I recently explored market impacts of emerging regulations on supply chain compliance and the supply chain professional on a podcast series with representatives from Assent Compliance. During the course of this series, I visited with several members of the Assent team to introduce the topic, look at Human Trafficking and Slavery (HTS), supply chain risk management programs, Corporate Social Responsibility (CSR) value propositions, the current state of responsible mineral sourcing and scaling up to meet future challenges. This white paper is a result of my interviews.

Part 1 – The HTS Landscape

Kate Dunbar, is the Senior Business & Human Rights Analyst and subject matter expert in HTS, for Assent Compliance. We begin with a review of the current landscape of HTS legislation and where it may well be headed. Interestingly, since 2015, there has been between one and three laws related to human trafficking and slavery enacted each year. This has added many legal requirements which companies must understand, manage and comply with going forward. Dunbar explained these regulations fall into three general types.

The first is transparency laws. Under transparency laws, companies are required to scope and disclose what efforts, if any, they are taking to address the issue of modern slavery, both in their operations and supply chain. She provided several examples of this type of HTS legislation. The first of this kind was the “California Transparency in Supply Chains Act, which came out in 2012. Next is the UK Modern Slavery Act which came out in 2015. Recently, you would have the Australian Modern Slavery Act.” These are all examples of transparency laws.

The second type of laws are what Dunbar referred to as trade laws, which are mainly coming out of the US. In the US it is illegal to transport persons for work without pay, whether in the sex trade or any other industry. Of course, transporting persons for the sex trade is also illegal. It is also prohibited to import goods into the US that have been made with forced labor or child labor. Dunbar noted, “if you are a company that sells or imports goods into the US the onus is on you to conduct due diligence, to be able to show enforcement agencies that your goods weren’t made involving those human rights violations.”

The third type of regulations related to HTS generally are what are called mandatory human rights due diligence laws. Dunbar believes, “in many ways this is the most interesting and, at the end of the day, may be the most effective because it demonstrates the move from transparency laws (name and shame) and now we are moving towards mandatory due diligence.” These due diligence laws obligate companies to take robust action to identify and mitigate risks of human trafficking and other human rights violations from within a supply chain.

Most interestingly, the first country to enact this type of law was France. They call it the “Duty of Vigilance Law.” The European Union (EU) itself is looking at moving towards this type of law on a continent-wide basis and, as Dunbar related, several other EU countries such as Germany, Italy and Sweden are all considering enacting their own version of a mandatory human rights’ due diligence law. Finally, Dunbar related there is a United Nations (UN) working group on business and human rights which is pushing for this type of legislation as well.

I asked Dunbar how a supply chain compliance professional can take this information regarding these types of laws and then synthesize these requirements into a compliance program? She related the key is to not simply human trafficking slavery as a pure compliance topic because to do so and you are “missing half the picture.” Dunbar recommends, “looking at the broad array of requirements and expectations, not just from a regulatory point of view, but also customer, investor and consumer point of view. Take input from your important stakeholders as to what they are expecting and requiring of you as a business and use that information to build your compliance and due diligence.”

Dunbar believes what an organization needs is a “defensible process when it stands up to scrutiny and that is consistent. Such an approach enables you to take more targeted action and protect your business. In a nutshell, it’s really about getting the information from your suppliers that you need and taking appropriate action based on that data so that you can, you can protect your business.”

Part 2 - Instituting a Broader Risk Management Program

I next turned to Jared Connors, senior CSR subject matter expert (SME), on how to institute a broader supply chain risk management program. In 2019, under the Trump Administration, sanctions and a wide variety of other economic pinch points can be levied and changed on an almost daily basis. I asked Connors how this was impacting supply chain professionals. He said that previously the focus for supply chain professionals was on operational risk issues, this included “business continuity, quality lead time, availability, very similar procurement type risks to make sure that they can get the goods from suppliers they need to either assemble or manufacture or have assembled the products that a company is trying to put to market.” However, these operation risk issues have been overtaken by what Connors called “other peripheral risk issues, including regulatory issues addressing corporate social responsibility from human trafficking regulations, to environmental impacts and other similar corporate social responsibility issues.”

Yet Connors believes many supply chain professionals and companies are not addressing sanctions issues specifically involving Specially Designated Nationals (SDNs) and Potentially Exposed Persons (PEPs). Moreover, they are not evaluating their suppliers from the perspective “of am I even allowed to import goods from this company?” This has led him to conclude, “I think a lot of companies, are starting to realize that they’re leaving a lot of risk issues on the table and they are not sufficiently engaging.”

He provided the example of a CSR representative who might say something along the lines of the following, “I learned about this supplier months after the contract was signed and the procurement representatives said, I need you to address these risk issues that are out there. What do you mean we have risk issues out there with the supplier? We already have a contract. This puts the organization at a disadvantage to make sure that they are properly addressing engaging those risks with the suppliers.” Connors believes it is about setting expectations around the relationship, noting, “it just means that you might need to plant a seed with the supplier to make sure they’re clear on what the expectations are. Because oftentimes risk from the supply chain is nothing more than level setting on expectations.”

We then turned to risk assessments which are a key tool in managing your supply chain. One important way to think about risk assessments is to recognize that it is one data point that is continually refined with the additional data that you receive. Properly viewed this allows you to continue to refine information to narrow down a cogent list of the areas of risk which require your attention. In other words, this process allows you to determine the highest risks to your organization and manage those risks. This allows you to focus on your risk but in a cost-effective manner so that you are not spending time, money and your efforts on every risk, but on the key risks for your organization.

I asked Connors about the different ways to obtain information through the risk management process. He noted, “a lot of organizations will have their supplier management or supplier onboarding portals. You can start through very basic, oftentimes public information on a third party to determine your initial risk. This can be based on things like what types of materials they are producing for your organization, what is the risk associated with those types of materials, labor concerns, geographical risks, the amount of your spend, sole source suppliers and a myriad of other issues” which might show how vulnerable your organization is with a supplier if that supplier were to no longer exists tomorrow.

There are multiple ways to use information from your initial risk assessment. As you are gathering information on the supplier, you can further refine the focus areas you may need to address with the supplier. It may well be that you need to perform a physical, onsite audit.

Yet even in that situation, Connors related, “oftentimes I find that corrective actions, for example, can be done long before physical audit. A physical audit can be used to actually assess if your supplier has instituted those corrective actions. If not, then then the auditor can go and focus on those things. Even for companies which cannot afford supply chain audits because they may have too large of a supply base or do not have the in-house capabilities to perform supply chain risk assessments”, Connors noted there are multiple “automated tools to help support that risk assessment.”

Part 3 - What is Your CSR Value Proposition?

I next turned to Sarah Carpenter, Manager, Business and Human Rights, on the value proposition of CSR for corporations. Carpenter has spent a large part of her professional career in the CSR space. I asked her how she has seen this space evolve. She noted that CSR has certainly evolved in significant and important ways, since it first entered the lexicon of business. When it initially started out, “I would say businesses who are seeking to be socially responsible, were focused primarily focused on philanthropy, very much focused on donating a portion of their revenue or their profits to support charitable aims perhaps within their communities or within society.” That has evolved and although philanthropy remains a component of CSR it has expanded. This expansion has caused companies to consider how they actually generate revenues and profits; in a manner which considers, mitigates or even reduces their negative social environmental impact. She believes this is the new focus of CSR programs.

Carpenter went on to relate that this is an “important and fundamental shifts. I think part of it gets to the heart of businesses understanding of their role and of their responsibility within society.” “Once upon a time, businesses would have understood that they existed solely to generate maximum profits, within the boundaries of the law.” However now, “I have seen that has changed in important ways where businesses are also concerned about their impact on human capital, social capital and natural capital as well.”

During her professional career Carpenter worked supporting supported the United Nations (UN) International Labor Organization (ILO). During that tenure came one of the seminal turning points for CSR, the Rana Plaza disaster. She noted, “Bangladesh is one of the main producing countries of garments worldwide. Companies have been sourcing from Bangladesh for years and many companies were looking doing so in a socially responsible manner.”

However, “these companies were primarily using audits as one of their key tools to manage the process. This left a big gap which everyone learned in the most horrific possible manner through the collapse of Rana Plaza.” Companies were simply not looking at the structural integrity of buildings where their goods were produced. She said, “it was a rude awakening to the industry in terms of considering the holistic impacts as it relates to corporate social responsibility and really being proactive to engage in meaningful in the due diligence when it comes to how they source their goods and services.”

We next turned the evolution of CSR beyond simply something written by CSR professionals for other CSR professionals. Carpenter believes this change came as “businesses came to understand that CSR is a fundamental aspect of good corporate governance and good corporate governance, of course, underpins strong financial performance. This means that CSR provides numerous advantages to businesses, far beyond a strict legal and regulatory compliance.” Further, “if you consider sort of the broader value proposition around CSR, it is so much more than what is legally required.”

Carpenter went on to emphasize there are other reasons for this growth in CSR. One aspect is around investor pressure for Environment Social Governance (ESG) issues in investing which has put pressure to create a new value proposition through sufficiently addressing ESG. There is also brand and reputation protection, especially as corporate stakeholders become more sophisticated and better equipped with the information that they need to sort of assess corporate behavior to hold companies to account for; most particularly for those who might not be meeting norms around CSR. The other obvious group is employees as companies need to be able to attract and retain top talent. Carpenter said, “employees increasingly are looking to work for companies who are doing well and doing good in the world. Of course, being able to tell that compelling story is I think key to attracting a large pool of great talent that exists in the world today.”

Also, there has “been an important shift in the investor community where ESG investing has very much moved from the fringe to the mainstream and when investors consider ESG and those companies who are addressing those impacts well, do well financially as well. So, it goes without saying that they’re looking to, you know, target their friends where it’s companies that are sufficiently addressing their ESG impacts because there are certainly at lower risk than those who aren’t. Another important group to talk about is civil society and journalists. And, I think this really is important, and, perhaps, an obvious one in the context of corporate social responsibility, civil society and journalists, they are as well equipped and have a more information than they ever have.”

The proliferation of CSR programs has increased the need for greater supply chain risk management. No one wants a replay of the Rana Plaza disaster. Companies, consumers, employees and investors are all demanding greater CSR programs, scrutiny and oversight.

Part 4 - The Current State of Responsible Minerals

With Jared Connors, we explored the current state of conflict minerals/responsible minerals. We began by focusing on the moniker ‘conflict minerals’ which has now changed to ‘responsible minerals’. Connors related that this is an area where he has been working on since before the legislation in the Dodd-Frank Act became law. He is therefore well suited to relate the transition from conflict minerals to responsible minerals. The intent of conflict minerals legislation was to identify the material sources of origin and demonstrate a chain of custody that those materials are not tampered with along the way. It was this basic premise which has led to the more encompassing name of responsible minerals because the desire is to make sure that a company is sourcing responsibly. Connors noted he is “very proud” of his work in this area.

Connors went on to relate that the transition from conflict minerals to responsible minerals means that organizations are now looking at a variety of different risk issues. “You see this most clearly taking shape with additional metals that are coming into the responsible mineral space. The original legislation was about tin, tantalum, tungsten and gold and that remains unchanged. However now you see organizations such as a responsible steel group, you see the aluminum stewardship initiative, you certainly see the cobalt institute; all of these organizations are engaging in their respective industries to look at a variety of topics from environmental issues to labor rights.” Connors concluded, “it is no longer simply about the true conflict minerals nature of where did I get this from and was there a conflict. It’s grown well beyond that. And it’s something that I’m personally very proud to see.”

All of this has shown the true power of the original Dodd-Frank provision around conflict minerals. While there was significant push back against the “conflict” part of this legislation; the business purpose of understanding your sourcing underlying the law has become more critical. It is significant for not only reliable supply of raw materials and products but also in this age of increased awareness by consumers and employees it is important that a company demonstrate its adherence to ethical sourcing. This means knowing your minerals were not stolen or extracted using slave or child labor. It also means know that your products were not constructed in sweat shop conditions.

Connors took it a step further, saying that the real intent of the original Dodd-Frank legislation was “supply chain transparency. This is one of the initial elements that we have seen in legislation requiring companies to open their eyes to their upstream suppliers. This is no more true in current years when we see a or a recent months when we companies now realizing that some of their upstream sources in which they have no direct business interest are actually under OFAC [Office of Foreign Assets Control] sanctions.” It is through the concepts laid out in conflict mineral legislation, and then responsible mineral sourcing; that companies understand they need visibility both up and down their supply chain.

This need for transparency has literally exploded in the business world. It has gone beyond supply chain and other compliance professionals. It is not simply a requirement from a business process or even a risk management perspective. It has become a key element for customers and employees. These basic concepts are something that every company is going to have to incorporate in the way they do business going forward.

Connors said, “it’s a huge deal. It’s a big deal now for investment companies, when you see a letter from the CEO of Blackrock to other CEOs talking about being a good corporate citizen. It’s all through the concept of transparency. Do you have transparency into the activities that are going on within your four walls or outside of your four walls and certainly well upstream of you as your organization gathers in these materials?” He added that while many of “us are very excited about the technology that we have right in front of us now on our desk or in our cars and the cost of those technologies being cheap, comes at a cost. As consumers, we need to make sure that without sacrificing the ability for us to get goods and services, that we can continue to get those elements of technology and do it responsibly.”

We concluded with a look into the veiled land of 12 months or so into the future. What do you think are going to be some of the key issues and responsible mineral sourcing going forward for the next 12 months and perhaps beyond? Connors sees three issues: (1) Country of origin information, which he believes companies may have become lax on; (2) Due Diligence and its two parts including downstream due diligence and upstream due diligence; and (3) The addition of new or other metals into the your overall production process and how you are accounting for this in your supply chain?

Part 5- Scaling to Meet Change

I concluded my exploration of the impacts of emerging regulations with with Jonathan Hughes, who is the Director, Strategic Relationships at Assent Compliance. We considered how market impacts are driving the need for more technology-based solutions for supply chain management.

We began with a discussion about the use of third-party compliance platforms in supply chain risk management. Hughes noted this is something that he and his team at Assent are seeing more in the marketplace growing at what he termed an “exponential pace”. Interestingly, he believes it “keeps on snowballing, becoming more each and each year as more companies are adopting this technology. Moreover, I think it plays into each other as the more companies that adopt it, they pushed down through to their suppliers and so forth. But I think at its heart it has to do with the regulations themselves. As any compliance officer would tell you within the first few minutes of meeting them, regulations are becoming more prevalent and more complex.” A technological solution is now almost mandated from this complexity.

Hughes expounded more on this increase in complexity. He said, “if you look at the number of regulations on the book that a compliance officer had to deal with 10 years ago compared to five years ago, even compared to two years ago, then look at the number of new regulations that are being promulgated and planned over the next two, three, four, five years. It really is quite staggering.” Equally challenging for the supply chain professional is the dynamic nature of these regulations. This means is that a lot of these regulations now have room in them to change over time. Hughes related, “just with the depth, complexity and the volume of that information, the regulatory knowledge that you need to be a supply chain compliance officer is literally doubled in the last five years.”

All of this leads to a number of questions which the supply chain professional must ask when it comes to the management of their supply chain around data, evidence and documentation. Such as: How do we capture this data? How do we measure this data? How do we verify this data? How do we access this data quickly and efficiently to respond to regulators? Corporate stakeholders? Customers? Hughes believes all of this “leads to more complexity and burden on your internal programs. This leads to the need for more processes and governance. So, when you add these things up, many companies are looking for a service provider who can deliver a platform which can handle this myriad of issues.”

A challenge which I see, now almost daily, is the change in trade regulations from the current administration. When you overlay these changes on an already challenging environment, I wondered how a product and services provider such as Assent can create solutions which can keep pace. Hughes said the answer centers on the ability of the Assent platform to rapidly scale up. “Talk to most any success entrepreneurs and they will tell you one of their greatest challenges is what do you put in place that allows you to scale up, not painlessly, as it will never be painless but with is as little friction as possible.”

Hughes said this “moving yardstick” in the rules, requirements and regulations around supply chain compliance forced Assent to find a solution. A key insight Assent has found to be effective is to build “configurability and scalability into our software. This means is once you have a set of configurable rules, processes and workflow that can be applied to any type of restriction and change, you can just tweak your system as needed.”

This has allowed Assent to take these different types of trade compliance changes that “we’re seeing in almost real time” and have a product which meets these challenges. This comes through having a solution which is scalable, easily re-configured when a change comes out. Assent originally made these changes to its platform due to rapid changes in sourcing regulations. Hughes related, “it’s very fortuitous to us that we prepared to do this in one space and now this happening in another space like trade compliance. We can take those set of features and configurability and scalability and apply it to another solution. That is one of the overall benefits of being on a platform like Assent. We have these wide range of sets and features; we can often apply them to different supply chain and compliance issues.”