The ABCs of ESG Policy: Part 1, Due Diligence

Twenty years ago, the concept of sustainability was embraced by a fraction of consumer goods businesses; they typically sold niche products with “eco-friendly” labels that could only be found in specialty stores. Since then, sustainability has grown into a mainstream concern for businesses. From electric vehicles to puffy jackets, consumers are more frequently seeking products designed with sustainability in mind, and to meet this demand, global brands are feeling the push to improve. Yet, until recently, no single set of standards require brands to measure and communicate their environmental and social impact. 

Soon, even the most forward-looking brands will face rigorous sustainability expectations, as new environmental, social, and corporate governance (ESG) and product transparency regulations pass into law. To stay ahead of the curve and meet these regulations, it’s time for your business to start preparing.

In this three-part series, we’ll discuss some of the most influential policies being developed in the EU and US, how they’re shaping global market expectations, and implications for consumer goods brands and manufacturers. To kick off the series, we’re examining new due diligence regulations that will require businesses to understand their upstream and downstream value chain impacts – from manufacturing facilities all the way to delivery methods and product disposal. 

Which Supply Chain Due Diligence Policies to Watch

Recently, the European Commission released a draft of the Directive on Corporate Sustainability Due Diligence (CSRD). By 2025/2026, mid- to large-sized companies that operate in the EU will be required to establish mandatory due diligence on human rights and environmental risks across their full value chain. While CSRD applies to a relatively small set of companies for now – companies with over 500 employees and that exceed EUR 150 million in net turnover worldwide, and LLC’s operating in high impact sectors with over 250 employees and a net turnover of EUR 40 million worldwide – the legislation is slated to impact small and medium enterprises by 2026, and many additional US companies that generate revenue in the EU will also be required to comply.

At the country level, starting in 2025, France will require the apparel industry to include a carbon label on garments, scoring items from A to E based on environmental impact. The ranks will be determined based on a variety of environmental factors that are still being debated, though expected to take into account a product’s water use, carbon footprint, end of use, and more. This comes after France introduced a Planet-score on food sold at grocery stores and retailers – a testament to the country’s dedication to increasing product transparency for consumers across industries.  

Meanwhile, the Fashion Sustainability and Social Accountability Act, or New York Fashion Act proposed in early January, would require all fashion companies that sell their products in New York and generate over $100M in revenues to map the social and environmental impact of at least 50% of their supply chains. Businesses would have to publicly disclose environmental impacts including carbon emissions and water and chemical use. 

While organizations like the UN Guiding Principles Reporting (UNGPR) and the Organization for Economic Co-operation and Development (OECD) implemented responsible business due diligence frameworks years ago, they are voluntary or suggestive in nature, and businesses have been slow to adopt. CSRD, and New York Fashion act if passed, brings firmer direction to how businesses must take responsibility for, and act upon, their social and environmental impact. 

How to Prepare for Supply Chain Due Diligence Regulations

Currently, most businesses map select Tier 1 and 2 environmental and social impacts, and use individual tools to collect this data. 

Manufacturing supply chain tiers

Your sustainability team may be able to calculate carbon emissions from finished product assembly factories, but they don’t know the footprint at fabric and trim factories. And they may track labor practices at one half of these factories, but not the other. New regulations will ask your business to comprehensively track upstream impact across Tiers 1 and 2 (at least). To achieve this level of granularity, it’s time to move beyond disparate systems and siloed views of the value chain and adopt due diligence technologies that can help your business manage and report end-to-end impact. 

Technologies like the Higg Brand and Retail Module (Higg BRM) are designed to help businesses track a variety of impact factors from the bottom up – across factories, all the way to the corporate level. The solution should also help unify how your business’s value chain partners measure impact and communicate progress, using streamlined assessments such as the Higg Facility and Environmental Module, and Facility Social and Labor Module (Higg FEM and Higg FSLM). 

If value chain due diligence is new to your company, start by planning how you’re going to better trace where you’re sourcing materials from and what their environmental and social impact is. By taking a phased approach, collecting data first from Tier 1 partners, and then moving into Tier 2, your business can start to make progress ahead of regulations.

Higg is here to help you collect the right data and future-proof your business before these policies are introduced. Our products were designed with evolving regulatory standards in mind, and we are ready to prepare the consumer goods industry for the next era of expectations.

Stay tuned for Part 2 of the ABC’s of ESG Policy: Disclosure.

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