Sustainability as an integral part of trade compliance

A new dimension is gaining importance in the world of trade: sustainability. With society expecting more sustainable economies, this will set the tone for future business, politics and legislation, and encompass far more than CO₂ reduction. Concerns and regulations stemming from sustainability potentially affect all aspects of global trade, from raw materials, intermediate products and the end of life cycle of a product, as well business partners and suppliers across the entire value chain.  This is why companies with international supply chains need to incorporate mandatory sustainability aspects into their existing trade compliance management and control frameworks.

Globalisation has opened up numerous opportunities in oversea markets and has increased economic prosperity around the world. However, in recent years, globalisation has come under pressure from various angles: through the pandemic, protectionism, ‘trade and tech wars’, and increasing regulatory requirements, including export controls, embargoes and sanctions or customs requirements.

Besides these ‘conventional’ trade regulations, a new dimension is gaining significant importance in the world of trade: sustainability. Sustainability is defined as the ability to cause little or no damage to the current environment so as to not affect the balance and prospects of future generations. The term environment encompasses not only the physical, but also the social and economic dimensions.  With society expecting more sustainable economies, this will set the tone for future business, politics and legislation, and encompass far more than CO₂ reduction.

Concerns and regulations stemming from sustainability potentially affect all aspects of global trade, from raw materials, intermediate products and the end of life cycle of a product, as well business partners and suppliers across the entire value chain.  Sustainability can therefore be an enabling factor or a showstopper, businesses cannot ignore this topic if they want to be successful in the long term. Changing consumer behaviour, purchasing strategies in supply chains and the push towards sustainable investing increasingly depend on, and hold to account, the sustainability ratings and overall credibility of a company.

Furthermore, international trade is an engine for economic growth and poverty reduction and thus important to achieve the Sustainable Development Goals as defined by the United Nations. International business plays an important role towards a more sustainable future through social, economic and legal developments.

Increasing sustainability requirements

There is a general trend by lawmakers and governments to implement mandatory sustainability requirements into compliance frameworks. This is illustrated by the free trade agreement between the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland) and Indonesia, which recently was narrowly accepted by the Swiss voters. It contains far-reaching provisions on sustainable palm oil production, which are to be based on verifiable certifications. Only sustainably produced palm oil will benefit from trade facilitation. Furthermore, the agreement also considers the basic rights of workers and the management of forest resources. This agreement could be a blueprint for future FTAs, not just for Switzerland. The narrow result shows that such future agreements should likely take sustainability aspects into account, otherwise they face difficulties in a popular vote.

Another rapidly developing category of sustainability requirements are enhanced Business Partner Due Diligence Requirements. These are often necessary, for example when sourcing precious raw materials from potential conflict regions. This is essential for Switzerland, as it is the most important hub in the international gold trade: two-thirds of the world's precious metal is refined and processed here. According to Swissaid, the OECD Due Diligence Guidance procedures are very hard to judge as it is difficult to maintain visibility across the entire supply chain from the mines in Africa to the refineries and traders in the UAE to the final product. The Swiss government therefore proposes to improve tariff differentiation of gold types within the framework of the World Customs Organisation to tackle at least a part of the transparency issue.

Moreover, there are soft laws and non-mandatory international standards like Voluntary Sustainable Standards (VSS) or the UN Guiding Principles on Business and Human Rights. Sustainability labels are increasingly demanded by many consumers and have become an integral part of the marketing strategy from a number of firms. According to the Ecolabel Index, the number of VSS increased from around 50 to over 450 over the last 30 years.

The future of trade compliance is green

Although the Responsible Business Initiative was rejected narrowly in Switzerland in November 2020, the counter proposal will enter into force with certain sustainability reporting obligations. There are similar developments in other countries too: The British government wants to impose penalties on large companies that are unable to disclose that their supply chains are free of products made under forced labour. The focus is particularly on the Xinjiang region in China, where, according to experts, up to one million members of various minorities are in so-called re-education camps.

European Union (EU) member states reached an agreement on a new supply chain law that aims to hold countries or companies accountable for guaranteeing that social and environmental standards are adhered to across the entire production chain. The EU Commission will be coming up with a legal framework to ensure necessary due diligence by all affected companies. This legislation could constitute a real game changer once implemented. According to the Federal Association of German Industry, the draft report goes far beyond the national level obligations currently being debated including EU based parent companies being held liable for damages caused by their business partners. In the long term, Swiss companies may likely be affected by these developments happening on the continent.  

In December 2020, the EU adopted the Human Rights Sanctions, similar to the concept of the US Magnitsky Act. This allows the EU to target individuals, entities and bodies responsible for, involved in or associated with serious human rights violations and abuses worldwide. The EU has the power to freeze assets and impose travel bans on specific individuals, thereby allowing them to hold those responsible for human rights violations accountable for their actions.

A European solution would be welcomed to prevent distortions of competition and to not further increase regulatory complexity. However, individual governments are primarily responsible for observing environmental and human rights. International companies should take responsibility and contribute, but they cannot do it alone and due diligence requirements must still be feasible in their daily business operations.

What does this mean for the business?

Companies with international supply chains need to incorporate mandatory sustainability aspects into their existing trade compliance management and control frameworks. This can be done using the following steps:

Step 1 - Understand the landscape. Evaluate to which degree an organisation is exposed to legal sustainability risks affecting its trading activities. Beyond mandatory regulations, identify industry specific standards and consider customised, corporate ‘goals’.  

Step 2 - Set a tailored strategy. Define the level of sustainability the organisation strives for and align this with the existing strategy and framework. Define a fit-gap-analysis on three levels: Trade Compliance, Corporate Responsibility (supply chain) and external communication.   

Step 3 - Adjust the Compliance and Control Framework. Amend the trade compliance and control frameworks accordingly including elements of corporate responsibility and implement (external) communication channels. Take the BPDD process to the next level by scaling up sustainability in the supply chain.  

Step 4 - Communicate. Refine communication on sustainability and corporate responsibility report; add a new dimension by strategically including trade compliance and its relevant sustainability elements into your reporting. Interlink communication functions with trade compliance functions.    

Sustainability requirements across the supply chain have become a significant element of overall global trade compliance. And this is only the beginning both in Switzerland and abroad. Living up to expectations coupled by adhering to the legal requirements across the entire value chain, product lifecycle and all relevant markets will be challenging for many organisations. Sustainability should ideally be incorporated in your Trade Compliance and Corporate Social Responsibility Framework and supported by a transparent and dependable communication strategy. Addressing current sustainability requirements, anticipating upcoming challenges and defining your corporate standards will be paramount now and in the future.