In recent years and decades, numerous cases have come to light involving inhumane working conditions, child labor, disregard for occupational safety regulations, or even severe environmental pollution at foreign suppliers of reputable multinational companies, causing significant damage to the affected companies (decline in share prices, boycotts, reputational damage, deterioration of business and community relations).
The role of ESG in supply chains
Such abuses in themselves make it necessary to improve the sustainability of supply chains; however, they also present additional value creation opportunities. Through due diligence and reporting, companies can not only reduce their risks and enhance the security of their operations, but also strengthen their brand and the trust of stakeholders.
Supply chain due diligence obligation in the EU
Hungarian companies that export to companies in other EU Member States are also not exempt from the requirements of due diligence obligations. The EU Directive on corporate sustainability due diligence (Corporate Sustainability Due Diligence Directive – CSDDD) aims to strengthen environmental protection and the protection of human rights both within the EU and globally, based on which the largest EU companies may impose expectations on their suppliers. Member States must transpose the CSDDD into national law by July 2028, under which companies will be required to comply with the relevant provisions from July 2029.
In addition, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), which entered into force in January 2023, serves the same objectives. This legislation affects many companies operating in Hungary that are suppliers to German companies, as it requires due diligence across the entire supply chain alongside risk assessments; since January 1, 2024, it applies to all companies with more than 1,000 employees.
At the same time, developing existing suppliers from an ESG perspective and prioritizing more sustainably operating suppliers is an essential element for companies committed to sustainability, as integrating sustainability considerations into the supply chain contributes to creating an ethical and sustainable future and to compliance with regulatory requirements.
Furthermore, it is also important for companies operating as suppliers to be able to meet the increasingly stringent expectations coming from customers in this area.
Our services related to the supply chain
OECD sustainability due diligence framework
The ESG-focused due diligence of the supply chain is based on the OECD Due Diligence Guidance for Responsible Business Conduct published in 2018, the practical approach of which is also largely reflected in the Hungarian ESG Act.
| ESG service | Steps of the OECD sustainability due diligence framework | Business benefits improving competitiveness |
|---|---|---|
| Review and update of existing policies and procedures | 1. Embedding responsible business conduct into corporate policies and governance systems | Policies are better aligned with day-to-day operations, enabling real value creation |
| Training programs on legal and sustainability objectives for employees and suppliers | ESG expectations are incorporated into daily operations, increasing the reliability of the supply chain | |
| Support in developing incentive systems aligned with sustainability objectives | Enhances employee and management engagement and supports the achievement of objectives | |
| Mapping suppliers and the value chain, identifying and assessing control points | Increases the transparency of the supply chain and enables the management of ESG risks | |
| Review and update of supplier contracts from an ESG perspective | Ensures the implementation of sustainability due diligence at the contractual level | |
| Environmental, social and human rights impact assessments | 2. Identification and assessment of adverse impacts | Identification and prioritization of the most significant ESG risks |
| Support in the preparation of legal, anti-corruption, financial and occupational health and safety due diligence, and their ESG-oriented interpretation | Supports the identification of relevant ESG risks and the timely management of identified gaps | |
| Support for consultation with internal and external stakeholders | Supports transparency and informed decision-making | |
| Preparation of a detailed action plan to eliminate activities causing adverse impacts | 3. Remediation, prevention and mitigation of adverse impacts | Structured elimination of high-risk activities |
| Implementation of governance systems and definition of supplier requirements | Consistent ESG practices across the entire supply chain | |
| Development of a framework of preventive and corrective measures | 4. Ensuring remediation and cooperation in remediation | Supports the effective management of risks |
| Expansion of the complaints handling system | Incorporation of feedback on the measures taken |
Our services for SMEs supplying large companies
| ESG service | Business benefits enhancing competitiveness |
|---|---|
| Legal and business review of supplier declarations required by large corporations regarding compliance with human rights and environmental expectations, and the proper management of such requirements throughout suppliers' supply chains | Through the legal and ESG expert review of supplier declarations, it can be avoided that the requesting company shifts excessive liability onto the supplier beyond what is necessary, or includes commercially unfavorable provisions in the declaration |
| Advisory services on developing corrective actions in cases of non-compliance with social responsibility or environmental obligations | By eliminating non-compliance as early as possible through appropriate corrective measures, significant fines and customer boycotts, as well as the suspension or termination of customer contracts, can be avoided. Due to the increasingly stringent regulatory environment and stakeholder expectations, companies are increasingly favoring suppliers where potential non-compliances can be easily and quickly remedied |
| Legal and professional support in connection with the suspension or termination of supplier agreements | With appropriate legal, business, and ESG expert support, business relationships suspended or even terminated due to breaches of social responsibility or environmental obligations can be restored with a higher likelihood |
