Around the world, there are growing regulatory requirements in place to address environmental, social, and governance (ESG) issues and create a more sustainable future. While environmental regulations have been in existence for over 50 years, governments are increasingly taking action to address forced labor, unfair working conditions, and modern slavery. These efforts reflect concerns about human rights in modern supply chains, as highlighted by the International Labor Organization (ILO) in its 2021 report. The report stated that 50 million people globally are in conditions of modern slavery, including forced labor, an increase of 10 million people from the ILO’s report five years earlier. The German Supply Chain Due Diligence Act aims to address these issues by introducing requirements for companies to conduct due diligence in their supply chains.
Environmental concerns, modern slavery, and forced labor require a global response. This can take the form of initiatives such as the Sustainable Development Goals (SGDs), such as Goal 8 on Decent Work and Economic Growth and Goal 13 on Climate Action, as well as country-specific regulations like the UK Modern Slavery Act and the California Transparency in Supply Chain Act. In June 2021, Germany passed its own legislation addressing these issues, the Supply Chain Due Diligence Act, also known as the Lieferkettensorgfaltspflichtengesetz (LkSG).
Beginning on January 1, 2023, companies based in Germany or German-registered branches of foreign companies with more than 3,000 employees will be required to create or update their business processes to identify, assess, remediate, prevent, and report on human rights and environmental risks and related actions in their own operations and those of their direct and indirect suppliers in accordance with the German Supply Chain Due Diligence Act (LkSG). Failure to comply with the LkSG can result in fines of up to 2% of annual turnover and/or exclusion from being awarded public contracts.
In response to the requirements of the LkSG, they believe that companies should consider the following three points:
To address these challenges, IBM and FRDM have partnered to develop a solution for human rights and environmental risk sensing and management. The solution uses big data and AI to generate real-time risk signals up to the third tier of the supply chain and provides teams with the ability to respond to these signals and connect with suppliers to mitigate risks. This enables companies to detect and address issues in a timely and dynamic manner. To minimize the cost of compliance for suppliers, the platform is free to sign up for, and it can be expanded to meet changing regulatory requirements.
The LkSG requires companies to establish a risk management system, perform a regular risk analysis, implement preventive measures for their own operations and multiple tiers of suppliers, and take remedial action. Its scope is broad and goes beyond companies’ tier 1 suppliers. The main challenge with risk management is that risks are not static. Self-assessment and survey-based tools, which are commonly used to assess risks, can only provide a snapshot of a company’s business and supply chain risks. These tools are also often unverifiable, and companies must trust the accuracy of responses. To proactively and dynamically address risks, it would be beneficial to implement a solution that can constantly update and keep track of changes in the supply chain and risk levels while ensuring that the information is current.
The IBM FRDM solution uses big data to generate insights on supply chain environmental, social, and governance (ESG) risks from tier 1 suppliers to tier 3 suppliers. This platform leverages a company’s spending data and third-party data (including news sources, trade databases, and sanctions databases) to map supply chains and commercial relationships and generate a live risk assessment of a company’s supply chain. The platform’s proprietary product genome database can create a predictive bill of materials (BOMs) that breaks down a company’s purchases to identify the material and service inputs, allowing the platform to map risks up through the third tier. The platform generates dashboards for companies and their suppliers with live risk ratings and issue alerts powered by machine learning. It also provides a forum for supplier engagement on remediation and enables report generation on progress updates and impact tracking.
The IBM FRDM solution also offers risk management and response management services that assist companies with taking remedial action, documenting, and reporting on their due diligence obligations. These services include coverage of the first-level response to risk alerts, supplier questionnaires, and risk assessment changes. IBM can provide third-party review of supply chain whistleblower reports and help ensure timely escalation to the appropriate parties and prompt remedial action.
Suppliers often have to go through audits, surveys, and training as required by their customers. This can be exhausting for their teams and also expensive. It would be beneficial for businesses to create effective and efficient processes for meeting LkSG requirements, and to work with their suppliers to reduce the overall burden of compliance.
Many risk assessment platforms currently rely on supplier-filled questionnaires and do not verify this information through audits. These platforms often ask suppliers about the measures they have taken to address risks, but do not verify the accuracy of this information. Additionally, some of these platforms charge suppliers a fee to respond to the questionnaire and make their data available to their customers. In contrast, the IBM FRDM joint solution uses big data to generate insights and risk ratings without requiring suppliers to pay a fee and does not require them to sign up for any special platform. Companies can also use this solution to conduct a more in-depth analysis of their suppliers using a free digital supplier assessment.
The IBM FRDM joint solution does not charge suppliers a fee to participate, which means that companies can collect information from all of their suppliers, regardless of their size or order volume. This is important because LkSG requires companies to consider all of their suppliers, including small ones that may not be able to afford to pay platform or survey fees. Additionally, companies do not have to pay out-of-pocket to cover these costs for smaller suppliers, which makes it easier for them to comply with LkSG requirements.
The IBM FRDM solution saves suppliers time and effort because they do not have to pay for the platform or module, and they do not have to be trained on a new system for entering data. This allows suppliers to focus on more valuable activities and reduces their survey fatigue. As a result, companies can build better relationships with their suppliers and create more efficient supply chain operations.
LkSG is a German law that aims to hold companies accountable for creating and maintaining fair and sustainable supply chains. It is similar to other regulations in Europe, such as the French Duty of Vigilance law and the UK Modern Slavery Act, as well as regulations in other parts of the world, such as the Australia Modern Slavery Act and the California Supply Chain Transparency Act. A European Union-wide law with similar provisions is expected to take effect in January 2024.
Companies need to be able to adapt quickly to changing regulatory demands. However, with so many different requirements, it can be difficult to build teams with expertise in all aspects of environmental, social, and governance (ESG) issues. IBM’s managed services can help companies understand these requirements, manage the data, and prioritize follow-up and remediation efforts. IBM also has a global presence, which allows it to set up local teams that understand the specific requirements and can work directly with clients. These teams can provide a first-level response to risk alerts, supplier questionnaires, and other changes in risk assessments, and can escalate any necessary issues to the responsible parties within the company.
The IBM FRDM solution uses AI and machine learning to adapt to changing or expanding regulations. It also provides local teams with deep expertise and support.
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LkSG is just one of many recent government regulations regarding supply chain responsibility. As regulatory bodies, consumers, and employees continue to demand greater accountability for protecting the people and environment involved in the supply chain, companies must create and implement solutions that can address risk as a dynamic and changing variable. Risk is not static, and companies need more than a one-time snapshot of their supply chain risks in order to adequately address any issues. The IBM FRDM solution is designed to be forward-looking and adaptable to new risk factors and indicators and can be expanded to meet new legislation and requirements. IBM and FRDM are ready to support companies as they work to improve their practices and safeguard the planet and its people.
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