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Budgeting for Compliance & ESG..a risky task for Business

Be ready for change, be prepared for growth, and develop a solid program and infrastructure that can quickly adapt to those changes.

In the coming years, the compliance landscape will dramatically transform as governments intensify efforts to make manufacturing more sustainable. Companies, but particularly complex manufacturers, must ensure that their existing compliance programs can withstand the rush of new requirements, greater scrutiny, and increased risk. The infrastructure - tools and specified partners are what will save you time, money, and effort when new requirements emerge — do the homework up front, and save yourself thousands of hours of work later on, with the added benefit of protecting your market access.

It’s not only governments influencing this change. Investors and industry leaders have built sustainability reporting into their business decision making processes, and manufacturers that can demonstrate top-tier compliance standards and deep ESG reporting capabilities have a significant competitive advantage in this new landscape.

As we’ve seen in the past three years, nothing can prepare you for everything.

We will examine the regulations and market pressures related to supply chain sustainability, specifically those pertaining to product compliance and ESG that many companies previously referred to as corporate social responsibility (CSR). These two areas represent the majority of topics related to human health, human rights, environmental protection, responsible sourcing, fair labor practices, and other criteria necessary for deeply sustainable supply chains.

At a high-level, product compliance regulations are created by governments, and companies must meet their requirements to attain market access and avoid financial penalties. In contrast, ESG requirements are established by investors, industry, and customers. These groups use ESG performance as a crucial metric to decide where to invest or who to buy from. However, recent legislation is blurring the lines between these two fields, as ESG becomes more formally regulated with stiffer penalties and market access impacts of its own. By examining regulatory trends, manufacturers can better predict and understand their future requirements, allowing them to budget effectively and prepare accordingly.

Product Compliance Largely led by the EU, in the past five years, we’ve seen significant expansion to the:

EU Registration, Evaluation, Authorisation, and Restriction of Chemicals (REACH) Regulation

EU Restriction of Hazardous Substances (RoHS) Directive

EU Waste Framework Directive (WFD), which mandated the creation of the Substances of Concern

In articles, as such or in complex objects (Products) (SCIP) database

We also saw the implementation of new regulations, such as the EU Medical Device Regulation (MDR), which replaced the outdated EU Medical Device Directive.

Going beyond the CSR business model, ESG is focused on building more responsible supply chains and business practices, specifically related to protecting human rights and the environment and ensuring worker protections throughout the entire supply chain.

In the EU, the German Supply Chain Due Diligence Act (SCDDA) comes into force on January 1, 2023. It holds companies accountable for their environmental and human rights impacts both in their factories and throughout their supply chain. With significant financial penalties, the SCDDA is a comprehensive regulation that companies must take as seriously as REACH, RoHS, and other product compliance regulations that are a mandatory part of doing business in the EU.

Manufacturers must also keep an eye on proposed rules, such as the proposed ban on products made with forced labor in the EU and the U.S. Securities and Exchange Commission (SEC)’s proposed ESG reporting requirements, among others. While ESG is in a nascent stage, and has come under much-publicized criticism, it’s clear that governments around the world are not only embracing it, but encouraging its adoption among manufacturers with the aim of building more sustainable supply chains.

The European Commission has also proposed amendments to the existing NFRD in the form of the Corporate Sustainability Reporting Directive (CSRD). The NFRD requires companies to report on environmental and social matters, respect for human rights, anti-corruption and bribery, as well as corporate diversity.

The CSRD extends the scope of the NFRD, includes requirements to back claims through audits, and introduces more detailed reporting requirements.

We must view supply chain sustainability holistically, including product compliance with ESG as the foundational pieces of deeper sustainability. By doing this, manufacturers can be sure their products are safe, environmentally-friendly, responsibly sourced and manufactured, and made in accordance with national and international law.

Each company’s sustainability maturity is different and their compliance and ESG budgets will vary according to their stage on the journey to deep sustainability.

Starting from a basic compliance program, a manufacturer can expect four total phases when evolving to deep sustainability:

Step One: Basic Compliance

Step Two: Foundation for Sustainability

Step Three: Strong Sustainability

Step Four: Deep Sustainability

Starting from basic compliance to deep sustainability, each step requires additional information from the supply chain and capacity to analyze that data. It’s a company’s decision as to whether or not these needs are met with technology, people, or both.

Budgets will vary depending on each company’s goals. Companies that understand their goals, and how compliance activities and costs are spread throughout the organization, will be more successful in budgeting for the long term, and better equipped to make decisions that improve their program’s quality and efficiency.

It’s now impossible to separate product compliance from sustainability. Governments, customers, investors, and industry need more transparency and accountability from the companies they do business with. It’s a tall order, but with careful planning and a proactive outlook, it’s achievable. Companies that have not adapted their programs and dedicated the appropriate resources to handle these increasing requirements may need to drastically reallocate resources and shift priorities in the future to catch up. In contrast, companies that prepare for compliance have the flexibility to respond to regulatory pressure, mitigate risk, and maintain market access.

Source by: Assent

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