Looming EU Sustainability Requirements Will Force You To Get Visibility Into Your Supply Chain

There are a number of EU sustainability requirements which are going to require importers to obtain a LOT more visibility over their supply chains. Not something to take lightly, as lacking transparency over who is in, what is made, and where it is done in your supply chain will probably see you barred from importing into the EU.

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The EU ‘Green Deal’s’ new sustainability requirements and what they mean.

The EU Green Deal is a wide initiative started in 2019 pushing the EU to become ‘climate neutral’ and improve the use of energy, water, materials, product sustainability, and lots of other actions that will reduce the continent’s environmental impact, and soon. It has around 50-60 regulations that will impact the products being sold in the European Union, including the Ecodesign for Sustainable Products Regulation and the Corporate Sustainability Due Diligence Directive. These two alone will force businesses to do more due diligence into their upstream supply chain than they have probably previously been doing. There is also the Corporate Reporting Directive about non-financial reporting which comes into effect in 2025 for large businesses, meaning that they need to gather the required information from their suppliers as soon as 2024. Some importers are not taking this very seriously yet, but it promises to be at least as impactful on everyone as GDPR was. They will affect a lot of importers currently buying products from places like China, branding them, and then importing and selling them as they will need to provide a lot more information about their products and supply chain’s sustainability. (01:40)

What sustainability information must now be collected by importers?

There is a feeling right now that non-compliant products aren’t a priority of the EU commission, so these new regulations are an attempt to change the perception that it’s not that hard to import and sell them in the EU. A start was made in 2019, where fulfillment centers were made responsible for the compliance of products they sell, so we saw a lot of vendors on Amazon, for example, being axed in response to that as their products weren’t compliant.

The Ecodesign regulation coming into force in 2025 will force importers to add a product passport to products, probably in the form of a QR code that can be accessed by consumers, distributors, and market surveillance authorities. This will have to include:

The Declaration of Conformity
Substances included – if non-compliant with REACH etc it can’t be recycled easily.
Product durability – also can it be repaired, maintained and disassembled for recycling?
Where has it been made – was it manufactured in an environmentally friendly way and with no forced labor?
User manual
Repair instructions
Technical folder (password access by market surveillance authorities)

So all of the product’s information, down to where it was made, who provided its components, the environmental impact of the whole supply chain, etc, will be available at the touch of a button. There will also be a common EU-wide IT system for use by customs authorities that allow them very easy access to the importer and product information in order that they can control what is imported and can flag suspect shipments for additional checking very quickly. (07:35)

How easy will it be to get visibility into your supply chain?

In China especially this promises to be difficult because manufacturers don’t like to share supply chain information because they feel that relationships they have with other suppliers are a business secret. Therefore obtaining this information is probably going to be hard, at least at first, for smaller businesses who don’t place large enough orders to give them the ‘sway’ needed to demand comprehensive supply chain information from Chinese suppliers.

The problem is that Chinese suppliers won’t know about these forthcoming requirements and were previously not affected by EU regulations as the importer was held responsible for the compliance of the products, therefore they won’t care (unless you’re a huge customer).

Another issue is that purchasing through intermediaries is quite common in China, so your supplier might be buying through a trader who specializes in a certain material or component and has his own suppliers, so even if they wanted to give you supply chain information, they don’t even have it themselves! (17:12)

Approaches used to oversee supply chains.

There are different approaches to doing due diligence on their supply chains.

One approach is used in wood products, for example, which often feature the FSC certification which demands a chain of custody where each actor in the chain must be certified all the way to the forest itself, so it’s possible to prove that the wood was sourced from sustainably managed forests.

A second approach is to map the supply chain. This became popular during Covid so importers knew where each part of the supply chain was, and action could be taken if suppliers in a certain area were affected by Covid restrictions. Software companies made software which could be given to suppliers and sub-suppliers to fill out, but for all but the largest companies, persuading suppliers beyond your tier-one is extremely difficult. Your main assembler may tell you their own company details, where they’re based, etc, but in many cases for their suppliers, will at best just let you know their location of them so you still don’t even know who they are. Overall, it’s good to know where the actors in your supply chain are and to be able to pinpoint potential sources of risks such as more polluting processes, but in general, it will still be limited in terms of the information you have about each one and its products.
It will not satisfy the sustainability requirements coming in, so this will be a challenge for buyers with manufacturing in China and anywhere else in Asia and beyond, quite honestly, if they cannot gain comprehensive information about their full supply chain.

A third approach is to use small IoT trackers on containers so shipments and some information about humidity, temperature, etc, can be tracked at any time. This could help you to know where products are in real-time, or at least to download the data upon arrival so you know that the shipper has packed and shipped them at, say, the required temperature. Some startups also do the same for materials, where a small tracker is placed on the original materials used downstream in the supply chain and they can be followed all the way through the supply chain as they’re processed and finally manufactured into the finished products. This is a more cutting-edge version of this approach and is currently used by huge companies like Adidas and Ralf Lauren to provide unambiguous evidence of exactly where the materials came from and te structure of the supply chain, so it would be obvious that products were not sourced or manufactured in, say, an area suspected of using forced labor, or, to use the wood example, there would be proof that the wood came from a sustainable location and not virgin forest. (29:18)

Why the old business model of buying off-the-shelf products from an ODM will probably need to change?

The business model of buying existing products off-the-shelf from an ODM who designed, developed, and manufactured them themselves and simply adding your brand and then importing them for sale is going to change because these importers simply do not and maybe cannot get the necessary information about supply chain sustainability. This could lead to some businesses closing down, and the EU Commission would support that in favor of those that can comply importing in future.

If importers wait until the final version of the regulations comes out they may only have 12-18 months to gather the information and become compliant. Is it enough time? Arguably not, so it would be wise to start working on this now and, in these cases of importers who have previously white-labelled products from ODM suppliers without having much supply chain information, they might develop their own products that they do have supply chain information about and control over in order to be able to keep importing into the EU. (43:46)

Conclusion: What you can do to prepare and how this will affect many areas in future.

Foreign business travel is now possible in China, so visiting your suppliers to discuss this in person will help pave the way to getting the information you need to become compliant more quickly. Working with an Asia-based company that can assist with appropriate due diligence on your behalf will also be very effective.

The EU is at the forefront of this kind of sustainability initiative, but other countries such as Canada, Australia, and certain States in the USA like California and New York are paying close attention to the EU’s progress on the Green Deal, so be aware that similar changes are coming even if you don’t sell in the EU. (46:14)

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