panel. And the downstream phase of the supply chain includes distributing manufactured panels to vendors, integrating them into solar systems, and managing end-of-life disposal. While the classification of upstream and downstream depends on a company's primary function, every business is integral to its supply chain ecosystem.

This poses a question for all companies: how responsible are you for the actions of the other companies in your ecosystem? Addressing this question is often referred to as corporate sustainability “due diligence” — which means assessing and managing environmental, business, and human rights risks within your own company and its supply chain. This due diligence is a functional act towards staying on your front foot concerning corporate best practices, but it’s also increasingly part of industry expectations and legislation. 

Recently, the European Parliament passed the Corporate Sustainability Due Diligence Directive (CSDDD) to enhance environmental and human rights safeguards within corporate supply chains. After years of planning and fluctuating support, this decision is a landmark moment for the sustainability reporting landscape. 

This directive will require large companies meeting certain criteria, such as EU companies with an average of 1,000 employees and turnover of EUR $450 million or more and non-EU companies with that same turnover, to perform due diligence on their operations and associated value chain partners with the risk of penalties for non-compliance. Primarily focused on upstream processes, this directive also includes certain downstream aspects including distribution and recycling. The agreement highlights the need for a climate change mitigation plan, enhances civil liability provisions, and sets definitive standards based on internationally ratified instruments. While still awaiting formal approval by the European Union Council, this decision will bring responsibility and action to the transparency businesses are required to provide under the already approved Corporate Sustainability Reporting Directive. 

The policy’s focus on supplier engagement is crucial. Supplier engagement has many different phases and levels of influence depending on the stage and stature of a given company. Still, while the magnitude and influence may vary, the expectation for ethical and sustainable supply chain practices is here to stay. As increasing legislation looks at enforcing not just engagement, but compliance, it’s imperative that all companies start to lay the groundwork for working with their supply chains to implement practices for a more ethical, efficient, and sustainable future of business. 

Even smaller firms can embark on this journey by formulating a supplier code of conduct, initiating dialogues with suppliers, and gradually working to embed sustainable practices throughout the life cycle of their products or services. With this responsibility in mind, Arcadia has recently implemented a code of conduct outlining our expectations of our vendors. As legislative landscapes evolve, emphasizing not just engagement but also compliance, laying a robust foundation for ethical supply chain practices will become indispensable. We’re proud to take this first step in doing just that.