EU omnibus proposal: cutting through the noise and refocusing on the fundamentals of sustainability best practice

TN: Hi. Well, I'm Tara Norton. I am the head of advisory for EMEA in LRQA, and I also have a dual role of leading sustainability internally at LRQA.

Thank you so much. Great to have you JP.

JS: I'm JP Stevenson. I am the head of market development for EiQ, which is our data business. I am based out of Hong Kong, and a lot of my work is spent looking at how the production market responds to actually, bills like the omnibus proposal.

Thank you both so much for joining. It's great to have both of your perspectives on this really important topic right now. And I know a lot of businesses are probably struggling to kind of cut through all of the debates and different updates. So just given your expertise in the industry and extensive work with companies across the globe, what is one piece of advice you would offer businesses right now to confidently, kind of navigate this uncertainty surrounding the EU omnibus proposal?

TN: This is a good moment for us to get back to first principles of why we are focused on ESG and sustainability in general. One thing I've been thinking about recently is, if you had woken up one morning and had gone from there was no regulation around reporting to, ‘hey, the EU has decided that there's going to be regulation for reporting, and it's going to cover more than 7000 companies, which will then implicate their suppliers, which is a lot more companies, obviously, both in the EU and around the world,’ we would all think this is a great success. And the truth is that what has happened is there's been a lot of years of discussion around this reporting. There's been questions about it. There's been a lot of hopes in different camps around what needed to go in. What good due diligence looks like, etc. But at the end of the day, the omnibus, whatever comes out at the end of this, sustainability reporting is here to stay. It is going to continue to be required.

So, this is just a moment to reflect for companies and to go back and say what is really important to us. How do we align with what our peers are doing, what we know to be best practice, and what is best aligned with our own strategy? And so, that is the advice that we are giving companies. And indeed, we are seeing some that are hesitating a little bit or pulling back, but most of our clients who have been reporting are continuing on the same vein, and if anything, they're just a little annoyed by the delay, but it's still full steam ahead, just being prudent about it, and smart

JS: Yeah, Tara, I totally agree. I mean, I would tell them not to scale down and to focus on the core, uh, principles of responsible sourcing, which are kind of the common denominator anyway, across regulation, across multiple markets. The other thing that I'd say too is it's funny looking at some of the other changes that we've seen in trade occur concurrently now, like out of the US context, for example. I remember when the start of the US-China trade war happened. It's like, all of a sudden, you have to decouple and move all these goods for final stage production into new sourcing markets, and then that kind of faded, like the regulatory overtones softened, and now with this current administration, it's come back up again. And whereas the first time around, folks were very, very surprised by it and caught off guard, it's part of a larger kind of geopolitical narrative around trade that much like with this, the direction has been set. And so, if you were starting limiting your investing in it, you're probably not putting yourself in a great position for what the laws will look like two, three years now, irrespective of what the actual structure is.

That's super interesting. And Tara, just to your point about how you're seeing a lot of business. Businesses that aren't necessarily changing what they're currently doing. What then would you say are kind of distinct strategies from companies that are implementing those best practices? What are they doing well? And how can that kind of be an example for those that are trying to figure out how to comply or how to adjust their strategies?

TN: Well, one great development that has come out in sustainability is just the alignment on what good practice for a materiality assessment looks like. So, the principles of double materiality and the approach of double materiality are just good in terms of strategic thinking around sustainability for a company. So, what double materiality requires is basically you look at what is most material to your business from a financial and reputational and operational perspective, and then also what your stakeholders in the wider world are expecting from you and what is the impact that you're having. Now. This predates the regulation, this type of approach. But what the EU regulation did, especially in CSRD, is to really codify that, and it is really good practice. And if you do it well again, you're going to get the right issues that are going to come out for you in terms of the things that you need to not only report on, but then the things you need to do as a business. And I think that's the other piece of this. At the end of the day, reporting is reporting on what we're doing, right? We're not just writing things down. And so, the action is behind the reporting. And I think that's the other thing that companies are doing is where can we make meaningful or where can we take meaningful action that makes sense for our business, that is going to help us be sustainable in the long term. And just to cut to the chase, I think the double materiality approach, well applied, is still really a good fundamental thing that we're seeing businesses continue to do. 

JS: Yeah, and just to second that as well, it's been so interesting now seeing programmes pursue that today, especially those that have had some form of compliance programme that did not use the principles of a double materiality preassessment previously, in part, because I think they've struggled more to retrofit their existing programmes around the framework than those that are actually starting with the base for that. To your point, yeah, good foundation to begin with, especially if you're, you're building from scratch for the future.

TN: Well, and yeah, and another thing that's important to add to this picture is that, of course, investors are still asking for this. I mean, we know it, right? We have investor owners, and they're still requiring that we take a strong approach to double materiality, and that has not changed as a result of either the geopolitical context or the questions around the omnibus.

And the other thing, and JP, you alluded to it, is when it comes to responsible sourcing, whether you are in somebody else's supply chain, or you are the top of the chain, or as the buyer, or the bottom of the chain, these principles still apply. And having an aligned approach to how you do sustainable sourcing. How do you identify what your most material issues are, what are the actions you need to take? Again, it's the same thing as it's been and if anything, hopefully this just helps to focus and put your resources really where they are needed.

Yeah, completely, and to build off of that, and just to even remind our audience that this still is in proposal stages, and we will continue to monitor how this will develop and whether it will actually be implemented. But JP, you're based in in Hong Kong and the Asia Pacific region. How, if it goes through, do you kind of foresee these regulatory changes impacting supply chain risks and how they're embedded and how businesses can kind of adjust to that?

JS: I think in anticipation of the reforms, there has been a slowdown in some of how the larger suppliers to Europe have looked at building out their practices. However, I do think now that the ship around this has sailed, and a lot are also continuing to invest in spite of it, and it's not actually directly in response to the law. It's more like there's like five or six big regulatory frameworks that a lot of the larger suppliers are now looking at being governed on, including a lot of homegrown legislation. I mean, you can look for to as an example, the draft of Thailand's human rights due diligence law that is now up for consideration. You can look to last year, actually, the Korean parliament developing its own set of supply chain due diligence standards that were similar in a lot of ways, and punitive like the CSDDD was originally conceived. Japan has guidelines. You have the BSRS in India. And the frameworks are maybe a little bit different, but conceptually, there is still this common denominator of what best practice looks like. And so, I don't think for those that seek to lead and work across big, global value chains, it's really been that much of a deterrent.

TN: Yeah, well, and can I add to that also, is, it's important, actually, when we're talking about the omnibus, because sometimes people forget, it's not all the legislation around sustainability in the EU even. So, if you are in electronics companies, right, if you're an electronics company that is dealing with batteries, you are still subject to the developing EU battery regulation, and the same with EUDR, the deforestation regulation, which affects the number of industries, and that is requiring a lot of the same practices around due diligence. So, to your point. JP, there is regulation all over the world and including still in the EU. This is in some ways, and I think this is where I've been a little bit calmer, I think about the omnibus and then some others in sustainability, because I see, yes, it's developing. It's still new. We know about the changes in the geopolitical context. And so, it's not really surprising that maybe there was some kind of pause to look at this particular side of reporting. But it comes to taking action and due diligence that is still required in many jurisdictions around the world, including in the EU.

Yeah, no, that's an absolutely, it's a great point. And I think what is also to take from that as well, is even taking out the question of regulatory requirements or legislation, the risks are still there, right? What are you guys seeing in the risk landscape, or what can you kind of tell the audience about what we're seeing and the issues that are within these businesses and their supply chains that really can't be ignored, whether or not there is the regulatory red tape in place to mitigate those.

JS: I see a few bigger risk areas that are maybe not getting addressed, and this doesn't deal with in relationship to any bill. The first thing is, is a lot of European retailers have historically structured their value chain in so way that the parent entity that operates out of the EU is divorced operationally from the sourcing office, and the visibility the sourcing office actually has into supply chain risk, and I guess where this one does tie with omnibus, is that the movement to look at business partners rather than the value chain, I do think, creates perhaps a problem of the extent to which real risk is obfuscated. For example, looking at our data in EiQ. One of Europe's largest retailers, I won't say who they are, but when we look at like 10% of their factory base, of their sourcing office, they'll have issues around workers being worked 100 days continuously. 10% of the factories for them that we've looked at, and this is someone that, like everyone in Europe, goes and shops with under the current legislation. Omnibus, this is not necessarily in scope, because it would constitute their tier two. It's that company's sourcing offices, factory base. But that risk is still there.

The other thing that I'd say, just aside from that, and to Tara's earlier point around multiple pieces of regulation that are being passed, I'm encouraged to see this one being looked at more seriously, because I don't think there's been enough conversation around it, and actually it's part of a bigger structural shift in supply chains, and that is a revisitation, actually, of regulatory frameworks around goods that enter in both the EU and the US through de minimis frameworks. I mean, we have seen an exponential growth in the number of goods that have entered the European Union through this trade exemption. So, it's gone up, actually, 6x from 2016. I know in the United States, 92% of inbound goods into the US are not subject to traditional regulatory processes or certainly any sustainability regulation. And the Trump administration has looked at that, but we are also seeing the EU consider whether or not there's a huge cost associated with that, because there's no compliance framework for it, which I think is is an important question. How people buy make goods, especially in a digital economy, is really different from 10, 20, years ago, and in some ways, these types of proposals like omnibus are built around a really old structure within the economy where you have very, very large value chains. But as we know, most of the growth in consumer markets today does not sit in that. It's in businesses that are much more transactional in nature. So, I hope that actually moving forward, we see folks focus more on that transactional part of the digital economy in the sustainability framework that's there because there's absolutely risk present. It's just not being met.

TN: I have a slightly, I don't know if this is an opposing view or just a slightly different view. Well, because whether we're in the digital economy or not, at the end of the day, when we're talking about goods, everything goes back to something that is taken out of the ground or something that is grown somewhere you cannot get away from. The physical inputs and where they generally are, and the risk associated with them. And I think one other point that we haven't raised, it's important to say, is even in the new proposal with the omnibus, even though it's saying companies are only required to look at their own operations, subsidiaries and their tier one suppliers, it also says that they need to assess places where there's credible information indicating a risk. And as we know, certainly from our tool EiQ, and there are companies who are using any kind of risk tool, the risks are known and well-documented for most of our goods globally. No matter if you're talking about consumer goods or if you're talking about industrial inputs, these risks are well known and well documented. So again, you still need to do your due diligence, and all of the reporting frameworks are going to continue driving us in that direction. 

JS: Yeah, you're absolutely right. I mean, I think with the amount of digitalisation that is happening upstream, in supply chains, in production markets, and you see this actually reflected in the big exposes that you've had by civil society organisations. Sugar cane. I'm thinking of Pepsi, Coke, India. The processes used around processing sugar, you certainly see this within jasmine supply chains for beauty product companies. Before, you just would not have visibility actually, into the labour practices there. That is no longer the case. And because of that, I think that meets those criteria of plausible information requiring due diligence.

Yeah, and I think there's going to be continued pressure from civil society to sort of point out that these risks are known. It will continue to be very important for companies to be monitoring their own risk, and then also, to be when they know that it exists, they can't pretend it's not there. And many companies are already doing really good things around this, either collaboratively in industry groups or through their own monitoring practices. But this is not taking the pressure off of that.

It sounds to me that both of you are essentially saying the same message, which is, you know, no matter what's happening, no matter all the different updates that you're seeing, it's really important for everyone to just refocus on kind of the root of what's important and get back to the foundations of due diligence, which will continue to be a crucial part of supply chain, resilience and Sustainability, no matter what sort of regulatory changes are happening in the landscape.

But aside from this, sorry, go ahead. Tara.

TN: Just one more point on this, no matter what's happening, I think part of the reason that it can be difficult for companies is if it's new to them or if it's something that they haven't put a lot of effort into. But what we have seen, and certainly, there are many companies who will speak to this, is the more that you do it, and the further down the path you get, and the more you implement these processes, it becomes just a part of the way that you operate, and you get a lot of extra benefit in terms of reduced risk, better supply chain partnerships, better access upstream. There's a whole range of things that come along with it. So, there's no reason to back off from it. It's just a good time of reflection to make sure that you're doing the right things. 

Absolutely. So aside from what we've already discussed, obviously, this is a really important topic. Do you feel that there's anything else that's missing from this conversation that needs to be addressed to help businesses kind of cut through all the distraction and get back to what you both have alluded to here.

JS: Stop following the latest proposal, regulatory trend. I mean, I know that's what you're here to listen to, but it's not helpful, actually, and it doesn't change anything that much. Ultimately, yeah, this is a structural shift in how sourcing is done, so you just kind of need to get behind it.

TN: Yeah, and let the lawyers sort out the regulatory requirements, because law will always be interpreted differently by different companies. And so, lean into what needs to be done, what is strategic for your business, what are the important resources that you need to have access to, and how does due diligence and attention to ESG risk within what you're doing as a general approach?

Well, thank you both so much. I think this is a very important message for a lot of organisations right now, and will be crucial for them to hear. So, thank you both for joining today. I really appreciate your time. You've been listening to the future in focus podcast brought to you by LRQA. Make sure to subscribe wherever you get your podcast, to stay up to date with new episodes. Thanks for listening, and we will catch you next time.