For nearly three decades, the world has annually witnessed an event of critical importance for the future of our climate: the Conferences of the Parties, better known as the COP. First held in 1995 following the adoption of the United Nations Framework Convention on Climate Change at the Earth Summit in Rio in 1992, these conferences bring together nations that have ratified this treaty in a collective effort to combat climate change, a phenomenon increasingly evident in our daily lives.

Among these conferences, two stand out for their significant impact. The first COP3, held in Kyoto in 1997, marked a turning point with the near-unanimous adoption of the Kyoto Protocol. This agreement, which came into force in 2005 after intense negotiations, mandated signatories to reduce greenhouse gas emissions by at least 5% by 2012. Despite its legally binding nature, some countries attempted to diminish its ambition, and others, like the United States, never ratified it. Canada withdrew from the treaty in 2011, citing the discovery of highly polluting tar sands in Alberta. At the 2012 Doha conference, the Kyoto Protocol was extended until 2020 despite the absence of the US agreement.

COP15, held in Copenhagen in 2009, acknowledged for the first time the necessity of limiting global warming to 2°C above pre-industrial levels and proposed the creation of a Green Climate Fund endowed with 100 billion US dollars annually until 2020. Unfortunately, this initiative lacked legal enforcement and clear rules for fund allocation. By 2014, after the Lima conference, the Green Climate Fund had only amassed 10 billion US dollars.

Then came COP21 in 2015 in Paris, one of the most well-known conferences, which led to the landmark Paris Climate Agreement. This agreement set three primary goals:

1. Limit Temperature Rise: Keep the global temperature rise well below 2 degrees Celsius above pre-industrial levels while pursuing efforts to limit it to 1.5 degrees Celsius.
2. Adapt to Climate Impacts: Enhance the ability of countries to adapt to climate change impacts, focusing on resilience and adaptive capacity, especially in vulnerable regions.
   
3. Align Financial Flows: Redirect financial flows towards low greenhouse gas emissions and climate-resilient development, ensuring consistent support for mitigation and adaptation.

Once again, the agreement was not, or only minimally, binding: Participant countries were encouraged to define their "Nationally Determined Contributions" to be re-evaluated and submitted to the UN every five years, with each submission expected to be more ambitious than the last. The only legal obligation was the transparency of national contributions and their evaluation by experts.

The Paris Agreement, however, paved the way for landmark climate litigation, including a significant case in the Netherlands where a foundation sued the Dutch government for reducing its climate ambitions. The government lost, with the European Convention on Human Rights forming the legal basis of the decision.

From Words to Deeds: The Struggle for Effective Climate Change Policies at COP28

The climate is a highly complex system with significant inertia; actions taken today might only manifest their effects in a century! As of 2020, global warming is estimated to be around +1.2°C, with an increase of approximately +0.2°C per decade.

Current policies are steering us toward a +3°C increase, underscoring the need for a COP that results in a binding agreement backed by major powers and supported by financial measures. Former UN Secretary-General Ban Ki-Moon had suggested a global tax on financial transactions to fund the Green Climate Fund.

There is also hope for new agreements to ban subsidies for fossil fuels. However, the fact that COP28 is set to take place in the United Arab Emirates, chaired by the CEO of the national oil company, sends a mixed message. It is crucial that Gulf countries play a significant role on the international stage, especially given the recent escalation of the Israeli-Palestinian conflict in late 2023, highlighting their pivotal role in both international peace and climate change issues. On the latter, the trajectory is concerning: 181 million tons of oil were extracted in 2022, an increase of nearly 11% in a year, and gas extractions, though stable over the past year, have risen by 9% since 2012.
COP28, therefore, faces legitimate criticism, with the most significant being that the conference could be an exercise in greenwashing. Recent allegations reported by the BBC suggest potential misuse of the COP presidency to secure new oil and gas contracts.

Finally, responsibility contributions remain unresolved: the "Economic North" is primarily responsible for climate change, yet those who will suffer the most are the countries of the "Global South." Some island nations are even at risk of disappearing due to rising sea levels caused by climate change, and certain areas could become uninhabitable by 2050 due to extreme temperatures and humidity, preventing natural cooling processes like sweating. Addressing loss and damage will also be a central point at the conference.

Stay tuned for the second part summarizing the debates and agreements done at COP 28.

ESG frameworks and regulations have developed due to rising awareness of sustainability and supply chain risks. They aim to enhance transparency, accountability, and ethics, encouraging environmental preservation, social improvement, and better governance. While fostering innovation and financial benefits, aligning with sustainable development goals, these measures might increase costs for businesses, especially smaller ones. Differences across regions and a focus on compliance could inhibit real change, promoting a superficial 'tick-box' approach rather than significant enhancements.

This article takes an in-depth view of some of the most relevant recent regulations and analyzes how effective they seem to be.

Unraveling Supply Chain Regulations: From Past to Present

We traced the evolution of supply chain regulations from non-binding guidelines to binding laws, examining their impact on corporate sustainability. Along the way, we explored the challenges businesses face as they strive to comply with these constantly evolving standards.

Note: The list of regulations and frameworks mentioned is a high-level list of the most mentioned acts.

Global and Non-binding

When analyzing global and non-binding regulations, although they provide crucial frameworks for promoting corporate accountability by offering guidelines for responsible business conduct, they also have limitations. For instance, they lack legal enforceability due to their non-binding nature, potentially hindering compliance. Given the broad scope of the guidelines, implementation challenges arise, particularly in regions with weak governance.

Here are a few examples of recent sustainability regulations:

By Region and Binding

Binding legislation requires companies to meet specific standards in sustainability, environmental protection, and social responsibility. Non-compliance risks legal penalties and reputational damage. However, weak enforcement, insufficient penalties, and legal ambiguities often lead to criticism.
Additionally, logistical and resource constraints, especially across borders, limit the effectiveness of regulatory bodies in monitoring and enforcing compliance. Furthermore, the penalties imposed are often disproportionately low. Moreover, these bodies depend on companies’ self-reporting without independent verification, leading to underreporting.

By Country/State and Binding

State or country legislation on supply chains encounters several challenges. These include jurisdictional limitations, enforcement difficulties due to resource constraints, and compliance burdens, especially for smaller businesses. Additionally, fragmented regulations across states or countries can complicate compliance for companies operating nationally. This underscores the importance of coordinated efforts between states and the federal government to address supply chain issues effectively.
In addition, regulatory bodies contend with logistical and resource limitations, mainly when operating across borders, which can hinder their effectiveness in monitoring and enforcing compliance.

Unveiling Vulnerabilities Sector Screening for Supply Chain Controversies

In this section, we explore the evolving landscape of supply chain regulatory frameworks and ESG risks in supply chain management. We also dive into how future regulations will affect global trade, corporate responsibility, and sustainability efforts.

Supply Chain Controversies Over Time

We analyzed supply chain-related controversies from 2019 onwards and found a consistent increase each year, peaking in 2023. Concurrently, mentions of various frameworks, laws, and legislations [mentioned in Part I] related to these issues have also risen.
Our analysis reveals a strong and positive correlation between the two trends (r=0.99), indicating a significant relationship. While the apparent increase in supply chain issues, breaches, and controversies may be concerning, it's largely caused by implementing more frameworks that increase visibility and accountability. Even without binding regulations, companies' reputations are affected. Thus, the proliferation of laws and frameworks contributes to the heightened online attention to these breaches.

Supply Chain Controversies: An ESG Analysis

For this analysis, we primarily focused on environmental and social issues within the supply chain, as legislation often targets these areas due to their significant external impacts. Issues like environmental damage and labor violations are most likely to occur in the supply chain and can profoundly affect communities and ecosystems. Governance issues, on the other hand, are more internal and directly pertain to a company's operations and management practices.
Therefore, we analyzed a sample of 31,011 entities across industries with frequent mentions of ESG-related supply chain risks, focusing on social and environmental risks.

Specialized Retail has the highest incidence of social and environmental controversies, followed by Technology Software and Automobile & Components, respectively.
As shown in the graph above, many of the issues highlighted in the Social ESG supply chain pillar are driven by human and labor rights breaches, which significantly contribute to the ESG risks mentioned.

Social Risks in the Supply Chain

In specialized retail, many brands face scrutiny for alleged forced labor; some examples include Amazon, Hugo Boss, Diesel, and Costco.
Additionally, Amazon garnered widespread attention when the company settled a $1.9 million human rights abuse claim. Consumer groups sued Starbucks over deceptive ethical sourcing claims linked to human rights issues.
Walmart and Centric were also investigated for human rights violations. Moreover, reports tie Amazon and IKEA suppliers to forced labor. These controversies dominate ESG supply chain discussions in retail.

The automotive industry ranks second as notable companies like Tesla face criticism, with allegations ranging from opening showrooms in China linked to genocide allegations leading to backlash and investigations led by the US Senate. Tesla's involvement with child labor and its battery material supplier's recurrent human rights abuses further add to the scrutiny.
Furthermore, we detect multiple mentions regarding Volkswagen's supplier breach that could impact up to 3.3 million customers. Moreover, slave labor accusations resurface for Volkswagen in Brazil, while companies like Toyota Motor, General Motors, Tesla, and Volkswagen suppliers are accused of exploitative labor practices in Southeast Asian factories.

Regarding the other industries, we also see that technology hardware displays a significant proportion of mentions stemming from mentions of forced labor for Lenovo, Cisco, and Intel, and numerous controversies regarding Apple, among many other allegations.

Similarly, Companies from the food and beverage manufacturers industry were also linked with human rights violations and infringements on labor rights, with companies like Tyson Foods, McDonald's, Hershey,  Pepsi, and Nestle having multiple supplier issues connected with child labor, discrimination, and exploitative work. While Technology Software companies mentions were primarily related to contractors and content moderators’ health & safety issues and labor rights infringements from companies like Meta, Microsoft, and Google.

Environmental Risks in the Supply Chain

Environmental risks, though relatively fewer in proportion compared to social risks across sectors' supply chains are notably prevalent in specific sectors, notably in oil and gas, where incidents such as oil-well blasts are due to the lack of safety practices, improper disposal, harmful emissions from gas flaring, unremedied oil spills disproportionately impact communities and contractor negligence. This negligence has resulted in substantial environmental harm, endangering both communities and workers and, in some cases, leading to fatalities.

In specialized retail, brands’ suppliers are linked to deforestation, illegal extraction of minerals, animal cruelty, and illegal waste disposal. Similarly, controversies arise from controversial mining, breaches of clean air acts by suppliers, deforestation, and questionable cobalt sourcing in the auto and components sector. Environmental concerns also impact the food and beverage supply chain, with prevalent issues like deforestation, animal abuse, and unethical sourcing.

In sum, the evolving supply chain regulations reflect a global commitment to sustainability and ethical business practices. Navigating these regulations presents challenges and opportunities for businesses to lead in corporate responsibility and advance principles of environmental stewardship and social equity. Embracing these regulations as a compass rather than a constraint can help chart a course toward a sustainable future.

Reach out to SESAMm

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A few months ago, Sylvain Forté, CEO of SESAMm, and Julia Haake, Head of ESG Ratings Agency at Ethifinance, sat down and dove deeper into how AI and new regulatory standards are reshaping the future of ESG ratings for rating providers.
Download the ebook and have an insider’s view into their thoughts on ESG regulations for rating agencies, the challenges they face, and the possible solutions.

What You'll Learn:

• Upcoming ESG Regulations for Rating Providers
• ESG Data Availability and Key Challenges
• AI Applications in ESG Ratings
• CSRD and ISSB: Impacts on Data Standardization

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