By George Riddell and Danny Vu
As businesses seek to green their supply chains, through actions such as decarbonising production processes and reducing the use of plastics, they are having to navigate compliance obligations for new regulations across multiple jurisdictions. Businesses need to think about these developments differently and overcome existing organisational silos.
We look at the new regulations businesses are having to address and how businesses can turn compliance obligations into a strategic advantage.
Supply chain regulatory developments
Plastic Packaging Taxes
The UK plastic packaging tax (PPT) was enacted by the UK government to provide a clear economic incentive for businesses to use recycled plastic in the manufacture of plastic packaging. This increase demand for recycled plastic and in turn, the aim is for the increased demand to stimulate higher levels of recycling and collection of plastic waste. Ultimately, this should lower the levels of plastic being sent to landfills or incineration, locally and abroad. In Spain and the other EU countries, the Plastic Levy supplements other regulations (e.g., Circular Economy, Single-Use Plastic, Waste) in order to ensure that all packaging within the EU marker is reusable or recyclable in a cost-effective way by 2030.
Carbon Border Adjustment Mechanisms
The EU CBAM is a measure that aims to address the risk of carbon leakage by ensuring equivalent carbon pricing for imports and domestic (EU) production that is subject to carbon costs under the EU Emissions Trading System (ETS). CBAM currently applies to certain goods imported into the EU and imposes reporting requirements through its transitional period ending in 2026.
Recently, UK ETS prices have fallen sharply and where the UK ETS initially tracked the EU ETS, it has now diverged significantly. This is a result of recent UK government announcements delaying the ban on new petrol and diesel vehicles until 2035 and releasing an extra 53.5m tonnes of allowances — about half a year’s worth of UK emissions covered by the scheme — to participating sectors between 2024 and 2027. This divergence will have a cost implication for UK exporters to the EU under the EU’s CBAM regime.
Extended Producer Responsibility
The UK’s EPR legislation will require producers to take responsibility for the environmental impact of the packaging they supply by obligating them to pay for the collection and disposal costs of this packaging when it becomes waste. This aims to provide a financial incentive for producers to reduce the amount of packaging they supply and to improve the recyclability of their packaging.
Deforestation
The EU’s Deforestation Regulation (EUDR) requires operators and traders who place certain commodities and derived products on the EU market or export them from the EU to conduct due diligence to ensure that they are deforestation-free including i) they are deforestation-free, meaning that they have not been produced on land that was deforested after December 31, 2020; ii) they have been produced in accordance with the relevant legislation of the country of production and, iii) they are covered by a due diligence statement that indicates no more than a negligible risk of non-compliance with the EUDR.
Strategic considerations responding to regulatory change
- Getting to the right data
A key practical challenge is that these new regimes are often not aligned in their reporting cycles, the information that is required nor how reports should be submitted to the authorities. They do, however, contain many commonalities which blend aspects of data from different parts of the business and their respective IT systems including supply chain, customs, tax and sustainability.
In practice, this means that the necessary data needed to comply with any of the new regimes is likely to be spread across multiple ERP or accounting systems, in the hands of group/local finance, procurement, or operations teams as well as external upstream suppliers and customs brokers/agents. Addressing this challenge upfront is crucial for businesses to be able to adapt accordingly and understand their exposure to these fast-moving regulatory developments.
- Streamlining compliance processes across multiple regulations
Ensuring that compliance for each regulation is not looked at in isolation should be a priority for businesses. Internal processes, procedures and technology should be integrated to get to the right data and generate the necessary compliance reports across the entire regulatory landscape. This entails a clear assigning of responsibilities, identifying the data, any gaps and establishing the processes for compliance.
- Restructuring supply chains
To accelerate decarbonisation efforts (while simultaneously mitigating costs such as CBAM), businesses should be looking to move supply chains toward less emission-intensive products or processes. This will likely involve changing product components, suppliers, or supply routes.
Final thoughts
While we have outlined a few developing supply chain regulations, many more are expected to be introduced over the coming years bringing with them the need for supply chain due diligence and enhanced corporate reporting requirements. This is a trend businesses cannot ignore. Meeting the compliance obligations of these new supply chain regulations is an opportunity to proactively shape the business’ sustainability strategies and work towards a sustainable future. Businesses in the vanguard of ESG change are approaching these not merely as a compliance burden but rather as an opportunity to reduce their carbon footprint and support wider ESG objectives.
