The ESG risks and implications of not knowing your supply chain

Whilst there may have been some recent ‘reining in’ in specific areas over the last couple of months in some organisations, it is still safe to say that over the last few years there has been an increased focus on ESG in the boardroom, with businesses ensuring that this is firmly on their agenda. However, it is no longer sufficient for businesses to simply look at their own practices; there is now a growing trend toward viewing ESG in a more holistic manner, with increased scrutiny on the supply chain.

Green Claims

To comply with the CMA’s Green Claims Code, businesses must consider the full life cycle of their product or service, including its supply chain, when making environmental claims. It is important to be able to substantiate any green claims, which may mean obtaining evidence from others within the supply chain.

Not knowing your supply chain sufficiently could mean that you are unintentionally “greenwashing” and potentially engaging in unfair commercial practices under the Digital Markets, Competition and Consumers Act if it can be established that any misleading green claims are likely to cause the average consumer to take a transactional decision that they wouldn’t have otherwise taken.

Take the time to understand the environmental impact of your supply chain, especially now that from April 2025 the CMA will have much more robust powers when it comes to enforcement, including the power to fine infringing businesses up to 10% of their global turnover.

Modern Slavery

Section 54 of the Modern Slavery Act (MSA) 2015 requires commercial organisations who have a turnover of at least £36 million to prepare a statement outlining the steps they have taken to ensure that slavery and human trafficking is not taking place in their business or supply chains.

Knowing your supply chain is crucial for meeting your obligations under MSA 2015. Although current sanctions for failing to report on the supply chain in this context are limited, this may soon be changing. The MSA has faced criticism for no longer meeting its purpose, especially in the wake of an increasing international focus on supply chain regulation and due diligence in this space (e.g. the EU Forced Labour Regulations).

A House of Lords Select Committee has recently put forward recommendations to strengthen the position under the MSA 2015, including introducing stricter sanctions for failing to comply with supply chain requirements and mandatory modern slavery due diligence. The Joint Committee on Human Rights has also recently announced a new inquiry into the UK’s response to forced labour in international supply chains, and he MSA’s effectiveness. This demonstrates increased scrutiny on supply chain and indicates that an overhaul of UK modern slavery legislation and stricter regulation is on the horizon.

Although these are only recommendations and the timeframe for reform is uncertain, it would be prudent to consider your supply chain in the context of modern slavery now. This will ensure compliance with t current legislation as well as any future changes.

International regulations

There has been a global shift towards greater scrutiny of supply chains in the ESG context, with new legislation / regulations being passed in the US, Canada and the EU to reflect this.

For example, the EU Corporate Sustainability Due Diligence Directive imposes a corporate due diligence duty on large businesses to ensure that they identify and address adverse human rights and environmental impacts in their operations and across their global value chains.

The EU Deforestation Regulations will come into force in late 2025 which will require companies trading in certain materials to conduct extensive due diligence on their supply chains to ensure that their products have not led to deforestation or forest degradation.

Whilst international regulations do not directly apply to UK businesses, it is likely that UK businesses will be indirectly affected by these regulations should they have activities within these jurisdictions. Therefore, it is important for you to consider your supply chain, not only so that you can ensure compliance with UK legislation / regulations but also to ensure you understand your international obligations.

Key risks

• Regulatory risk – Not knowing your supply chain could mean that you fail to meet your regulatory obligations which may result in sanctions from the relevant regulator. This could include substantial fines and civil penalties.

• Reputational risk – Consumers are much more conscious of ESG issues, and it is not uncommon for consumers to choose products/services based on a business’ ESG credentials. Failing to understand your supply chain could mean that there are practices taking place that do not align with your ESG values and could result in you making inaccurate ESG statements. This would likely be looked upon unfavourably by consumers, risking your reputation and potentially leading to loss of revenue.

• Impact on value – Linked to the above, a loss in revenue may affect the share price of your business. Failing to understand the potential ESG issues within your supply chain may also lead to loss of investors / shareholders who may decide to cut ties with the business due to share prices having fallen or because they feel that the business’ values do align with their own, with ESG often being an important factor when deciding which businesses to invest in.

• Litigation risk – Legal claims may be brought by those affected by misleading ESG claims or by ESG issues within the supply chain. We have recently seen a case which serves as a prime example of the risks of not knowing your supply chain. In the case of Limbu and others v Dyson Technology Ltd and others a claim has been brought against Dyson relating to allegations of forced labour. Even though the forced labour is alleged to have taken place in two Malaysian factories operated by a different company, it has been ruled that the claim can be heard in the English courts, as the factories made products for Dyson and the alleged harm was caused by decisions and policies made centrally by Dyson UK companies.

For further details on the key reasons why ESG is important for companies and investors, please see our previous article in the ESG in the Boardroom series on ‘Why ESG matters; the corporate game-changer’

Live example – Shein

On 7 January 2025, Shein appeared before the Business and Trade Committee, who questioned the fast-fashion retailer over its working practices, particularly in relation to allegations of forced labour in their supply chain.

Shein are hoping to list the company on the London Stock Exchange and recently received approval from the FCA. However, during the authorisation process the potential listing was challenged by advocacy group Stop Uyghur Genocide, who sent a dossier to the FCA alleging forced labour abuses within Shein’s supply chain. The Independent Anti-Slavery Commissioner also raised concerns about Shein’s practices and what message their listing on the London Stock Exchange may send.

At the hearing, Shein’s General Counsel faced questioning on the practices within the company’s supply chain but was unable to give straightforward answers to the Committee. This was highly criticised by the Chair of the Committee who stated that they had been “pretty horrified” by the lack of evidence provided, with General Counsel being accused of “wilful ignorance” over supply chain questioning. The Committee concluded by stating “you have given us almost zero confidence in the integrity of your supply chains, you can’t even tell us what your products are made from, you can’t tell us much about the conditions which workers have to work in. The reluctance to answer basic questions has frankly bordered on contempt of the committee”.

Shortly following the hearing, the BBC also published an investigation into Shein, and the conditions workers face in the Chinese factories where Shein products are made, again pointing to allegations of forced labour within their supply chain.

This is a stark reminder of the scrutiny and criticism you may come under for not knowing or addressing the ESG issues within your supply chain.

Get to know your supply chain and address any issues

With greater scrutiny of the supply chain coming from regulators, consumers and investors, it is really important that you ensure you have adequate measures in place to help identify and address any ESG issues that may expose you to risk. If you suspect or identify any potential ESG issues within your supply chain, we recommend that you respond swiftly and appropriately to tackle these issues.

At TLT, we support clients across all sectors in addressing challenges in the ESG space. If you would like to talk to us about any of the above, please get in touch.

To learn more about the complexities of ESG compliance and strategy, read the other articles in our ESG in the boardroom series. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.