By Mark Seavy   

With the European Union Parliament’s approval of a new supply chain law, the licensing industry will be faced with increased scrutiny for human rights violations and environmental risks.  

The Corporate Sustainability Due Diligence Directive passed the EU Parliament in April and is expected to be finalized next year with the new rules taking effect in 2028. EU companies with more than 1,000 employees and $450 million in annual revenue will be required to identify supply chain risks and take action to prevent and/or remedy them.  

The new law requires brand owners to fully audit design and manufacturing partners, including licensees, and to monitor those companies that transport, store, and distribute products. Moving forward, contracts will be revised to reflect ethical supply chain (ESC) requirements and carry penalties for violations.  

These due diligence requirements are an acknowledgement that while actions are being taken to protect human rights and the environment, progress has been slow and uneven. For example, the increased complexity of global supply chains has made it difficult for companies to obtain reliable information on business partners’ operations. 

Because of these complicating factors, the Directive’s regulations were revised before ultimately being implemented after some EU members expressed concern about the increasing regulations. Germany didn’t support the new rules, instead passing and implementing its owned supply chain requirements in 2023. 

“Historically, licensors have been required to have a policy in place and have a statement saying what it is,” Ethical Supply Chain Program (ESCP) CEO Carmel Giblin said during Licensing International’s recent How to Navigate the New Supply Chain Regulations webinar. “For many of us, it used to be good enough to have a policy and put it on a website to comply [with regulations]. That is not good enough anymore because companies are being asked to provide evidence of the policy in action and the impact it is having.”  

In addition to the new EU laws, the California Transparency in Supply Chain Act, which passed the state legislature in 2010, is part of a wave of regulations designed to crack down on supply chain abuses.  

“Every geographic region is taking action regarding ESC and what we are looking at is emerging legislation that shows the requirements around ESC and corporate responsibility,” Giblin said. “It is being driven by a sense of urgency around things like climate change and concerns around carbon emissions. The deadlines are coming up and there has been an increase in the pace of needing and acting on data information.” 

Many of these new global ESC regulations also require companies’ annual reports to reflect more than a policy statement. Additionally, corporate staff are required to assess risks and violations of ESC rules could include financial penalties or being barred from a given market. In addition to potential financial consequences, failure to follow these regulations could result in significant damage to a brand’s reputation.   

“Reputation damage can be significant. Millions have been spent developing brands and that can be undermined very quickly. Consumers’ confidence is hard won and often easily lost. What we all want is to operate responsibly and minimize regulation when we can,” Giblin said. “We want to demonstrate that expectations can be managed without regulations being increased. That is the benefit of showing that action is being taken.” 

As part of that effort, ESCP developed a Social Impact Assessment Program which is designed for the licensing industry. That assessment program was developed after 70% of European businesses responded to an EU survey that action was required on corporate sustainability due diligence. A third of the companies also recognized the need for better regulations around human rights and the environment. 

“Ethics and supply chain management are related in various crucial ways,” American Public University said in a blog post regarding business and management. “As businesses become more global and more complex supply chains are created, ethical considerations have become increasingly more important.”