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Supply chain governance is changing. What’s at stake for developing countries?

22 December 2022 Jenny Larsen


On 1 January 2023, the new German Supply Chain Due Diligence Act came into force, requiring larger German and German-based companies to identify and assess rights and environmental violations within their supply chains, and develop risk management, monitoring and reporting strategies, with stiff fines for non-compliance. The Act is the latest in a growing body of legislation moving away from voluntary standards to force companies to take responsibility for cleaning up their supply chains. Norway and France have similar laws in place and a new European Union Directive, currently in negotiation, is expected to go further, including measures to allow victims to seek damages in court.

Although the new laws will affect a small proportion of EU companies and final rules may yet change, the push towards more stringent, binding social and environmental regulation is clear. The shift in direction is part of a reimagining of global supply chains, which, as the main channel of global trade and a major vehicle of job creation, are critical to the world economy. Crises such as the COVID pandemic and the war in Ukraine, as well as the related energy shock, have exposed the brittleness and inequities of globalized production networks. The threat to long-term growth from the climate emergency, coupled with calls from consumers, investors and civil society for fairer, greener production, mean that pressure to create more sustainable, and therefore resilient, supply chains will continue to grow.

This is good news, potentially leading to greater harmonization of regulations and the spread of cleaner, safer technologies and working environments, reversing some of the darker downsides of globalization. It could also accelerate innovation as firms upgrade to meet new standards, giving them more opportunities to enter global supply chains. Studies show that greater levels of environmental and social engagement among downstream companies is likely to benefit suppliers all along the chain.

But there are also risks. Some suppliers in developing countries may struggle to cope with the growing raft of costly compliance measures, and experts warn of potential unintended consequences if financial and technical help is not forthcoming. 

Speaking at a globalization and industrialization forum in December, UNIDO’s Director of Fair Production, Sustainability Standards and Trade, Bernardo Calzadilla-Sarmiento, said, “We need to pay attention that these approaches do not turn into barriers to trade that make it more difficult for some countries to participate. We need to make sure that we do not trade-off the different dimensions of sustainability.”

New regulations could become a particular headache for small and medium-sized companies (SMEs) that lack information on sustainability practices, or the means to invest in green technologies. Companies unable to meet stricter entry requirements for global supply chains might be left out, leading to a further concentration of global trade in the hands of large firms, Calzadilla-Sarmiento said.

Since the 1990s, integration into world markets through global supply chains has increased growth and incomes in countries such as Bangladesh, China and Viet Nam. Multinational enterprises, which have grown to account for over half of world exports, have driven much of this integration through foreign direct investment. In Viet Nam, for example, special economic zones designed to boost production and trade have created jobs, raised wages and benefitted from technological upgrading. But linkages to local firms outside the zones remain weak, bringing few improvements in wages, skills or productivity. Due diligence quality standards could risk leaving those firms further behind. 

There is also a danger that buyers may drop some suppliers and even pull out of certain areas altogether. Rising geopolitical tension and security concerns are leading countries and companies to reassess how they do business, and with whom. This could intensify a move away from suppliers perceived as high-risk, leaving them to operate in potentially less regulated markets with consequences for sustainability and rights, as well as employment and wages.

To avoid this, more investment will be needed in developing countries, especially in infrastructure and digital skills, with more support for domestic industry. Panelists at the Forum, jointly organized by UNIDO and the Kiel Institute for the World Economy, highlighted the importance of broader engagement to actively involve developing countries. Olaf Deutschbein, Head of Public Relations at the German Ministry for Economic Cooperation and Development (BMZ), emphasized the need to go beyond raw material extraction to provide support through technology transfer and vocational training as part of a development strategy that fits with individual country reform agendas.   

Discussions are already taking place at national and EU level, including a proposal to set up a digital one-stop-shop providing advice for both buyers and suppliers. The German government has launched an Initiative for Global Solidarity to help partner countries and German companies share responsibilities, supporting local advisory services and complaints mechanisms. BMZ has also joined with the European Commission in a Team Europe Initiative (TEI) on “Sustainability in Global Supply Chains” to better align existing support measures for suppliers, and if necessary set up new ones.

Wahidi Anosha, Head of Division and Commissary for sustainability standards at BMZ, says due diligence cannot be delegated. “The legislation provides for companies to work together with and support their suppliers, especially SMEs that do not fall into the scope of the legislation, in implementing appropriate measures,” she said, underlining the importance of development cooperation and the role of international organizations in minimizing negative effects.  

UNIDO is working in close collaboration with the European Commission, other international organizations and industry to unlock funding and provide necessary technical assistance to deliver on these goals, as well as participating in the Global Gateway and Team Europe initiatives. On 13 December 2022, UNIDO signed an agreement with non-profit business association amfori to collaborate on building supplier capacity in developing countries in order to support supply chain sustainability.

UNIDO delivers a range of programmes and projects that support the overall development of sustainable production, ranging from policy and governance advice to the development of quality infrastructure institutions that enable companies to meet compliance and technical standards. For example, through its Resource Efficient and Cleaner Production initiative UNIDO has worked for more than two decades with enterprises in over 60 developing countries applying concepts, methods, policies, practices and technologies to processes, products and services in order to increase efficiency, and protect nature and the well-being of workers and local communities

Additionally, it has supported the development of laboratory infrastructure through programmes such as the West Africa Competitiveness Programme and the Global Quality and Standards Programme, which are helping producers meet technically sophisticated quality requirements. UNIDO also has a long-standing commitment to working with governments and industry to build sustainable artisanal gold supply chains, while a more recent example is its involvement in the Industrial Deep Decarbonization Initiative to stimulate the market for decarbonized industrial materials and set common industry standards.

Such initiatives are part of a broad-based approach to compliance, aiming to incentivize better sustainability practices along supply chains and help developing countries to meet the demands of tougher due diligence measures, allowing them greater access to global markets.

Gunther Beger, Managing Director of UNIDO's Directorate SDG Innovation and Economic Transformation, emphasized that UNIDO welcomes greater focus on supply chain due diligence, however it remains essential that developing countries are supported with the right measures, adding,UNIDO’s technical expertise in areas such as quality infrastructure, standards and trade capacity building means we are well-placed to support our Member States increase sustainability in global supply chains, ensuring that producers in developing countries get a fair deal. UNIDO is ready to contribute its technical expertise in this area, in coordination with other agencies on complementary approaches.”