ESG is not just carbon: Factors shaping the global supply chain in Canada

Authors: Olaitan Oyekunle, MLT Aikins ESG practice group

In the realm of Environmental, Social  and Governance (ESG), the spotlight is increasingly shifting to the significance of “S” in “ESG.” In another blog post, we cover the new requirements for an annual “Supply Chain Risk Report,” which many Canadian businesses will need to submit by May 31, 2024. This blog post delves into the intricacies shaping the global supply chain in Canada, emphasizing the multifaceted factors that are driving the ESG agenda forward.

Evolution of government regulations and policies

Customs tariff

The impact of government regulations, exemplified by the Customs Tariff amendments stemming from the United States-Mexico-Canada Agreement (USMCA), has sparked pivotal changes within the Canadian supply chain. Notably, the prohibition on the importation of goods produced through forced or compulsory labour has underscored Canada’s commitment to ethical and transparent business practices. Section 136 of the Customs Tariff now explicitly restricts the import of goods associated with forced labour or child labour, instigating a crucial call for due diligence within supply chain operations. More precisely, tariff item 9897.00.00, which covers “goods mined, manufactured, or produced wholly or in part by forced labour or child labour,” is prohibited from being imported. If any items are found to have been manufactured using forced labour, they are categorized under tariff item 9897.00.00 under the Customs Tariff, and the importer is notified. An importer may file an appeal, but the process is usually cumbersome and takes time.

The Modern Slavery Act

In response to the growing need for enhanced supply chain transparency and against the backdrop of the Customs Tariff, Canada has enacted the Modern Slavery Act. This is the first Act to combat modern slavery: Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (“Modern Slavery Act”).

The Modern Slavery Act amplifies reporting obligations and establishes stringent financial sanctions for non-compliance. The looming deadline of May 31, 2024 will compel businesses to furnish a Supply Chain Risk Report, outlining the strategic measures taken to mitigate the risks of modern slavery practices. Non-adherence to this reporting mandate could lead to penalties of up to $250,000, emphasizing the gravity of responsible supply chain management.

The Modern Slavery Act forbids goods manufactured using forced or child labour from entering international supply chains. The Act uses two methods: reporting and due diligence. In addition to submitting a “Supply Chain Risk Report,” businesses must look into their supplier chains and investigate if forced labour has been used. Nonetheless, the Act is primarily “reporting legislation,” as it only provides a penalty for not furnishing a Supply Chain Risk Report.

As pointed out by the United Nations Special Rapporteur, Canada’s legislation could be stronger. Not only in terms of prevention and remediation of modern slavery risk but also in self-reporting and monitoring mechanisms to manage due diligence and compliance.

Future expansion of supply chain due diligence requirements

While the current focus is on modern slavery, supply chain due diligence is not a new topic, and it’s one that is ready for expansion. For decades, prudent organizations have taken care to identify risks with business partners ranging from money laundering, terrorist financing and even operational compliance. In recent years, global media coverage has brought awareness to unsafe working conditions, forced labour and environmental damage that are the source of materials used around the world to power industrial and business operations, such as lithium ion batteries, timber and cotton. In response, some jurisdictions, like the European Union, have enacted legislation that goes beyond its borders in mitigating the risk of modern slavery to include due diligence activities focused on combating biodiversity loss, pollution and environmental degradation. Concurrently, the global demand for critical minerals spurred resources, such as a recent guide regarding environmental due diligence in mineral supply chains.  As concerns over social and environmental sustainability continue to increase, we will likely see these types of supply chain due diligence requirements.

Stakeholder influence: Shareholders, investors and consumers

The increasing pressure from shareholders and investors to embrace ESG principles has prompted companies to prioritize responsible supply chain management. ESG considerations have become integral to the investment process, emphasizing the importance of sustainable and ethical business practices. To get a more comprehensive understanding of the firms they invest in, investors are integrating ESG data into their investing process. A responsible supply chain is becoming increasingly important to investors in all sectors of the economy. Responsible supply chains are highly valued by shareholders, who feel that businesses should be just as accountable for good change as governments.

Simultaneously, the rise of consumer activism, fueled by the amplifying power of social media, has catalyzed demand for transparent and ethically sound supply chains. Instances of consumer activism have translated into legal action, serving as a stark reminder of the repercussions of non-compliance and misconduct within the global supply chain arena. For example, in response to complaints from human right groups, the Canadian Ombudsman for Responsible Enterprise (CORE) is investigating companies alleged to sell products using forced labour in China.

With the rise of social media, this has intensified. Customers are openly voicing their disapproval of corporate misbehavior and non-compliance, which affect how businesses handle and approach the global supply chain. This has resulted in third-party lawsuits against non-complying companies in countries like France and Germany. Since the introduction of the Modern Slavery Act, non-complying entities in Canada may be subject to similar lawsuits from parties with an interest in seeking an interpretation of the Act.

Key takeaways

Given the evolving landscape of the global supply chain and the growing societal demand for ethical practices, it is imperative for organizations to instill transparency and accountability within their supply chain operations. The changing dynamics of the global supply chain within Canada underscore the critical importance of upholding ethical, social, and governance standards. By adhering to stringent regulatory frameworks, prioritizing stakeholder engagement, and fostering a culture of transparency and responsibility, organizations can navigate the complex ESG landscape and pave the way for a sustainable and ethically sound future.

In light of this, the MLT Aikins ESG practice group stands ready to provide comprehensive assistance, including conducting due diligence, developing internal policies, facilitating the creation of Supply Chain Risk Reports and establishing effective ethics and compliance hotlines.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.