What is Social Compliance?
The term "Compliance" refers to the entrepreneurial obligation to comply with applicable laws and regulations. As diverse as the different areas of law are, there are also numerous compliance areas. One of these is "social compliance", which deals with legal social and societal requirements. This is about the well-being of employees and society.
In Germany, for example, this includes issues such as gender equality and regulated working and break times. In addition, the company's own sites and production facilities play an important role. Probably the most comprehensive law on this subject is the so-called EU Supply Chain Act. The aim is to pay greater attention to the welfare of workers and the environment along the entire value chain ("due diligence obligations"), to minimize risks and to hold the companies responsible in the event of violations.
Why is Social Compliance important?
Fact are, "global social compliance" is not only an underestimated competitive factor for practicing companies, but also of great importance for many other reasons. Especially in the manufacturing and industrial sector, supply chains are often long and complex, and they pass globally through several countries until the finished products reach the end consumers. In order to be able to meet the high level of consumption, a large part of the production, as well as the production of the required preliminary products, is carried out outside of Germany and the EU.
However, when manufacturing abroad, there is a higher proportion of so-called "risk hours". This term refers to working hours that are subject to a higher risk of being performed under poor or inadequate working conditions.
The reason is that standards in some low-income countries (Asia, Africa or Latin America) do not match those in Germany and Europe. Apart from much lower wages, workers have little or hardly any rights to assemble and/or to form or join trade unions. In addition, many workers there are exposed to hazards and unhealthy situations. Such working conditions are indirectly supported, often without being aware of it, by, for example, German companies that buy (pre-) products that have been produced under poor conditions.
Top 10 industries (private sector) by supply chain risk hours
Number of risk hours in billions; Source: Systain
The figure on the left shows that the textile sector in industry is most affected by the risk hours in question. However, the further up the supply chain a company is, the higher the risk hours of its employees. In the vehicle construction industry, the greatest risk is associated with the extraction of raw materials. However, many of the German vehicle manufacturing companies have no direct connection or contractual relationship with the upstream suppliers involved in raw material extraction. Thus, the human rights violations that occur at this stage often go unnoticed, even though these materials or products are incorporated into the vehicle manufacturer's final product.
Proportion of risk hours by individual stages in the supply chain
Source: UN Global Compact Yearbook (2013)
In the figure on the left, it can be seen that in German vehicle manufacturing, human rights violations occur primarily from supplier level 4 (Tier 4-n) and the levels before.
In low-wage countries, there is a great deal of competition, especially for simple production techniques, such as in the textile industry, because market entry is not a high hurdle for new competitors. Thus, disregarding minimum standards and human rights brings a short-term competitive advantage, because the products can be offered more cheaply. It follows that when we benefit from low prices here, other places in the world often work under unacceptable conditions for our goods.
Accordingly, it is important to comply with and monitor international labor standards and human rights throughout the value chain.
What does it look like in Practice?
The expectations and requirements for internationally operating companies are constantly growing and for many it is difficult to keep track of what is currently relevant for their own company. There are many standards, guidelines and regulations that specialize in the area of social compliance. These include, for example, the SA8000 standard from the Social Accountability International Organization or the ten principles of the UN Global Compact, which are primarily about compliance with human and labor rights. However, well-known frameworks relating to Environmental, Social and Governance (ESG) reporting guidelines also contain useful references from a social perspective.
The graphic above is intended to show an example supply chain of a textile retailer.
In reality, such a supply chain certainly looks a lot longer and more complicated. It is also important for the company under consideration to define where the boundaries are to be drawn. In other words, to answer the question: What stages do we include from the entire supply chain? Because if you also include the supply chains of all individual stages, you will eventually arrive at a global chain that includes almost all industries.
An example would be the following:
The first participating company in the supply chain in the graphic is responsible for the raw material extraction of crude oil. To do this, it needs certain equipment, machinery and other technologies, which in turn come from upstream suppliers. Thus, more or less all supply chains are directly and also indirectly interrelated globally. For companies, it is therefore relevant to obtain a precise overview of their own supply chain, the (Pre)-suppliers involved, and the downstream customers.
What is purchased in which country from which upstream supplier, and how and from where do the upstream suppliers in turn procure their products? This step is very extensive and often the most challenging for many companies. Next, all suppliers and customers involved should be evaluated with regard to the four criteria namely reputation, security of supply, quality and regulation. This can then be used to prioritize where there is the greatest need for action. Once various fields of action have been defined on this basis, the actual situation should be determined for the critical participants in the supply chain. This can be done, for example, through on-site checks, but also through reports from third parties or stakeholders.
Depending on the result, specific measures can then be defined. The same applies here if certain standards or regulations are not met: be consistent and work out solutions together; if necessary, business relationships must be terminated.
Difficulties and Challenges for SMEs
SMEs are part of a global supply chain and are often supplied by large corporations or resell their products to larger companies that fall under the supply chain management obligation. Therefore, it is essential to deal with one's own supply chain in order to be able to pass on information as a supplier. In addition, more and more stakeholders, including investors, attach importance to more transparency in the supply chain and compliance with international standards. However, it is often particularly difficult for SMEs to obtain an overview of the entire supply chain, as they do not always have the necessary means to obtain information and lack the knowledge of which areas need to be screened.
It is not uncommon for confusion to arise as to which regulations apply to the individual company and which criteria and framework conditions are relevant in each case. Since the extent of obligations is also increasing for SMEs and is also becoming more complex, Sustainable Disruption helps you to identify relevant requirements and derive specific fields of action on the topic of Social Compliance.
Our experts are happy to assist you on your way to more supply chain transparency and sustainability.
We would be happy to advise you in a non-binding consultation.