Protecting the world’s forests – new obligations for business on the horizon

How promoting sustainability can lead to future profit

The government is to introduce a new law to prevent goods containing the products of illegal deforestation entering the supply chains of UK businesses. Companies will be required to demonstrate that they know where the commodities they use, or sell have come from and that they comply with local laws in the place of origin.

Is this another compliance headache or a leadership opportunity? Probably both. Managing supply chains, contractually and in practice, can be complex. We have seen this year how Modern Slavery allegations in the fashion industry can impact brand, reputation and investor sentiment. These new forestry obligations have the potential to be equally impactful to a business that falls short.

The flip side of the coin is that the proposals present an opportunity to reinforce environmental and social governance credentials by tackling the challenges head on, and ahead of legislative requirements coming into force. At the very least this will enable business to smooth any compliance bumps ahead of time. More positively, the opportunities to promote People, Planet and Purpose credentials ahead of the curve can enhance Profit in the long run.

What we know so far

A recent government consultation revealed overwhelming support for proposals that will make it illegal for larger businesses to use, either in production or trade within the UK, "forest risk" commodities that have not been produced in accordance with relevant laws in the country where they are grown.

• ‘Forest risk commodities’ include those embedded within products
• ‘Relevant laws’ include those that protect natural forests and other natural ecosystems from being converted into agricultural land

The government will include additional provision in Primary Legislation by adding to the Environment Bill which is currently at committee stage in Parliament. It is anticipated this will be supported by more detailed secondary legislation that will:

• Require businesses to conduct due diligence to ensure that forest risk commodities that have not been legally produced do not enter their supply chain, and to report on this exercise publicly (as with Modern slavery reporting requirements)
• Provide for fines and other civil sanctions against businesses that continue to use forest risk commodities that have not been produced legally and/or that do not have a robust system of due diligence in place.
• Require that the Government regularly review the law’s effectiveness
• Define which larger businesses are caught by the requirements.

It is anticipated that the legislation will align reporting periods and deadlines with the Modern Slavery Act transparency in supply chains requirements which means businesses will have six months to report after the end of the UK financial year.

What next?

The government describes the proposals as "a pioneering piece of legislation". The new requirements will only come into force once further, secondary legislation has been passed. The proposed secondary legislation will be "subject to further engagement with key stakeholders as well as formal consultation.

This will consider which commodities will be prescribed, the thresholds that determine which businesses will be subject to the requirements, the precise information businesses will be required to report on and the level of fines."

Steps to take now

Whilst we don’t have the detail, this is a significant change for manufacturers and retailers whose products contain forestry products.

Supply chains are often long and complex so an early start on working through the potential ramifications makes sense. It is certainly something to at least factor in when running tender processes and renewing or creating new supplier relationships. It will become good practice, or even an essential step, to incorporate rights into contracts to audit and verify compliance with these new obligations by suppliers.

Manufacturers and retailers looking to further future proof their agreements and address the sustainability of their supply chains may also wish to consider including clauses from the Climate Contract Playbook. The Climate Contract Playbook contains example clauses addressing climate change issues which have been drafted on a pro bono basis by lawyers from around the world. For example, one of the clauses gives a customer the right to exit an agreement without incurring cancellation fees unless its existing supplier is able to at least match green improvements represented by an alternative supplier's offer.

With the ever-growing spotlight on sustainability and supply chain accountability, incorporating this type of clause into supply contracts could help prevent manufacturers and retailers being tied into contracts which impede their sustainability goals and ultimately have a detrimental impact on the environment.

For many this will be seen as a compliance headache. And it certainly has the potential to be that. Observers of the retail fashion industry will be only too aware of the fall out for BooHoo arising out of allegations of modern slavery in their supply chain. There has been significant bad press, parliamentary scrutiny and withdrawal of support by institutional investors. This relates to failures by suppliers who are local and therefore in plain sight, which arguably makes the failings less forgivable but also indicates the difficulty of monitoring a relatively straightforward supply chain.

In summary

Looking at things more positively, the proposed legislation gives rise to opportunities for business with Environmental and Social Governance on the corporate agenda - it's clear that an increasing number already do as we see Retailers decline furlough money (e.g. IKEA) or repay business rates relief (e.g. B&Q). Even Philip Green voluntarily paid into the Arcadia Pension Fund when Arcadia went into administration.

Getting ahead of the legislation, even positively contributing to the consultation on the secondary legislation, presents an opportunity for responsible Retailers and Manufacturers to build their ESG credentials as well as getting ready for reporting when the time comes. These businesses will demonstrate brand enhancing behaviour which attracts ethical investors and customers, resulting in a positive impact on the bottom line.