Cost of Non-Compliance
Global Regulations & the Imperative for Sustainability Compliance
In the last two years, U.S. Customs and Border Protection has detained over 8,000 shipments under the Uyghur Forced Labor Prevention Act (UFLPA). The total value of these detentions exceeds $3 billion. Of these, 40% were permanently denied. With enforcement increasing, companies can no longer minimize the risk of noncompliance. With enforcement increasing, companies can no longer minimize the risk of noncompliance.
Businesses worldwide face a complex network of regulations designed to ensure environmental responsibility, social equity, and ethical practices throughout the extended supply chain. Complying with these sustainability requirements is essential for several reasons. Adhering to sustainability laws helps mitigate the risk of regulatory penalties, lawsuits, and reputation damage. It also demonstrates a commitment to ethical practices, environmental responsibility, and social equity, enhancing the business’s reputation among customers, investors, and employees. Furthermore, integrating sustainability into operations can improve efficiency, reduce costs, and build long-term resilience, essential for navigating a rapidly changing market.
Consequences of Noncompliance with Global Sustainability Laws
Noncompliance with global sustainability laws can have severe repercussions. Let's examine the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) to understand the potential impacts.
Sustainability Laws in the EU
The European Union has implemented two significant sustainability laws: the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD).
CSDDD: Effective from March 2024, this directive requires organizations to publish a due diligence policy, identify and address potential adverse impacts, establish a complaint procedure, and file annual reports on their due diligence efforts. It applies to EU businesses with over 1,000 employees and €450 million in global revenue and non-EU companies generating over €450 million from the EU market annually over the past two years.
CSRD: This directive standardizes sustainability reporting requirements to ensure corporate stakeholders have access to reliable data. It mandates regular reports on social and environmental risks, impacts on people and the environment, and independent audits based on EU sustainability reporting standards. The CSRD is being phased in gradually, initially applying in 2024 to companies already subject to the Non-Financial Reporting Directive (NFRD) and expanding to include more companies over the next few years. Businesses subject to the CSRD must disclose sustainability information covering their entire global operations, including activities outside the EU.
Potential Costs of Noncompliance
Failing to comply with sustainability laws can lead to significant consequences, including:
Fines and Penalties: Regulatory bodies can impose substantial fines, often a percentage of the company’s turnover. Under the CSDDD, fines can reach up to 5% of annual net worldwide revenue, significantly impacting the bottom line.
Loss of Market Share: Noncompliance can result in market exclusion or restrictions, leading to decreased revenue and market share. Businesses that disregard the CSDDD may be barred from public contracts and tenders, and failure to meet environmental standards may exclude products from certain markets or procurement processes.
Reputation Harm: In today's interconnected world, news of noncompliance can spread rapidly, fueled by social media and activist groups. A reputation for ignoring sustainability requirements can turn consumers against a business, reduce sales, and make it difficult to attract talent or investors. Business partners committed to sustainable practices may also refuse to engage with noncompliant companies. Reputations, like forests, take years to build but can be destroyed in moments.
Supply Chain Disruptions: Noncompliant suppliers or partners can disrupt or break supply chains, leading to delays, increased costs, and additional procurement expenses to find new, compliant suppliers.
Legal Costs and Remediation Expenses: Noncompliance can trigger legal action from regulatory bodies, stakeholders, or affected parties, resulting in legal liability, lawsuits, and costly remediation efforts to rectify environmental or social harm.
Prevention is Better Than Cure
The costs of noncompliance with sustainability laws extend beyond immediate financial penalties. Businesses facing hefty fines and legal expenses may also experience reduced revenue due to market access issues, supply chain disruptions, and reputational damage. Investing in sustainability compliance is not just about avoiding fines; it's about safeguarding the future viability and integrity of the business in an increasingly conscientious marketplace. By embracing sustainability as a core business principle, companies can mitigate risks, enhance resilience, and earn the trust and loyalty of stakeholders.
Value of Shipments Detained by UFLPA Enforcement
Since the Uyghur Forced Labor Prevention Act (UFLPA) came into effect in June 2022, U.S. Customs and Border Protection (CBP) has detained a substantial number of shipments due to concerns about forced labor in China's Xinjiang region. Between June 2022 and May 2024, CBP detained approximately 8,465 shipments, with a combined value of around $3.32 billion.*
These detentions underscore the ongoing enforcement of the UFLPA, which presumes that goods produced in Xinjiang are made with forced labor unless proven otherwise. The act's enforcement has led to significant scrutiny and delays for affected shipments, particularly those from industries such as electronics, apparel, and textiles.
Businesses can address the UFLPA by enhancing their supply chain due diligence. This involves mapping the supply chain to ensure no links to forced labor, obtaining robust documentation from suppliers, and implementing comprehensive compliance programs to verify the origins of materials and labor practices. Engaging with trade compliance experts and staying informed about updates to the UFLPA entity list can also help businesses navigate this complex regulatory environment.
At Zeus, we help businesses avoid costly mistakes by providing complete oversight of their extensive supply chains with software that facilitates top-tier business practices. We can help you build an effective response package.
Reach out to us today to learn more.
*Source: US CBP https://www.cbp.gov/newsroom/stats/trade/uyghur-forced-labor-prevention-act-statistics
